SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the fiscal year ended
December 31, 1995, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the transition period
from N/A to __________.
Commission File Number 0-16533
SOVEREIGN BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2453088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610
(Address of principal executive offices) Zip Code)
Registrant's telephone number: (215) 320-8400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (without par value)
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No. .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of Common Stock of the
Registrant held by nonaffiliates of the Registrant was
$508,253,463 at March 4, 1996. As of March 4, 1996, the
Registrant had 47,835,620 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement to be used in
connection with its 1996 Annual Meeting of Shareholders is
incorporated herein by reference in response to Part III hereof.
<PAGE>
PART I
Item 1. BUSINESS.
General
Sovereign Bancorp, Inc. ("Sovereign") is a Pennsylvania
business corporation and is the holding company for Sovereign
Bank, a Federal Savings Bank ("Sovereign Bank") and for Colonial
Bank for Savings, a Federal Savings Bank ("Colonial Bank"). Both
Sovereign and Sovereign Bank are headquartered in Wyomissing,
Pennsylvania, a suburb of Reading, Pennsylvania. Colonial Bank
is headquartered in Freehold, New Jersey.
Sovereign Bank was created in 1984 under the name Penn
Savings Bank, F.S.B. through the merger of two financial
institutions with market areas primarily in Berks and Lancaster
Counties, Pennsylvania. Sovereign Bank assumed its current name
on December 31, 1991. Sovereign was incorporated by Sovereign
Bank in 1987.
From 1989 through 1994, Sovereign expanded its markets
throughout eastern Pennsylvania and central New Jersey by
completing ten acquisitions with assets totaling approximately
$3.3 billion. At December 31, 1994, Sovereign had 130 offices
and $6.6 billion in assets.
On November 17, 1995, Sovereign acquired two branch offices
located in Bergen County, New Jersey, and related deposits from
Berkeley. Sovereign assumed approximately $111.7 million in
deposits for a premium of $5.5 million. The acquisition was
accounted for as a purchase.
On November 15, 1995, Sovereign acquired Colonial State Bank
in a transaction accounted for as a purchase. After receipt of
regulatory approvals and pursuant to the terms of the agreement
entered into by Sovereign and Colonial State Bank, upon
acquisition, Colonial State Bank became a wholly-owned, BIF
insured, subsidiary of Sovereign and converted to a federal
savings bank under the name Colonial Bank for Savings, a Federal
Savings Bank. Sovereign acquired Colonial Bank in exchange for
$6.3 million in cash. Sovereign acquired $46.5 million in
assets, consisting principally of loans and investment
securities, and also assumed approximately $42.0 million in
deposit liabilities.
On November 10, 1995, Sovereign completed the sale of its
Pottsville, Pennsylvania, branch office with related deposits
totaling $23.9 million to Northwest Savings Bank and the sale of
its English Village branch office in North Wales, Pennsylvania
with related deposits of $12.4 million to Union National Bank &
Trust Company.
On April 21, 1995, Sovereign completed its sale of seven
southern New Jersey offices with related deposits totalling
$106.7 million to Collective Bancorp, Inc. ("Collective"). Six
of these offices had previously been purchased from Berkeley as
part of the transaction which closed on January 1, 1995. In
addition, Sovereign acquired $7.0 million in deposits from
Collective's Wilmington, Delaware branch office.
On January 1, 1995, Sovereign acquired 23 branch offices
located in New Jersey and Delaware, $909.3 million of related
deposits, cash and fixed assets from Berkeley Federal Bank &
Trust, FSB ("Berkeley") for a premium of $66.6 million. The
acquisition was accounted for as a purchase.
On November 1, 1994, Sovereign acquired Charter FSB Bancorp,
Inc. ("Charter"), with assets of $405.8 million and 10 offices
located in Morris and Sussex Counties, New Jersey. Sovereign
exchanged a total of 7.0 million new shares (7.7 million shares
as adjusted for all subsequent stock dividends) of Sovereign
common stock for all the outstanding shares of Charter. The
acquisition was accounted for as a pooling-of-interests.
On September 16, 1994, Sovereign acquired the Chadds Ford
Pennsylvania office and $14.4 million of related deposits of
Second National Federal Savings Association ("Second National")
from the Resolution Trust Corporation, receiver for Second
National, and received approximately $13.7 million of cash. The
acquisition was accounted for as a purchase.
On August 5, 1994, Sovereign acquired all the capital stock
of Shadow Lawn Savings Bank ("Shadow Lawn") with assets of
$787.5 million and 17 offices located in Monmouth and Ocean
Counties, New Jersey. Sovereign also assumed approximately
$730.6 million of deposit liabilities. Sovereign acquired Shadow
Lawn in exchange for $78.4 million of cash. The acquisition was
accounted for as a purchase.
On November 5, 1993, Sovereign acquired Valley Federal
Savings and Loan Association ("Valley Federal"). At
September 30, 1993, Valley Federal had total assets, deposits and
stockholders' equity of $315.7 million, $256.4 million and
$18.6 million, respectively. Sovereign exchanged a total of
2.9 million new shares (3.5 million shares as adjusted for all
subsequent stock dividends) of Sovereign common stock with a
value of $32.3 million for all of the outstanding shares of
Valley Federal common stock. The acquisition was accounted for
as a pooling-of-interests.
On August 27, 1993, Sovereign assumed $252.3 million of
deposit liabilities and received $233.7 million of cash from the
RTC as receiver of 9 branch offices of Home Unity Federal Savings
and Loan Association.
On January 15, 1993, Sovereign formally acquired Harmonia
Bancorp, Inc. ("Harmonia") in a transaction that was accounted or
as a purchase. Sovereign acquired total assets of $621.0 million
and assumed liabilities consisting principally of deposits in
exchange for $19.6 million of cash and 9.6 million new shares
(11.6 million shares as adjusted for all subsequent stock
dividends) of Sovereign common stock, issued at a value of
$66.1 million.
On October 2, 1995, Sovereign entered into an Agreement to
acquire West Jersey Bancshares, Inc. ("West Jersey") and West
Jersey's wholly-owned subsidiary, West Jersey Community Bank
("WJCB"). WJCB is a $101 million New Jersey commercial bank
headquartered in Fairfield, New Jersey. The terms of the
Agreement call for Sovereign to exchange $8.40 in Sovereign
common stock (subject to adjustment) for each share of West
Jersey common stock. Subject to regulatory approvals and
pursuant to the Agreement, the acquisition will be effected by
the merger of West Jersey with and into Sovereign and the merger
of WJCB with and into Sovereign Bank. The acquisition is
expected to close in April 1996, and is expected to be tax free
and accounted for as a pooling-of-interests.
At December 31, 1995, Sovereign's consolidated assets,
deposits and shareholders' equity were approximately $8.08
billion, $5.04 billion and $427.0 million, respectively. Based
on assets at December 31, 1995, Sovereign is the largest thrift
holding company headquartered in Pennsylvania.
Sovereign's primary business consists of attracting deposits
from its network of community banking offices, located in
Pennsylvania, New Jersey and Delaware, and originating
residential mortgage loans and home equity lines of credit in
those communities. Sovereign Bank originates mortgage loans
through its community banking offices and its Outside Sales
Division that consists of commissioned employees who conduct
business out of loan production offices. Sovereign also
originates mortgage loans through its Wholesale Division that
uses a network of independent mortgage bankers and brokers. All
underwriting for the Wholesale Division is performed by Sovereign
Bank.
Sovereign operates in a heavily regulated environment.
Changes in laws and regulations affecting it and its subsidiaries
may have an impact on its operations. See "Business -
Supervision and Regulation."
For additional information with respect to Sovereign's
business activities see Part III, Item 7 hereof.
<PAGE>
The following table sets forth the maturity schedule for
Sovereign's loan portfolio (excluding residential real estate and
consumer loans):
<TABLE>
<CAPTION>
Amounts at December 31, 1995, Maturing
-------------------------------------------------
LOAN MATURITY SCHEDULE In One Year After One Year After
(IN THOUSANDS) or Less - Five Years Five Years Total
----------- -------------- ---------- -----
<S> <C> <C> <C> <C>
Commercial real estate
loans: $2,487 $ 7,793 $36,897 $ 47,177
Real estate construction
loans:
Residential
(net of loans in
process of
$23,365) 267 791 37,093 38,151
Residential development
(net of loans in
process of
$736) 1,255 - 421 1,676
Commercial loans 4,871 3,674 7,286 15,831
------- ------- ------- --------
Total $ 8,880 $12,258 $81,697 $102,835
======= ======= ======= ========
Loans with:
Fixed rates $ 2,403 $ 8,631 $15,742 $ 26,776
Variable rates 6,477 3,627 65,955 76,059
------- ------- ------- --------
Total $ 8,880 $12,258 $81,697 $102,835
======= ======= ======= ========
</TABLE>
<PAGE>
The following table summarizes the allocation of the
allowance for possible loan losses and the percentage of such
allocation to each loan type for the past five years:
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(IN THOUSANDS)
<TABLE>
<CAPTION> December 31,
--------------------------------------------------------------------------------------------------------
Balance at end of
Period Attributable to: 1995 1994 1993 1992 1991
- ----------------------- ------------------- ------------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate $10,520 30.18% $10,540 29.05% $ 6,737 20.35% $ 7,316 27.54% $ 4,061 30.77%
Commercial real
estate 698 2.00 657 1.81 1,180 3.57 1,663 6.26 777 5.89
Commercial 181 .52 164 0.45 125 0.38 135 0.51 225 1.70
Consumer 4,190 12.02 4,435 12.22 927 2.80 997 3.75 754 5.71
Unallocated 19,267 55.28 20,493 56.47 24,130 72.90 16,451 61.94 7,381 55.93
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $34,856 100.00% $36,289 100.00% $33,099 100.00% $26,562 100.00% $13,198 100.00%
======= ======= ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The following table sets forth the maturity and yields of
Sovereign's investment and mortgage-backed securities held-to-
maturity at December 31, 1995. The maturities of mortgage-backed
securities held-to-maturity are based upon contractually
scheduled repayments. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or repay obligations with or without call or prepayment
penalties. Yields on tax-exempt securities were computed on a
tax equivalent basis using Sovereign's federal tax rate of 35%.
<TABLE>
<CAPTION>
Amounts at December 31, 1995, Due
----------------------------------------------------------------
INVESTMENT AND MORTGAGE-BACKED
SECURITIES HELD-TO-MATURITY
(IN THOUSANDS)
After One After Five
In One Year Year- Years- After
or Less Five Years Ten Years Ten Years Total
----------- ---------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
Investment Securities:
- ----------------------
U.S. Treasury and U.S. $498 $2,995 $1,500 -- $4,993
Government Agency 6.84% 6.40% 7.09% -- 6.65%
Securities
Corporate securities -- 1,010 -- -- 1,010
-- 8.20% -- -- 8.20%
Other securities -- 305 177 -- 482
-- 4.17% 1.94% -- 3.35%
Mortgage-backed Securities:
- ---------------------------
FHLMC 6,022 63,896 88,237 10,558 168,713
7.61% 7.34% 6.36% 7.97% 6.88%
FNMA 633 48,131 156,822 15,460 221,046
7.77% 7.11% 6.45% 7.01% 6.64%
GNMA -- 540 12,891 156,633 170,064
-- 9.61% 6.61% 8.90% 8.73%
RTC -- -- 28,954 -- 28,954
-- -- 6.80% -- 6.80%
Private Issues -- 139,489 91,509 53,642 284,640
-- 6.33% 6.82% 6.98% 6.61%
Collateralized Mortgage Obligations 478 1,088,394 42,168 66,270 1,197,310
7.75% 7.40% 6.45% 6.52% 7.32%
----- --------- ------ ------ ---------
TOTAL $7,631 $1,344,760 $422,258 $302,563 $2,077,212
====== ========== ======== ======== ==========
7.58% 7.27% 6.54% 7.91% 7.22%
====== ========== ======== ======== ==========
</TABLE>
<PAGE>
The following table sets forth the maturities and yields of
Sovereign's investment and mortgage-backed securities
available-for-sale at December 31, 1995. The maturities of the
mortgage-backed securities available-for-sale are based upon
contractually scheduled repayments. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or repay obligations with or without call or
prepayment penalties. Yields on tax-exempt securities were
computed on a tax equivalent basis using Sovereign's federal tax
rate of 35%.
<TABLE>
<CAPTION>
Amounts at December 31, 1995, Due
INVESTMENT AND MORTGAGE-BACKED
SECURITIES AVAILABLE-FOR-SALE
(IN THOUSANDS)
No
After One After Five Stated
In One Year Year- Years- After Maturity
or Less Five Years Ten Years Ten Years or Rate Total
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury and U.S.
Government Agency
Securities $12,001 $133,234 $5,007 $ -- $ -- $150,242
4.61% 5.26% 6.25% -- -- 5.24%
Equity Securities -- -- -- -- 135,494 135,494
-- -- -- -- 4.75% 4.75%
Mortgage-backed Securities:
FHLMC -- 131,370 -- 24,753 -- 156,123
-- 5.42% -- 7.61% -- 5.77%
FNMA -- 64,906 -- 71,955 -- 136,861
-- 5.63% -- 7.65% -- 6.69%
GNMA -- -- -- 59,215 -- 59,215
-- -- -- 8.87% -- 8.87%
Collateralized Mortgage
Obligations 46,201 198,836 -- -- -- 245,037
7.50% 7.54% -- -- -- 7.53%
TOTAL $58,202 $528,346 $5,007 $155,923 $135,494 $882,972
6.90% 6.20% 6.25% 8.11% 4.75% 6.36%
</TABLE>
<PAGE>
At December 31, 1995, Sovereign held the following
securities of single issuers (other than obligations of the
United States and its political subdivisions, agencies and
corporations) having an aggregate book value in excess of 10% of
Sovereign's shareholders' equity:
INVESTMENT AND MORTGAGE-BACKED
SECURITIES At December 31, 1995
(IN THOUSANDS)
Issuer Book Value Market Value
G.E. Capital Mortgage Servicing, Inc. $ 189,944 $ 190,868
Prudential Home Mortgage Securities,
Inc. 162,809 164,260
Residential Funding Mortgage
Securities, Inc. 138,472 139,262
Securitized Asset Sales, Inc. 136,244 136,804
PHH Mortgage Servicing Corp. 101,097 102,986
Housing Security, Inc. 91,682 90,581
Independent National Mortgage Corp. 73,095 73,508
Capstead Mortgage Corp. 72,906 72,969
Saxon Mortgage Securities Corp. 55,822 54,820
TOTAL $1,022,071 $1,026,058
========== ==========
<PAGE>
The following table sets forth the maturity of certificates
of deposit of $100,000 or more at December 31, 1995:
At December 31,
1995
(IN THOUSANDS)
Three months or less. . . . . . . . $94,918
Over three through six months. . . 71,231
Over six through twelve months. . . 40,002
Over twelve months. . . . . . . . . 20,245
Total. . . . . . . . . . . . . $226,396
========
Subsidiaries
Sovereign has three wholly-owned subsidiaries: Sovereign
Bank, Colonial Bank and Sovereign Investment Corporation, a
Delaware corporation that purchases and holds investment
securities.
In 1995, Sovereign Bank reorganized its existing subsidiary
structure. Sovereign Bank now has the following wholly-owned
subsidiaries: First Lancaster Financial Corp. and
201 Associates, Inc. 201 Associates, Inc. is a Delaware
corporation whose primary purpose is to purchase and hold certain
investment securities. First Lancaster Financial Corp. is a
Pennsylvania business corporation whose primary function is to
act as a holding company for The Sovereign Annuity Corp. and The
Sovereign Agency, Inc. Sovereign Annuity Corp. is a New Jersey
corporation whose primary purpose is to market investment
securities and mutual funds. The Sovereign Agency, Inc. is a
New Jersey corporation whose primary purpose is to market
insurance annuities. Colonial Bank has one subsidiary: CSB
Building Corporation, a New Jersey corporation whose primary
purpose is to hold title to property.
Federal regulations generally permit federally-chartered
savings institutions to invest up to 2% of assets in the capital
stock of, and make secured and unsecured loans to, certain types
of subsidiary service corporations. At December 31, 1995,
Sovereign Bank was authorized to have a maximum investment of
approximately $160.2 million in such subsidiaries, pursuant to
applicable federal regulations. As of such date, Sovereign Bank
had a total investment of $28.4 million in subsidiary service
corporations.
Employees
At December 31, 1995, Sovereign had 1,272 full-time and 232
part-time employees. None of these employees is represented by a
collective bargaining agent, and Sovereign believes it enjoys
good relations with its personnel.
Competition
Sovereign experiences substantial competition in attracting
and retaining deposits and in lending funds. The primary factors
in competing for deposits are the ability to offer attractive
rates and the convenience of office locations. Direct
competition for deposits comes primarily from other thrift
institutions and commercial banks. Competition for deposits also
comes from money market mutual funds, corporate and government
securities, and credit unions. The primary factors in the
competition for loans are interest rates, loan origination fees
and the range of products and services offered. Competition for
origination of real estate loans normally comes from other thrift
institutions, commercial banks, mortgage bankers, mortgage
brokers and insurance companies.
Environmental Laws
Environmentally related hazards have become a source of high
risk and potentially unlimited liability for financial
institutions relative to their loans. Environmentally
contaminated properties owned by an institution's borrowers may
result in a drastic reduction in the value of the collateral
securing the institution's loans to such borrowers, high
environmental clean up costs to the borrower affecting its
ability to repay the loans, the subordination of any lien in
favor of the institution to a state or federal lien securing
clean up costs, and liability to the institution for clean up
costs if it forecloses on the contaminated property or becomes
involved in the management of the borrower. To minimize this
risk, Sovereign Bank and Colonial Bank may require an
environmental examination of and report with respect to the
property of any borrower or prospective borrower if circumstances
affecting the property indicate a potential for contamination,
taking into consideration the potential loss to the institution
in relation to the burdens to the borrower. Such examination
must be performed by an engineering firm experienced in
environmental risk studies and acceptable to the institution, and
the costs of such examinations and reports are the responsibility
of the borrower. These costs may be substantial and may deter a
prospective borrower from entering into a loan transaction with
Sovereign Bank or Colonial Bank. Sovereign is not aware of any
borrower who is currently subject to any environmental
investigation or clean up proceeding which is likely to have a
material adverse effect on the financial condition or results of
operations of Sovereign Bank or of Colonial Bank.
Supervision and Regulation
General. Sovereign is a "savings and loan holding company"
registered with the Office of Thrift Supervision ("OTS") under
the Home Owners' Loan Act ("HOLA") and, as such, Sovereign is
subject to OTS regulation, examination, supervision and
reporting. The deposits of Sovereign Bank are insured by the
Savings Association Insurance Fund (the "SAIF") of the Federal
Deposit Insurance Corporation (the "FDIC"). The deposits of
Colonial Bank are insured by the Bank Insurance Fund (the "BIF")
of the FDIC. The SAIF and the BIF are administered by the FDIC,
but are required to be separately maintained and not combined.
See "Insurance of Deposit Accounts" below. Sovereign Bank and
Colonial Bank are required to file reports with the OTS
describing their respective activities and financial condition
and are periodically examined to test compliance with various
regulatory requirements. Sovereign Bank and Colonial Bank are
also subject to examination by the FDIC. Such examinations are
conducted for the purpose of protecting depositors and the
insurance fund and not for the purpose of protecting holders of
equity or debt securities of Sovereign, Sovereign Bank or
Colonial Bank. Sovereign Bank is a member of the Federal Home
Loan Bank ("FHLB") of Pittsburgh, which is one of the twelve
regional banks comprising the FHLB system. Colonial Bank is a
member of the FHLB of New York. Sovereign Bank and Colonial Bank
are also subject to regulation by the Board of Governors of the
Federal Reserve System with respect to reserves maintained
against deposits and certain other matters. Except as described
herein, Sovereign's management is not aware of any current
recommendations by regulatory authorities that would have a
material effect on Sovereign's operations, capital resources or
liquidity.
Holding Company Regulation. The HOLA prohibits a registered
savings and loan holding company from directly or indirectly
acquiring control, including through an acquisition by merger,
consolidation or purchase of assets, of any savings association
(as defined in HOLA to include a federal savings bank) or any
other savings and loan holding company, without prior OTS
approval. Generally, a savings and loan holding company may not
acquire more than 5% of the voting shares of any savings
association unless by merger, consolidation or purchase of
assets. Certain regulations of the OTS describe standards for
control under the HOLA. See "Control of Sovereign" below.
Federal law empowers the Director of the OTS to take
substantive action when the Director determines that there is
reasonable cause to believe that the continuation by a savings
and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness or stability of a
savings and loan holding company's subsidiary savings
institution. The Director of the OTS has oversight authority for
all holding company affiliates, not just the insured institution.
Specifically, the Director of the OTS may, as necessary,
(i) limit the payment of dividends by the savings institution;
(ii) limit transactions between the savings institution, the
holding company and the subsidiaries or affiliates of either;
(iii) limit any activities of the savings institution that might
create a serious risk that the liabilities of the holding company
and its affiliates may be imposed on the savings institution.
Any such limits would be issued in the form of a directive having
the legal efficacy of a cease and desist order.
Control of Sovereign. Under the Savings and Loan Holding
Company Act and the related Change in Bank Control Act (the
"Control Act"), individuals, corporations or other entities
acquiring Sovereign common stock may, alone or "in concert" with
other investors, be deemed to control Sovereign and thereby
Sovereign Bank and Colonial Bank. If deemed to control
Sovereign, such person or group will be required to obtain OTS
approval to acquire Sovereign's common stock and will be subject
to certain ongoing reporting procedures and restrictions under
federal law and regulations. Under the regulations, ownership of
25% of the capital stock of Sovereign will be deemed to
constitute "control," and ownership of more than 10% of the
capital stock may also be deemed to constitute "control" if
certain other control factors are present. It is possible that
even lower levels of ownership of such securities could
constitute "control" under the regulations.
Regulatory Capital Requirements. OTS Regulations require
savings associations to maintain a minimum tangible capital ratio
of not less than 1.5%, a minimum core capital, or "leverage,"
ratio of not less than 3% and a minimum risk-based capital ratio
(based upon credit risk) of not less than 8%. These standards
are the same as the capital standards that are applicable to
other insured depository institutions, such as banks. Federal
banking agencies are required to ensure that their risk-based
capital guidelines take adequate account of interest rate risk,
concentration of credit risk and risks of nontraditional
activities. In August, 1995, the federal banking agencies,
including the OTS, issued a rule modifying their then-existing
risk-based capital standards to provide for consideration of
interest rate risk when assessing the capital adequacy of an
institution. This new rule implements the first step of a
two-step process by explicitly including a depository
institution's exposure to declines in the value of its capital
due to changes in interest rates as one factor that the banking
agencies will consider in evaluating an institution's capital
adequacy. The new rule does not establish a measurement
framework for assessing an institution's interest rate risk
exposure level. Examiners will use data collected by the banking
agencies to determine the adequacy of an individual institution's
capital in light of interest rate risk. Examiners will also
consider historical financial performance, earnings exposure to
interest rate movements and the adequacy of internal interest
rate risk management, among other things. This case-by-case
approach for assessing an institution's capital adequacy for
interest rate risk is transitional. The second step of the
Federal banking agencies' interest rate risk regulation will be
to establish an explicit minimum capital charge for interest rate
risk, based on measured levels of interest rate risk exposure.
The banking agencies will implement this second step at some
future date.
The federal banking agencies, including the OTS, also
adopted final rules relating to concentration of credit risk and
risks of non-traditional activities effective on January 17,
1995. The agencies declined to adopt a quantitative test for
concentrations of credit risk and, instead, provided that such
risk would be considered in addition to other risks in assessing
an institution's overall capital adequacy. Institutions with
higher concentration of credit risk will be required to maintain
greater levels of capital. Similarly, the federal agencies
incorporated the evaluation of the risks of non-traditional
activities into the overall assessment of capital adequacy. The
agencies also indicated that proposed rules regarding specific
types of non-traditional activities will be promulgated from time
to time.
Under the Federal Deposit Insurance Act ("FDIA") insured
depository institutions must be classified in one of five defined
categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized). Under OTS regulations, an institution will be
considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater
and (iv) is not subject to any order or written directive to meet
and maintain a specific capital level. An "adequately
capitalized" institution is one that has (i) a total risk-based
capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater, (iii) a leverage ratio of 4% or greater
(or 3% or greater in the case of a bank with the highest
composite regulatory examination rating) and (iv) does not meet
the definition of a well capitalized institution. An institution
will be considered (A) "undercapitalized" if it has (i) a total
risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-
based capital ratio of less than 4% or (iii) a leverage ratio of
less than 4% (or 3% in the case of an institution with the
highest regulatory examination rating); (B) "significantly
undercapitalized" if the institution has (i) a total risk-based
capital ratio of less than 6%, (ii) a Tier 1 risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3%;
and (C) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets of equal to or less than
2%. The OTS may, under certain circumstances, reclassify a "well
capitalized" institution as "adequately capitalized" or require
an "adequately capitalized" or "undercapitalized" institution to
comply with supervisory actions as if it were in the next lower
category. Such a reclassification could be made if the OTS
determines that the institution is in an unsafe or unsound
condition (which could include unsatisfactory examination
ratings). A savings institution's capital category is determined
with respect to its most recent thrift financial report filed
with the OTS. In the event an institution's capital deteriorates
to the undercapitalized category or below, the FDIA and OTS
regulations prescribe an increasing amount of regulatory
intervention, including the adoption by the institution of a
capital restoration plan, a guarantee of the plan by its parent
holding company and the placement of a hold on increases in
assets, number of branches and lines of business.
If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be
imposed, including restrictions on interest payable on accounts,
dismissal of management and (in critically undercapitalized
situations) appointment of a receiver or conservator. Critically
undercapitalized institutions generally may not, beginning 60
days after becoming critically undercapitalized, make any payment
of principal or interest on their subordinated debt. All but
well capitalized institutions are prohibited from accepting
brokered deposits without prior regulatory approval. Pursuant to
the FDIA and OTS regulations, savings associations which are not
categorized as well capitalized or adequately capitalized are
restricted from making capital distributions which include cash
dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other
transactions charged to the capital account of a savings
association. At December 31, 1995, Sovereign Bank and Colonial
Bank each met the criteria to be classified as "well
capitalized."
Standards for Safety and Soundness. The federal banking
agencies adopted, effective in August, 1995, certain operational
and managerial standards for depository institutions, including
internal audit system components, loan documentation
requirements, asset growth parameters, and compensation standards
for officers, directors and employees. Sovereign does not
anticipate that the implementation or enforcement of these
guidelines will have a material adverse effect on its results of
operations.
Insurance of Deposit Accounts. The FDIC has implemented a
risk-related premium schedule for all insured depository
institutions that results in the assessment of premiums based on
capital and supervisory measures. Under the risk-related premium
schedule, the FDIC assigns, on a semiannual basis, each
institution to one of three capital groups (well-capitalized,
adequately capitalized or undercapitalized) and further assigns
such institution to one of three subgroups within a capital
group. The institution's subgroup assignment is based upon the
FDIC's judgment of the institution's strength in light of
supervisory evaluations, including examination reports,
statistical analyses and other information relevant to measuring
the risk posed by the institution. Only institutions with a
total capital to risk-adjusted assets ratio of 10.00% or greater,
a Tier 1 capital to risk-based assets ratio of 6% or greater, and
a Tier 1 leverage ratio of 5.0% or greater, are assigned to the
well-capitalized group. As of December 31, 1995, Sovereign Bank
and Colonial Bank were classified as well capitalized for
purposes of calculating insurance assessments. Institutions are
prohibited from disclosing the risk classification to which they
have been assigned. As of December 31, 1995, the FDIC calculated
deposit insurance assessments at the rate of $.23 for every $100
of deposits for the members of SAIF in the lowest risk-based
premium category and $0.31 for every $100 of insured deposits for
members of SAIF in the highest risk-based premium category.
In August, 1995, the FDIC adopted an amendment to the BIF
risk-based assessment schedule that lowers the deposit insurance
assessment rate for most (90% or more) commercial banks and other
depository institutions with deposits insured by BIF to $.04 per
$100 of insured deposits. On November 14, 1995, the FDIC further
reduced the BIF assessment rates to a range of $.00 per $100 of
insured deposits (subject to a minimum annual premium of $2,000)
for those institutions with the least risk to $0.27 for every
$100 of insured deposits for institutions deemed to have the
highest risk, beginning January 1, 1996. At the same time, the
FDIC voted to retain the existing assessment rates for SAIF-
insured institutions. The reduced BIF assessment rates result in
a substantial disparity in the deposit insurance premiums paid by
BIF and SAIF members and could place SAIF-insured savings
associations at a significant competitive disadvantage to
BIF-insured institutions.
Sovereign Bank is subject to FDIC deposit insurance
assessments at the rate applicable to SAIF-insured institutions
except, however, that the deposits acquired, on January 15, 1993,
when Sovereign acquired Harmonia Bancorp, Inc., remain subject to
BIF insurance assessment rates. The balance of these Harmonia
deposits was $756.0 million at December 31, 1995. Colonial Bank,
acquired by Sovereign on November 15, 1995, is subject to FDIC
deposit insurance assessments at the rate applicable to BIF
insured institutions.
Federal savings banks like Sovereign Bank and Colonial Bank
are required by OTS regulations to pay assessments to the OTS to
fund the operations of the OTS. The general assessment is paid
on a quarterly basis and is computed based on total assets of the
institution, including subsidiaries.
Taxation
Federal Taxation. Sovereign and its subsidiaries are
subject to those rules of federal income taxation generally
applicable to corporations and report their respective income and
expenses on the accrual basis method of accounting. Sovereign
and its subsidiaries file a consolidated federal income tax
return on a calendar year basis. Each member of the consolidated
group separately computes its income and deductions.
Intercompany distributions (including dividends) and certain
other items of income and loss derived from intercompany
transactions are eliminated upon consolidation of all the
consolidated group members' respective taxable income and losses.
In computing separate taxable income and loss, Sovereign
Bank and Colonial Bank each separately computes additions to its
bad debt reserves, pursuant to the special preferential rules of
Section 593 of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable only to certain savings banks, cooperative
banks, and domestic building and loan associations (generically,
sometimes referred to as either a "thrift" or a "savings
institution"). Under certain circumstances, the separate bad
debt reserve additions of Sovereign Bank and of Colonial Bank may
be subject to adjustments upon consolidation.
For purposes of computing the annual deductible addition to
the bad debt reserve, Sovereign Bank and Colonial Bank each must
separate its loans into "qualifying real property loans" (i.e.,
generally those loans secured by interests in real property -
"qualifying loans") and all other loans ("nonqualifying loans").
The deduction with respect to "nonqualifying loans" must be
computed under the experience method (using actual historical
experience), which essentially approximates a deduction for
Sovereign Bank's or Colonial Bank's actual charge-offs, as the
case may be. A savings institution, which meets the qualifying
assets test (as further described below), is able to compute its
bad debt deduction with respect to "qualifying loans" using one
of two methods (whichever results in the larger deduction):
(i) experience method, or (ii) the "percentage of taxable income
method" (less the amount deductible for the addition to the
reserve for "nonqualifying loans"). The amount so determined is
subject to limitation in certain cases. The sum of the additions
to each reserve for Sovereign Bank and for Colonial Bank for each
year is the annual consolidated bad debt deduction, subject to
any consolidating adjustments referred to above. Sovereign Bank
and Colonial Bank intend to elect to utilize whatever available
method provides the maximum bad debt reserve additions.
If Sovereign Bank or Colonial Bank distributes amounts to
stockholders (i.e., to Sovereign) and the distribution is treated
as being from accumulated bad debt reserves, the distribution
will cause Sovereign Bank or Colonial Bank, as the case may be,
to have additional taxable income. A distribution to
stockholders is deemed to have been made from accumulated bad
debt reserves to the extent that (a) the bad debt reserves exceed
the amount that would have been accumulated on the basis of the
experience method, and (b) the distribution is a "nondividend
distribution." A distribution in respect of stock is a
"nondividend distribution" to the extent that, for federal income
tax purposes, (i) it is in redemption of shares, (ii) it is
pursuant to a partial or complete liquidation of the institution
or (iii) the distribution, together with all other such
distributions during the taxable year, exceeds the distributing
savings institution's current and post-1951 accumulated earnings
and profits. The amount of additional taxable income resulting
from a "nondividend distribution" is an amount that, when reduced
by the tax attributable to such distribution, is equal to the
amount of the distribution.
The Code imposes a corporate alternative minimum tax
("AMT"). The corporate AMT only applies if such tax exceeds a
corporation's regular tax liability. In general, the AMT is
calculated by multiplying the corporate AMT rate of 20% by an
amount equal to the excess of (i) the sum of (a) regular taxable
income plus (b) certain adjustments and tax preference items
("alternative minimum taxable income" or "AMTI") over (ii) an
exemption amount ($40,000 for a corporation, but such amount is
reduced by 25% of the excess of AMTI over $150,000 and is
completely eliminated when AMTI equals $310,000). The excess, if
any, of the bad debt deduction using the "percentage of taxable
income" method over the bad debt deduction calculated on the
basis of actual experience method is treated as a preference item
for determining AMTI. Although there are other applicable
adjustment and preference items (e.g., the adjustment for
depreciation) for determining AMTI of a savings institution, this
particular preference item is significant in determining AMTI.
If a savings institution is subject to AMT, then all or a portion
of the amount of such preference will effectively be subject to a
20% surtax.
Sovereign's consolidated federal income tax return, as well
as certain prior year separate returns of Jersey Shore and
Harmonia, for the tax years beginning after 1991 are open under
the statute of limitations.
State Taxation. Sovereign and its nonthrift Pennsylvania
subsidiaries are subject to the Pennsylvania Corporate Net Income
Tax and Capital Stock Tax. The Corporate Net Income Tax rate for
1995 and thereafter is 9.99% and is imposed on a corporate
taxpayer's unconsolidated taxable income for federal purposes
with certain adjustments. In general, the Capital Stock Tax is a
property tax imposed on a corporate taxpayer's capital stock
value apportionable to the Commonwealth of Pennsylvania, which is
determined in accordance with a fixed formula based upon average
book income and net worth. In the case of a holding company, an
optional elective method permits the corporate taxpayer to be
taxed on only 10% of such capital stock value. The Capital Stock
Tax rate is presently 1.275%.
Sovereign Bank is taxed under the Pennsylvania Mutual Thrift
Institutions Tax Act (the "Mutual Tax Act"). The Mutual Tax Act
exempts Sovereign Bank from all other corporate taxes imposed by
the Commonwealth of Pennsylvania for Pennsylvania purposes and
from all local taxation imposed by political subdivisions of
Pennsylvania, except taxes on real estate and real estate
transfers. The Mutual Tax Act is a tax upon net income
apportioned to Pennsylvania, determined in accordance with
generally accepted accounting principles ("GAAP"), with certain
modifications. The Mutual Tax Act, in computing GAAP income,
allows for the deduction of interest earned on Pennsylvania
governmental and federal securities, while disallowing a
percentage of a thrift's interest expense deduction in the
proportion of the interest income from those securities to the
overall interest income of the institution. Pursuant to the
Mutual Tax Act, Sovereign Bank's tax rate is presently 11.5% of
such net income.
Sovereign Bank and Colonial Bank are also taxed under the
New Jersey Savings Institution Tax. The Savings Institution Tax
rate is 3% and is imposed on the portion of the taxpayer's
modified federal taxable income (with certain adjustments) that
is properly attributable to New Jersey. Effective September 29,
1995, Sovereign Bank is subject to a Delaware Franchise Tax that
is imposed on federal savings banks not headquartered in
Delaware. The tax, which is imposed on taxable income properly
attributable to Delaware branches, varies from a rate of 8.7% on
taxable income up to $20 million to a rate of 2.7% on taxable
income over $30 million.
Item 2. PROPERTIES.
Sovereign Bank is the owner of a five-story office building
in Wyomissing, Berks County, Pennsylvania. The building is used
as Sovereign's and Sovereign Bank's executive offices and as
Sovereign Bank's operations center. Colonial Bank leases its
office building in Freehold, Monmouth County, New Jersey, from
its wholly-owned subsidiary, CSB Building Corporation. The
building is used as Colonial Bank's executive offices, retail
banking office and operations center.
Sovereign Bank has 120 branch offices, including 6 loan
production and personalized banking offices. Sovereign owns 65
of these offices and leases 55. Branch office leases are
generally long-term. Loan production and personalized banking
office leases generally have terms of two years or less.
Colonial Bank has no branch offices.
Item 3. LEGAL PROCEEDINGS.
Sovereign is not involved in any pending legal proceedings
other than nonmaterial legal proceedings occurring in the
ordinary course of business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information, including principal occupation during
the past five years, relating to the principal executive officers
of Sovereign, as of March 4, 1996, is set forth below:
Richard E. Mohn - Age 65. Mr. Mohn was elected the Chairman
of the Board of Sovereign on April 24, 1995. Mr. Mohn became
Chairman of the Board of Sovereign Bank in November, 1989. He
is Chairman of Cloister Spring Water Company, Lancaster,
Pennsylvania, a bottler and distributor of spring water.
Jay S. Sidhu - Age 44. Mr. Sidhu has served as President
and Chief Executive Officer of Sovereign since November 21, 1989.
Prior thereto, Mr. Sidhu served as Treasurer and Chief Financial
Officer of Sovereign. Mr. Sidhu is also President and Chief
Executive Officer of Sovereign Bank and Colonial Bank. Prior to
becoming President and Chief Executive Officer of Sovereign Bank
on March 28, 1989, Mr. Sidhu served as Vice Chairman and Chief
Operating Officer of Sovereign Bank.
Lawrence M. Thompson, Jr. - Age 43. Mr. Thompson serves as
Chief Administrative Officer and Secretary of Sovereign and Chief
Administrative Officer and Secretary of Sovereign Bank. Upon
Sovereign's acquisition of Colonial Bank on November 15, 1995,
Mr. Thompson became Secretary of Colonial Bank. Mr. Thompson was
hired as Sovereign Bank's General Counsel and Secretary in 1984.
He was promoted to Vice President in 1985. In April 1986 he
became Sovereign Bank's Senior Vice President for legal affairs
and administration. In January, 1990, he became Group Executive
Officer - Lending and in June, 1995, he became Chief
Administrative Officer of Sovereign and Sovereign Bank.
Karl D. Gerhart - Age 43. Mr. Gerhart was elected Chief
Financial Officer and Treasurer of Sovereign on February 20,
1990. Mr. Gerhart is also Group Executive Officer, Treasurer and
Chief Financial Officer of Sovereign Bank and Treasurer and Chief
Financial Officer of Colonial Bank. Mr. Gerhart joined Sovereign
Bank in 1975 and in 1986 was promoted to Vice President-
Investments. In 1987, he became Sovereign Bank's Senior Vice
President, Treasurer and Chief Investment Officer, responsible
for managing Sovereign Bank's investment portfolio and interest
rate risk.
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Sovereign's common stock is traded in the over-the-counter
market and is quoted on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") National Market
System under the symbol "SVRN." At March 4, 1996, the total
number of holders of record of Sovereign's common stock was
8,452.
The high and low bid prices reported on the NASDAQ National
Market System for Sovereign's common stock for 1994, adjusted to
reflect all stock dividends and splits, including a 5% stock
dividend declared on December 20, 1995, were $11.000 and $7.000
and for 1995 were $10.375 and $7.000, respectively.
During 1995, Sovereign paid a cash dividend of $.0209 per
share in the first quarter, $.0209 per share in the second
quarter, $.0209 per share in the third quarter and $.0210 per
share in the fourth quarter. During 1994, Sovereign paid a cash
dividend of $.0336 per share in the first quarter, $.0256 per
share in the second quarter, $.0258 per share in the third
quarter and $.0209 per share in the fourth quarter. During 1993,
Sovereign paid a cash dividend of $0.0250 per share in the first
quarter, $.0259 in the second quarter, $.0252 in the third
quarter and $.0231 in the fourth quarter. These per share
amounts have been adjusted to reflect all stock dividends and
stock splits and acquisitions accounted for as pooling-
of-interests.
For certain limitations on the ability of Sovereign Bank and
of Colonial Bank to pay dividends to Sovereign, see Note 10 to
Sovereign's consolidated financial statements, incorporated by
reference herein at Item 8 "Financial Statements and
Supplementary Data" and Item 1 "Business--Supervision and
Regulation--Restriction on Capital Distributions" hereof.
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA(1)
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992(2) 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,078,287 $6,564,082 $4,877,166 $3,699,084 $2,274,702
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,674,364 4,350,898 2,898,014 2,337,382 1,437,247
Allowance for possible loan losses . . . . . . . . . . . . . . . . 34,856 36,289 33,099 26,562 13,198
Investment and mortgage-backed securities available-for-sale . . . 889,509 87,128 -- -- --
Investment and mortgage-backed securities held-to-maturity . . . . 2,077,212 1,816,840 1,689,304 1,001,356 644,061
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,039,143 4,027,119 3,183,107 2,961,058 1,815,679
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,530,656 2,162,587 1,367,100 427,591 285,059
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 427,025 303,900 259,121 220,419 137,259
<CAPTION>
SUMMARY STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992(2) 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total interest income . . . . . . . . . . . . . . . . . . . . . . $ 493,031 $ 354,141 $ 282,790 $ 199,431 $ 182,015
Total interest expense . . . . . . . . . . . . . . . . . . . . . 318,805 198,741 153,318 118,585 125,326
---------- ---------- ---------- ---------- ----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . 174,226 155,400 129,472 80,846 56,689
Provision for possible loan losses . . . . . . . . . . . . . . . 1,000 4,100 8,650 10,080 6,796
---------- ---------- ---------- ---------- ----------
Net interest income after provision for possible loan losses. . . 173,226 151,300 120,822 70,766 49,893
---------- ---------- ---------- ---------- ----------
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . 25,829 14,554 15,167 10,965 5,083
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 113,108 90,989 77,377 47,036 33,460
---------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative effect of change
in accounting principle . . . . . . . . . . . . . . . . . . . . 85,947 74,865 58,612 34,695 21,516
Income tax provision . . . . . . . . . . . . . . . . . . . . . . 29,539 28,467 22,998 15,057 9,534
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in accounting principle 56,408 46,398 35,614 19,638 11,982
Cumulative effect of change in accounting principle . . . . . . . -- -- 4,800 -- --
---------- ---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414 $ 19,638 $ 11,982
========== ========== ========== ========== ==========
Net income applicable to common stock . . . . . . . . . . . . . . $ 51,719 $ 46,398 $ 40,414 $ 19,638 $ 11,982
========== ========== ========== ========== ==========
SHARE DATA(3)
Common shares outstanding at end of period (in thousands) . . . . 45,465 45,567 41,357 40,682 23,898
Preferred shares outstanding at end of period (in thousands) . . . 2,000 -- -- -- --
Earnings per common and common equivalent share:
Before cumulative effect of change in accounting principle. . $ 1.00 $ .90 $ .70 $ .51 $ .37
After cumulative effect of change in accounting principle . . 1.00 .90 .80 .51 .37
Book value per common and common equivalent share at end of
period(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.40 6.05 5.24 4.53 3.73
Common share price at end of period . . . . . . . . . . . . . . . 9 5/8 7 10 11/16 6 1/16 3 3/16
Dividends paid per common share . . . . . . . . . . . . . . . . . .084 .106 .099 .082 .058
Dividend payout ratio. . . . . . . . . . . . . . . . . . . . . . . 8.40% 11.78% 14.14% 16.08% 15.68%
</TABLE>
(1) The acquisitions of Valley Federal and Charter were
accounted for as pooling-of-interests and accordingly, the
consolidated financial statements have been restated to
include the accounts of Valley Federal and Charter for all
periods presented.
(2) The acquisition of Harmonia was accounted for as a purchase
at the close of business on December 31, 1992. Sovereign's
consolidated balance sheet at December 31, 1992, includes
Harmonia. Sovereign's 1992 consolidated results of
operations do not include Harmonia's results.
(3) All per share data have been adjusted to reflect all stock
dividends and stock splits.
(4) Book value is calculated using equity divided by common
shares and, if converted, preferred shares.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General. Sovereign and subsidiaries reported net income of
$56.4 million for the year ended December 31, 1995. This
represents an increase of 22% over net income of $46.4 million
reported for 1994. Earnings per share were $1.00 for 1995 which
represents an increase of 11% over 1994 earnings per share of
$.90. Return on average equity and return on average assets were
14.95% and .78%, respectively, for 1995 compared to 16.47% and
.84%, respectively, for 1994. Return on average risk-adjusted
assets was 1.68% for 1995 compared to 1.77% for 1994.
Sovereign's financial results include the following significant
events:
Interest Rate Environment. During 1995, the Board of
Governors of the Federal Reserve System lowered short-term
interest rates three times, resulting in a 1% reduction in
short-term rates. Long-term interest rates responded
dramatically to 1995's slowing economy and lower rate of
inflation by decreasing more than 2% during the year. This
tightening of interest rates resulted in a flat yield curve (a
shrinking of the difference between short-term rates and
long-term rates). The flat yield curve coupled with a low
interest rate environment caused a contraction of Sovereign's
interest rate spread (the difference between the yield on total
assets and the cost of total liabilities and stockholders'
equity) from 2.82% in 1994 to 2.42% in 1995. While the flat
yield curve compressed Sovereign's interest rate spread, it did
allow Sovereign the opportunity to extend the maturity and
repricing of its liabilities and shorten the maturity and
repricing of its assets. This repositioning shifted Sovereign's
one year gap position (the ratio representing the difference
between assets, liabilities and off-balance sheet positions which
will mature or reprice within one year expressed as a percentage
of average assets) from a negative 10.5% at December 31, 1994, to
a negative .29% at December 31, 1995.
Berkeley. On November 17, 1995, Sovereign acquired two
branch offices and related deposits from Berkeley Federal Bank &
Trust, FSB ("Berkeley"). Sovereign assumed approximately
$111.7 million of deposit liabilities and received approximately
$104.9 million of cash.
Colonial. On November 15, 1995, Sovereign acquired Colonial
Bank in a transaction accounted for as a purchase. Sovereign
acquired $46.5 million of assets consisting principally of loans
and investment securities. Sovereign also assumed approximately
$42.0 million of deposit liabilities. Sovereign acquired
Colonial Bank in exchange for $6.3 million in cash. Colonial
Bank operates as a separate banking subsidiary of Sovereign.
Colonial's results of operations from November 15, 1995,
and thereafter, have been included in Sovereign's consolidated
results of operations.
Northwest Savings Bank and Union National Bank & Trust
Company. On November 10, 1995, Sovereign completed the sale of
its Pottsville, Pennsylvania branch office with related deposits
totalling $23.9 million to Northwest Savings Bank ("Northwest")
and the sale of its English Village branch office in North Wales,
Pennsylvania with related deposits of $12.4 million to Union
National Bank & Trust Company ("Union National"). As a result of
these transactions, Sovereign recognized a pre-tax gain of
$1.1 million and reduced goodwill by $568,000, respectively.
Collective. On April 21, 1995, Sovereign completed the sale
of seven southern New Jersey offices with related deposits
totalling $106.7 million to Collective Bancorp, Inc.
("Collective"). Six of these offices had previously been
purchased from Berkeley as part of a transaction which occurred
on January 1, 1995. In addition, Sovereign acquired $7.0 million
of deposits from Collective's Wilmington, Delaware branch office.
As a result of this transaction, Sovereign recognized a pre-tax
gain of $1.5 million and reduced its existing core deposit
intangible by approximately $6.0 million.
Berkeley. On January 1, 1995, Sovereign acquired 23 branch
offices located in New Jersey and Delaware with $909.3 million of
deposit liabilities from Berkeley. In exchange for assuming the
deposits of the Berkeley offices, Sovereign acquired principally
cash and fixed assets, net of a deposit premium of $66.6 million.
Charter. On November 1, 1994, Sovereign acquired Charter
FSB Bancorp, Inc. ("Charter"). At September 30, 1994, Charter
had total assets, deposits and stockholders' equity of
approximately $405.8 million, $341.4 million and $41.7 million,
respectively. Sovereign exchanged a total of 7.0 million new
shares (7.7 million shares as adjusted for all subsequent stock
dividends) of Sovereign common stock with a value of
$62.7 million for all of the outstanding shares of Charter common
stock.
The acquisition of Charter was accounted for as a
pooling-of-interests and accordingly, the consolidated financial
statements have been restated to include the accounts of Charter
for all periods presented.
Second National. On September 16, 1994, Sovereign acquired
the Chadds Ford, Pennsylvania office and related deposits of
Second National Federal Savings Association ("Second National")
from the Resolution Trust Corporation ("RTC"), receiver for
Second National. Sovereign assumed approximately $14.4 million
of deposit liabilities and received approximately $13.7 million
of cash.
Shadow Lawn. On August 5, 1994, Sovereign acquired Shadow
Lawn Savings Bank ("Shadow Lawn") in a transaction accounted for
as a purchase. Sovereign acquired $787.5 million of assets
consisting principally of investment and mortgage-backed
securities and loans. Sovereign also assumed approximately
$730.6 million of deposit liabilities. Sovereign acquired Shadow
Lawn in exchange for $78.4 million of cash.
Shadow Lawn's results of operations from August 5, 1994, and
thereafter, have been included in Sovereign's consolidated
results of operations.
Valley Federal. On November 5, 1993, Sovereign acquired
Valley Federal Savings and Loan Association ("Valley Federal").
At September 30, 1993, Valley Federal had total assets, deposits
and stockholders' equity of $315.7 million, $256.4 million and
$18.6 million, respectively. Sovereign exchanged a total of
2.9 million new shares (3.5 million shares as adjusted for all
subsequent stock dividends) of Sovereign common stock with a
value of $32.3 million for all of the outstanding shares of
Valley Federal common stock.
The acquisition of Valley Federal was accounted for as a
pooling-of-interests and accordingly, the consolidated financial
statements have been restated to include the accounts of Valley
Federal for all periods presented.
Home Unity. On August 27, 1993, Sovereign assumed
$252.3 million of deposit liabilities and received $233.7 million
of cash from the RTC as receiver of nine branch offices of Home
Unity Federal Savings and Loan Association ("Home Unity").
Harmonia. On January 15, 1993, Sovereign formally acquired
Harmonia Bancorp, Inc. ("Harmonia") in a transaction which was
accounted for as a purchase. Pursuant to applicable accounting
guidance for business combinations, the Harmonia acquisition was
accounted for as having been completed at the close of business
on December 31, 1992, because control of Harmonia had been
transferred to Sovereign as of that date. Sovereign acquired
total assets of $621.0 million consisting principally of cash and
interest-earning deposits, federal funds sold, investment and
mortgage-backed securities and performing loans. Sovereign
assumed liabilities consisting principally of deposits.
Sovereign acquired Harmonia in exchange for $19.6 million of cash
and 9.6 million new shares (11.6 million shares as adjusted for
all subsequent stock dividends) of Sovereign common stock which
were issued at a value of $66.1 million.
Since the Harmonia acquisition was accounted for at the
close of business on December 31, 1992, Sovereign's consolidated
balance sheet at December 31, 1992, includes Harmonia.
Sovereign's consolidated results of operations include Harmonia's
results of operations from January 1, 1993, and thereafter.
Accounting Changes. In January 1994, Sovereign adopted
Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity
Securities," which requires management to classify investments in
equity securities that have readily determinable fair values and
all investments in debt securities as either held-to-maturity and
reported at amortized cost, available-for-sale and reported at
fair value with unrealized gains and losses reported in a
separate component of stockholders' equity, or trading securities
and reported at fair value with unrealized gains and losses
included in earnings. Effective January 1, 1994, Sovereign
classified $1.29 billion of securities as held-to-maturity,
$391.0 million of securities as available-for-sale and
$6.5 million of securities as trading securities. The adoption
of SFAS No. 115 resulted in an $836,000 increase to stockholders'
equity accounted for as the cumulative effect of a change in
accounting principle in 1994. On November 15, 1995, the
Financial Accounting Standards Board ("FASB") issued a Special
Report, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities". On
December 7, 1995, in accordance with provisions in that Special
Report, Sovereign reclassified $750.2 million of securities from
held-to-maturity to available-for-sale. This reclassification
resulted in a $1.7 million unrealized gain, net of tax, which is
included in Sovereign's stockholders' equity at December 31,
1995.
In October 1995, the FASB issued SFAS No. 123 "Accounting
for Stock-Based Compensation" which provides companies with a
choice either to expense the fair value of employee stock options
over the vesting period (recognition method) or to continue the
previous practice but disclose the pro forma effects on net
income and earnings per share had the fair value method been used
(disclosure only method). Companies electing the disclosure only
method will be required to include the pro forma effects of all
awards granted in fiscal years beginning after December 15, 1994.
Sovereign plans to adopt the disclosure only method during 1996.
Effective July 1, 1995, Sovereign prospectively adopted SFAS
No. 122 "Accounting for Mortgage Servicing Rights". SFAS No.
122 requires that management recognize as separate assets, rights
to service mortgage loans for others, however those servicing
rights are acquired. Management allocates the total cost of
mortgage loans, either purchased or originated, to the loans and
the mortgage servicing rights based on their relative fair value.
The Statement also requires that management assess its
capitalized mortgage servicing rights for impairment based on the
fair value of those rights, and that this impairment be
recognized through a valuation allowance. The adoption of SFAS
No. 122 will not have a material effect on Sovereign's
operations.
Sovereign adopted SFAS No. 109 in January 1993, and has
applied the provisions of the statement without restating prior
years' financial statements. The adoption of SFAS No. 109
resulted in a $4.8 million increase to net income ($.10 per
share) that was accounted for as the cumulative effect of a
change in accounting principle.
Subordinated Debentures. On July 18, 1995, Sovereign issued
$50.0 million of 6.75% non-amortizing subordinated debentures due
July 1, 2000, receiving net proceeds of approximately
$49.4 million. On September 1, 1993, Sovereign issued
$50.0 million of 6.75% non-amortizing subordinated debentures due
September 1, 2000, receiving net proceeds of approximately
$49.2 million. On April 7, 1993, Sovereign issued $50.0 million
of 8.00% non-amortizing subordinated debentures due March 15,
2003, receiving net proceeds of approximately $48.7 million. All
of the subordinated debentures qualify as supplementary capital
at Sovereign Bancorp. Approximately $100.0 million of the net
proceeds of Sovereign's subordinated debentures has been
contributed to the capital of Sovereign Bank and qualifies as
primary capital at Sovereign Bank.
Preferred Stock. On May 17, 1995, Sovereign completed the
sale of 2.0 million shares of Convertible Preferred Stock,
raising $96.7 million in capital. The 6 1/4%, non-voting,
Cumulative Convertible Preferred Stock is convertible at the
option of the holder at any time, unless previously redeemed, at
a conversion rate of 4.989 shares of common stock for each share
of preferred stock, equivalent to a conversion price of
$10.022 per share of common stock.
Stock Dividends. Sovereign declared a 5% stock dividend on
December 20, 1995 and on February 22, 1995, and a 10% stock
dividend on April 19, 1994. All per share information such as
earnings, book value, share price and dividends have been
restated to reflect all stock dividends and stock splits. See
Item 8, at Note 1(c) to Sovereign Consolidated Financial
Statements for a detailed discussion of Sovereign's stock
dividends and stock splits.
Federal Deposit Insurance Corporation. Sovereign Bank is
insured by the SAIF of the FDIC and pays insurance fees equal to
$.23 per $100.00 (23 basis points) of insured deposits annually,
the lowest rate permitted. The average SAIF premium is 24 basis
points. Colonial Bank is insured by the BIF of the FDIC. During
recent years, the FDIC's BIF, which insures commercial banks and
certain savings banks, has also charged an average premium to its
members of 24 basis points, and a minimum assessment of 23 basis
points.
Effective September 30, 1995, the average BIF premium was
reduced from 24 basis points to 4.4 basis points, with the
minimum assessment being reduced from 23 basis points to 4 basis
points. Subsequently, the minimum BIF assessment was reduced to
0 basis points effective January 1, 1996, subject to the minimum
FDIC annual assessment of $1,000. The average and minimum SAIF
premiums remain at 24 and 23 basis points, respectively, until
the SAIF reserves reach $1.25 per $100.00 in insured deposits.
In order to accelerate the recapitalization of the SAIF, it
has been proposed that SAIF-insured institutions such as
Sovereign Bank be assessed a one-time charge of between 85 and
90 basis points of their insured deposits as of March 31, 1995.
If enacted, this assessment would result in a pre-tax charge to
Sovereign Bank's earnings of approximately $36.0 million to
$38.1 million. This charge would have a significant negative
impact on earnings in the period enacted. In accordance with
FASB guidance on this specific issue, no liability or charge for
this assessment is included in the 1995 audited financial
statements.
While it cannot be determined at this time what the outcome
of these events and proposals will be, Sovereign Bank has been
placed at a significant competitive disadvantage which will
remain until the BIF and SAIF insurance premiums are again made
equal.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994
Net Interest Income. Net interest income for 1995 was
$174.2 million compared to $155.4 million in 1994. This
represents an increase of 12% and is primarily due to an increase
in the size of the balance sheet resulting from the recent
acquisitions and internal growth, partially offset by a decline
in Sovereign's interest rate spread.
Interest and fees on loans were $327.5 million for 1995
compared to $248.7 million for 1994. The average balance of
loans was $4.50 billion with an average yield of 7.29% for 1995
compared to an average balance of $3.58 billion with an average
yield of 6.95% for 1994. The increase in average balance was
primarily due to the origination of $1.06 billion of residential
mortgage loans of which $808.8 million (principally discounted
adjustable rate loans) were retained in Sovereign's loan
portfolio. The increase in yield was the result of the upward
repricing of discounted adjustable rate loans which Sovereign
originated in 1994.
Interest on investment and mortgage-backed securities
available-for-sale was $10.1 million for 1995 compared to
$6.2 million for 1994. The average balance of investment and
mortgage-backed securities available-for-sale was $147.7 million
with an average yield of 7.09% for 1995 compared to an average
balance of $104.3 million with an average yield of 6.27% in 1994.
The increase in average yield is the result of generally higher
interest rates.
Interest on investment and mortgage-backed securities
held-to-maturity was $151.6 million for 1995 compared to
$96.7 million for 1994. The average balance of investment and
mortgage-backed securities held-to-maturity was $2.19 billion
with an average yield of 6.92% for 1995 compared to an average
balance of $1.55 billion with an average yield of 6.24% for 1994.
Interest on interest-earning deposits was $3.8 million for
1995 compared to $2.5 million for 1994. The average balance of
interest-earning deposits was $23.9 million with an average yield
of 16.10% for 1995 compared to an average balance of
$43.5 million with an average yield of 5.77% for 1994.
Interest on total deposits was $210.3 million for 1995
compared to $121.8 million for 1994. The average balance of
total deposits was $4.95 billion with an average cost of 4.25%
for 1995 compared to an average balance of $3.58 billion with an
average cost of 3.40% for 1994. The increase in average balance
was primarily due to the Berkeley acquisition. The increase in
the average cost of deposits was a result of a general rise in
interest rates.
Interest on total borrowings was $108.5 million for 1995
compared to $76.9 million for 1994. The average balance of total
borrowings was $1.83 billion with an average cost of 5.92% for
1995 compared to an average balance of $1.59 billion with an
average cost of 4.84% for 1994. The increase in average cost of
borrowings is a result of the general rise in interest rates and
the cost of the subordinated debentures issued during 1995.
<PAGE>
Table 1 presents a summary of Sovereign's average balances,
the yields earned on average assets and the cost of average
liabilities and stockholders' equity for the years ended
December 31, 1995, 1994 and 1993 (in thousands):
Table 1: Spread Analysis
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1994
---------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits . . . . . . . . . . . . $ 23,868 $ 3,843 16.10% $ 43,503 $ 2,508 5.77%
Investment and mortgage-backed securities
available-for-sale(1) . . . . . . . . . . . . . 147,658 10,118 7.09 104,296 6,188 6.27
Investment and mortgage-backed securities
held-to-maturity(2)(3) . . . . . . . . . . . . 2,191,395 151,620 6.92 1,549,999 96,729 6.24
Net loans(4)(5) . . . . . . . . . . . . . . . . 4,496,756 327,450 7.29 3,581,685 248,716 6.95
---------- -------- ----- ---------- -------- ----
Total interest-earning assets . . . . . . . . . . 6,859,677 493,031 7.19 5,279,483 354,141 6.72
Non-interest-earning assets . . . . . . . . . . . 366,931 -- -- 250,836 -- --
---------- -------- ----- ---------- -------- ----
Total assets . . . . . . . . . . . . . . . . . $7,226,608 493,031 6.83 $5,530,319 354,141 6.41
========== -------- ----- ========== -------- ----
Interest-bearing liabilities:
Deposits:
Savings deposits . . . . . . . . . . . . . . . $2,017,194 53,059 2.63 $1,594,473 36,677 2.30
Certificates . . . . . . . . . . . . . . . . . 2,929,025 157,208 5.37 1,989,931 85,135 4.28
---------- -------- ----- ---------- -------- ----
Total deposits . . . . . . . . . . . . . . . . 4,946,219 210,267 4.25 3,584,404 121,812 3.40
Total borrowings . . . . . . . . . . . . . . . . 1,832,446 108,538 5.92 1,588,560 76,929 4.84
---------- -------- ----- ---------- -------- ----
Total interest-bearing liabilities 6,778,665 318,805 4.70 5,172,964 198,741 3.84
Non-interest-bearing liabilities 70,630 -- -- 75,694 -- --
---------- -------- ----- ---------- -------- ----
Total liabilities . . . . . . . . . . . . . . 6,849,295 318,805 4.65 5,248,658 198,741 3.79
Stockholders' equity . . . . . . . . . . . . . . 377,313 -- -- 281,661 -- --
---------- -------- ----- ---------- -------- ----
Total liabilities and stockholders' equity . . $7,226,608 318,805 4.41 $5,530,319 198,741 3.59
========== -------- ----- ========== -------- ----
Interest rate spread(6) . . . . . . . . . . . . 2.42% 2.82%
===== ====
Net interest income/net yield on total
interest-earning assets(7) $174,226 2.54% $155,400 2.96%
======== ===== ======== ====
Ratio of interest-earning assets to interest-
bearing liabilities . . . . . . . . . . . . . . 1.01x 1.02x
===== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993
------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
---------- -------- ------
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits . . . . $ 82,980 $ 3,344 4.03%
Investment and
mortgage-backed securities
available-for-sale(1) . . . . . -- -- --
Investment and
mortgage-backed securities
held-to-maturity(2)(3) . . . . 1,530,073 92,534 6.06
Net loans(4)(5) . . . . . . . . 2,547,943 186,912 7.34
---------- -------- -----
Total interest-earning assets . 4,160,996 282,790 6.80
Non-interest-earning assets . . . 213,247 -- --
---------- -------- -----
Total assets . . . . . . . . . $4,374,243 282,790 6.47
========== -------- -----
Interest-bearing liabilities:
Deposits:
Savings deposits . . . . . . . $1,388,795 38,368 2.76
Certificates . . . . . . . . . 1,665,038 69,702 4.19
---------- -------- -----
Total deposits . . . . . . . . 3,053,833 108,070 3.54
Total borrowings . . . . . . . . 1,001,793 45,248 4.52
---------- -------- -----
Total interest-bearing liabilities 4,055,626 153,318 3.78
Non-interest-bearing liabilities 77,447 -- --
---------- -------- -----
Total liabilities . . . . . . 4,133,073 153,318 3.71
Stockholders' equity . . . . . . 241,170 -- --
---------- -------- -----
Total liabilities and
stockholders' equity . . . . $4,374,243 153,318 3.51
========== -------- -----
Interest rate spread(6) . . . . 2.96%
====
Net interest income/net yield on
total interest-earning assets(7) $129,472 3.11%
======== ====
Ratio of interest-earning
assets to interest-
bearing liabilities . . . . . . 1.03x
====
</TABLE>
(1) The tax equivalent adjustments for the years ended
December 31, 1995 and 1994 were $344,000 and $346,000,
respectively, and are based on a tax rate of 38% in 1995 and
35% in 1994.
(2) The tax equivalent adjustment for the year ended
December 31, 1993 was $145,000 and is based on a tax rate of
35%, (none in 1994 or 1995).
(3) Amortization of fees of $52,000 pertaining to
mortgage-backed securities is included in interest income
for the year ended December 31, 1993, (none in 1994 or
1995).
(4) Amortization of net fees of $2,574,000, $476,000 and
$4,491,000 for the years ended December 31, 1995, 1994 and
1993, respectively, are included in interest income.
Average loan balances include non-accrual loans and loans
held for resale.
(5) The tax equivalent adjustments for the years ended
December 31, 1995, 1994 and 1993, were $144,000, $150,000
and $152,000, respectively, and are based on a tax rate of
38% in 1995 and 35% in 1994 and 1993.
(6) Represents the difference between the yield on total assets
and the cost of total liabilities and stockholders' equity.
(7) Represents tax equivalent net interest income divided by
interest-earning assets.
<PAGE>
Table 2 presents, prior to any tax equivalent adjustments,
the relative contribution of changes in volumes and changes in
rates to changes in net interest income for the periods
indicated. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has
been allocated proportionately to the change due to volume and
the change due to rate (in thousands):
Table 2: Volume/Rate Analysis
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 VS. 1994 1994 VS. 1993
INCREASE/(DECREASE) INCREASE/(DECREASE)
------------------------------------- --------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- --------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits . . . . $ (449) $ 1,784 $ 1,335 $ (8,809) $ 7,973 $ (836)
Investment and mortgage-backed
securities available-for-sale 2,863 1,067 3,930 6,188 -- 6,188
Investment and mortgage-backed
securities held-to-maturity . 43,472 11,419 54,891 1,216 2,979 4,195
Net Loans(1) . . . . . . . . . . 66,140 12,594 78,734 72,255 (10,451) 61,804
======= ======== -------- ======== ======== --------
Total interest-earning assets . . 138,890 71,351
-------- --------
Interest-bearing liabilities:
Deposits . . . . . . . . . . . 53,273 35,182 88,455 18,169 (4,427) 13,742
Borrowings . . . . . . . . . . 12,885 18,724 31,609 28,205 3,476 31,681
======= ======== -------- ======== ======== --------
Total interest-bearing liabilities 120,064 45,423
-------- --------
Net change in net interest income $42,395 $(23,569) $ 18,826 $ 32,183 $ (6,255) $25,928
======= ======== ======== ======== ======== ========
</TABLE>
(1) Includes non-accrual loans and loans held for resale.
Provision for Possible Loan Losses. The provision for
possible loan losses was $1.0 million for 1995 compared to
$4.1 million for 1994. This decreased provision was the result of
improved asset quality. See "Credit Quality" for a detailed
discussion of Sovereign's asset quality.
During 1995, Sovereign charged-off (net of recoveries)
$2.9 million of loans compared to $5.6 million during 1994. The
decreased level of charge-offs is primarily due to $2.4 million
of charge-offs in 1994 that did not recur in 1995. The
$2.4 million of charge-offs in 1994 were related to the
disposition of $40.4 million of non-performing assets acquired in
the Shadow Lawn acquisition. Sovereign also acquired a $485,000
allowance for possible loan losses in the Colonial acquisition.
<PAGE>
Table 3 presents the activity in the allowance for possible
loan losses for the years indicated (in thousands):
Table 3: Reconciliation of the Allowance for Possible Loan
Losses
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Allowance, beginning of year . . . . . . . . . . . . $36,289 $33,099 $26,562 $13,198 $ 8,823
Charge-offs:
Residential . . . . . . . . . . . . . . . . . . . . 2,679 2,563 1,077 905 2,216
Commercial real estate . . . . . . . . . . . . . . 498 2,932 292 618 133
Commercial . . . . . . . . . . . . . . . . . . . . -- -- 1 1,853 104
Consumer (including home equity lines of credit) . 403 933 894 740 5
------- ------- ------- ------- -------
Total charge-offs . . . . . . . . . . . . . . . 3,580 6,428 2,264 4,116 2,458
------- ------- ------- ------- -------
Recoveries:
Residential . . . . . . . . . . . . . . . . . . . 514 352 7 41 17
Commercial real estate . . . . . . . . . . . . . . 125 82 49 54 5
Commercial . . . . . . . . . . . . . . . . . . . . -- 75 45 3 12
Consumer (including home equity lines of credit) . 23 297 6 28 3
------- ------- ------- ------- -------
Total recoveries . . . . . . . . . . . . . . . . 662 806 107 126 37
------- ------- ------- ------- -------
Charge-offs, net of recoveries . . . . . . . . . . . 2,918 5,622 2,157 3,990 2,421
Provision for possible loan losses . . . . . . . . . 1,000 4,100 8,650 10,080 6,796
Acquired reserves and other additions . . . . . . . . 485 4,712 44 7,274 --
------- ------- ------- ------- -------
Allowance, end of year . . . . . . . . . . . . . . . $34,856 $36,289 $33,099 $26,562 $13,198
======= ======= ======= ======= =======
Charge-offs, net of recoveries to average loans . . . .064% .155% .084% .237% .179%
======= ======= ======= ======= =======
</TABLE>
Other Income. Total other income was $25.8 million for 1995
compared to $14.6 million for 1994.
Other loan fees and service charges were $4.4 million for
1995 compared to $5.0 million for 1994. This decrease was
primarily due to a decrease in Sovereign's servicing portfolio.
At December 31, 1995, Sovereign serviced $4.04 billion of its own
loans and $947.1 million of loans for others. This compares to
$3.90 billion of its own loans and $1.11 billion of loans for
others at December 31, 1994.
Deposit fees were $9.4 million for 1995 compared to
$5.8 million for 1994. This increase was primarily the result of
the Berkeley acquisition and the full year effect of the Shadow
Lawn acquisition.
The gain on loans and investment and mortgage-backed
securities was $419,000 for 1995 compared to $494,000 for 1994.
Mortgage banking gains were $6.1 million for 1995 compared
to $1.5 million for 1994. The 1995 gain includes a $3.6 million
gain recognized on the sale of $238.5 million of mortgage
servicing rights. The 1994 gain includes a $1.1 million gain on
the sale of servicing rights related to $111.4 million of
residential mortgage loans.
Miscellaneous income was $5.5 million for 1995 compared to
$1.8 million for 1994. This increase includes a $2.6 million
gain on the sale of $130.6 million of deposits sold during 1995.
General and Administrative Expenses. Total general and
administrative expenses were $100.3 million for 1995 compared to
$84.4 million for 1994. The 19% increase in general and
administrative expenses from 1994 to 1995 compares to a 31%
increase in the average balance sheet over the same time period.
The ratio of general and administrative expenses to average
assets was 1.39% for 1995 compared to 1.53% for 1994. This
decrease in the expense ratio is the result of efficiencies
realized from recent acquisitions and an increase in average
balances without a corresponding increase in operating expenses.
Other operating expenses were $12.8 million for 1995
compared to $6.6 million for 1994. Included in other operating
expenses was amortization of goodwill and other intangible assets
of $12.2 million for 1995 compared to $6.5 million for 1994.
This increase was primarily the result of the Berkeley
acquisition and a full year of amortization of goodwill and core
deposit intangibles resulting from the Shadow Lawn acquisition.
Real estate owned ("REO") losses were $657,000 for 1995 compared
to $91,000 for 1994.
Income Tax Provision. The income tax provision was
$29.5 million for 1995 compared to $28.5 million for 1994. The
effective tax rate for 1995 was 34.4% compared to 38.0% for 1994.
FINANCIAL CONDITION
Loan Portfolio. Sovereign's primary loan products are
variable rate mortgage loans on owner occupied residential real
estate. Sovereign's focus on these products has resulted in
97.8% of Sovereign's total loan portfolio at December 31, 1995
being secured by residential real estate and $3.54 billion or
75.7% of the total loan portfolio being comprised of variable
rate loans. However, as a result of Sovereign's use of interest
rate swaps, $426.1 million of variable rate mortgage loans have
been effectively converted to fixed rate mortgage loans. Also,
$295.7 million of intermediate variable rate mortgage loans
(loans with a five-year fixed rate period) have effectively been
converted to a variable rate over the fixed rate period. At
December 31, 1995, Sovereign's total loan portfolio of
$4.67 billion included $4.00 billion of first mortgage loans
secured primarily by liens on owner occupied one-to-four family
residential properties and $456.9 million of outstanding home
equity loans ($293.1 million of additional unused commitments for
home equity lines of credit) secured primarily by second
mortgages on owner occupied one-to-four family residential
properties. At December 31, 1995, Sovereign's residential loan
portfolio also included $75.2 million of multi-family loans.
<PAGE>
Table 4 presents the composition of Sovereign's loan
portfolio by type of loan and by fixed and adjustable rates at
the dates indicated (in thousands):
Table 4: Composition of Loan Portfolio
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- ----------------------
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
---------- ------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Residential real estate
loans: . . . . . . . . . . . . . $3,998,048 85.53% $3,710,150 85.27% $2,434,520 84.01%
Real estate construction
loans:
Residential . . . . . . . . . . 38,151 .82 49,094 1.13 23,086 .80
Residential development . . . . 1,676 .04 3,226 .08 3,205 .11
Multi-family loans . . . . . . . . 75,218 1.61 95,216 2.19 117,257 4.04
Home equity loans . . . . . . . . . 456,922 9.77 413,037 9.49 270,471 9.33
---------- ------ ---------- ----- --------- ------
Total Residential
Loans . . . . . . . . . . . . . 4,570,015 97.77 4,270,723 98.16 2,848,539 98.29
Commercial real estate
loans . . . . . . . . . . . . . . 47,177 1.01 39,717 .91 18,259 .63
Commercial loans . . . . . . . . . 15,831 .34 5,730 .13 8,351 .29
Consumer loans . . . . . . . . . . 41,341 .88 34,728 .80 22,865 .79
---------- ------ ---------- ------ ---------- ------
Total Loans . . . . . . . . . . . $4,674,364 100.00% $4,350,898 100.00% $2,898,014 100.00%
========== ====== ========== ====== ========== ======
Total Loans with:
Fixed rates . . . . . . . . . . . $1,134,542 24.27% $1,097,469 25.22% $905,320 31.24%
Variable rates . . . . . . . . . 3,539,822 75.73 3,253,429 74.78 1,992,694 68.76
---------- ------ ---------- ------ ---------- ------
Total Loans . . . . . . . . . . $4,674,364 100.00% $4,350,898 100.00% $2,898,014 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1992 1991
---------------------- ----------------------
BALANCE PERCENT BALANCE PERCENT
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Residential real estate
loans: . . . . . . . . . . . . . $1,830,629 78.32% $1,113,224 77.46%
Real estate construction
loans:
Residential . . . . . . . . . . 38,954 1.67 28,040 1.95
Residential development . . . . 2,029 .09 2,522 .18
Multi-family loans . . . . . . . . 125,443 5.37 6,748 .47
Home equity loans . . . . . . . . . 260,514 11.14 191,651 13.33
---------- ----- ---------- -----
Total Residential
Loans . . . . . . . . . . . . . 2,257,569 96.59 1,342,185 93.39
Commercial real estate
loans . . . . . . . . . . . . . . 31,214 1.34 42,455 2.95
Commercial loans . . . . . . . . . 7,565 .32 7,878 .55
Consumer loans . . . . . . . . . . 41,034 1.75 44,729 3.11
---------- ----- ---------- -----
Total Loans . . . . . . . . . . . $2,337,382 100.00% $1,437,247 100.00%
========== ====== ========== ======
Total Loans with:
Fixed rates . . . . . . . . . . . $ 737,339 31.55% $ 420,151 29.23%
Variable rates . . . . . . . . . 1,600,043 68.45 1,017,096 70.77
--------- ------ --------- ------
Total Loans . . . . . . . . . . $2,337,382 100.00% $1,437,247 100.00%
========== ====== ========== ======
</TABLE>
<PAGE>
Credit Quality. Since Sovereign's primary loan products are
residential loans, Sovereign has instituted various controls
specifically designed to improve the credit quality of
residential loans. For instance, Sovereign utilizes underwriting
standards which in some cases are more conservative than the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal
National Mortgage Association ("FNMA"). Sovereign maintains an
independent Loan Review Department which each month reviews a
statistical sampling of all new originations for sound
underwriting practices and reviews and rates all mortgage loan
requests in excess of $300,000 with a loan-to-value ratio in
excess of 75% and all applications for home equity lines of
credit of $100,000 and over with a loan-to-value ratio in excess
of 70%, prior to submission of the loan for underwriting.
Results of these loan reviews are discussed at quarterly Loan
Review meetings. Criticized loans and deficiencies in those
loans are discussed and corrected.
Sovereign also closely monitors delinquencies as a means of
maintaining high asset quality. Collection efforts begin as
early as 15 days after a loan payment is due. All borrowers
whose loans are more than 30 days past due are contacted by a
collection officer in an effort to correct the delinquency. Once
a loan is more than 90 days past due, it is referred to the Asset
Recovery and Liquidation Department and the process of
liquidation begins. Sovereign monitors delinquency trends at 30,
60 and 90 days past due. These trends are discussed at the
quarterly Loan Review and monthly Asset Review meetings, and with
the Boards of Directors of Sovereign Bancorp and Sovereign Bank.
At December 31, 1995, Sovereign's non-performing assets were
$43.7 million compared to $40.5 million at December 31, 1994.
Non-performing assets as a percentage of total assets were .54%
at December 31, 1995 compared to .62% at December 31, 1994. At
December 31, 1995, 84% of non-performing assets consisted of
loans or REO related to one-to-four family residential real
estate. Historically, losses on the disposition of non-
performing residential real estate have been lower than non-
performing commercial and commercial real estate loans. The
remainder of Sovereign's non-performing assets consist
principally of commercial, residential development and multi-
family REO acquired in the Shadow Lawn acquisition. Non-
performing assets at December 31, 1995, included $4.5 million of
REO which is carried at lower of cost or estimated fair value
minus estimated costs to sell. Sovereign places all loans
90 days or more delinquent (except loans guaranteed by the
government) on non-performing status.
Table 5 presents the composition of non-performing assets at
the dates indicated (in thousands):
Table 5: Non-performing Assets
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Past due 90 or more days as to interest or principal:
Residential . . . . . . . . . . . . . . . . . . . $33,580 $25,379 $20,740 $20,465 $14,327
Other . . . . . . . . . . . . . . . . . . . . . . 3,902 2,892 1,795 835 762
Past due less than 90 days as to interest or principal:
Residential . . . . . . . . . . . . . . . . . . . 644 2,980 1,056 -- --
Other . . . . . . . . . . . . . . . . . . . . . . 739 -- -- -- 81
------- ------- ------- ------- -------
Total non-accrual loans . . . . . . . . . . . . . . . . . . 38,865 31,251 23,591 21,300 15,170
Restructured loans . . . . . . . . . . . . . . . . . . . . 296 99 372 1,183 30
------- ------- ------- ------- -------
Total non-performing loans . . . . . . . . . . . . . . . . 39,161 31,350 23,963 22,483 15,200
Real estate owned:
Residential . . . . . . . . . . . . . . . . . . . . . 2,437 6,104 4,510 7,655 10,079
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,076 3,087 8,306 12,247 1,148
------- ------- ------- ------- -------
Total real estate owned . . . . . . . . . . . . . . . . . . 4,513 9,191 12,816 19,902 11,227
------- ------- ------- ------- -------
Total non-performing assets . . . . . . . . . . . . . . . . 43,674 40,541 36,779 42,385 26,427
Past due 90 days or more as to interest or principal
and accruing interest . . . . . . . . . . . . . . . . -- -- 63 75 130
------- ------- ------- ------- -------
Non-performing assets and loans past due 90 days or more
and accruing . . . . . . . . . . . . . . . . . . . . $43,674 $40,541 $36,842 $42,460 $26,557
======= ======= ======= ======= =======
<PAGE>
Non-performing assets as a percentage of total assets . . . .54% .62% .75% 1.15% 1.16%
Non-performing loans as a percentage of total loans . . . . .83 .72 .81 .94 1.03
Non-performing assets as a percentage of total loans
and real estate owned . . . . . . . . . . . . . . . . .92 .93 1.24 1.75 1.78
Allowance for possible loan losses as a percentage of total
non-performing assets . . . . . . . . . . . . . . . . 78.95 88.24 89.24 61.91 49.00
Allowance for possible loan losses as a percentage of total
non-performing loans . . . . . . . . . . . . . . . . . 88.05 114.11 136.97 116.72 85.18
</TABLE>
In May 1993, the FASB issued SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 requires that
certain impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if
the loan is collateral dependent. In October 1994, the FASB
issued SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," that amends SFAS
No. 114 and eliminates its provisions regarding how a creditor
should report income on an impaired loan. Originally, SFAS No.
114 would have required creditors to apply one of two allowable
methods. As a result of the amendment, creditors may now
continue to use existing methods for recognizing income on
impaired loans, including methods that are required by certain
industry regulators. SFAS No. 118 also clarified SFAS No. 114's
disclosure requirements. SFAS No. 114 and SFAS No. 118 were
adopted by Sovereign beginning January 1, 1995. The effect of
SFAS No. 114 and SFAS No. 118 on Sovereign was not significant.
Potential problem loans (consisting of loans which
management has serious doubts as to the ability of such borrowers
to comply with present repayment terms, although not currently
classified as non-performing loans) were comprised of 17 loans
which amounted to $5.7 million at December 31, 1995 and consisted
principally of multi-family loans.
At December 31, 1995, Sovereign serviced, with recourse, a
total of $78.2 million of single-family residential loans.
Substantially all of this recourse servicing was acquired in the
Jersey Shore acquisition. These are seasoned loans and
historical loss experience has been minimal.
The adequacy of Sovereign's allowance for possible loan
losses is constantly evaluated. Management's evaluation of the
adequacy of the allowance to absorb potential future loan losses
takes into consideration the risks inherent in the loan
portfolio, past loan loss experience, specific loans which have
loss potential, geographic and industry concentrations,
delinquency trends, economic conditions, the level of
originations and other relevant factors. Sovereign's loan
delinquencies (all loans greater than 30 days delinquent) as a
percentage of total loans was 1.32% at December 31, 1995, up
slightly from 1994 delinquencies of 1.16% of total loans.
These factors indicated to management that a provision for
possible loan losses of $1.0 million was necessary to maintain
the allowance for possible loan losses at a level which
management conservatively estimates is necessary to absorb
potential future losses in consideration of the factors noted
above.
Investment and Mortgage-backed Securities Available-For-
Sale. Securities expected to be held for an indefinite period of
time are classified as available-for-sale and are carried at fair
value, with unrealized gains and losses reported as a separate
component of stockholders' equity, net of estimated income taxes.
Decisions to purchase or sell these securities are based on
economic conditions including changes in interest rates,
liquidity, and asset liability management strategies.
Table 6 presents the amortized cost and estimated fair value
of investment and mortgage-backed securities available-for-sale
at the dates indicated (in thousands):
Table 6: Investment and Mortgage-backed Securities
Available-for-Sale
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993
-------------------- ------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury and government
agency securities . . . . . . . $150,242 $149,109 $ -- $ -- $ -- $ --
Equity Securities . . . . . . . . 135,494 136,571 88,583 87,128 -- --
Mortgage-backed Securities: . . . .
FHLMC . . . . . . . . . . . . . . 156,123 155,529 -- -- -- --
FNMA . . . . . . . . . . . . . . 136,861 138,445 -- -- -- --
GNMA . . . . . . . . . . . . . . 59,215 61,912 -- -- -- --
Collateralized mortgage obligations 245,037 247,943 -- -- -- --
-------- -------- ------- ------- ------ ------
Total investment and mortgage-backed
securities available-for-sale . . $882,972 $889,509 $88,583 $87,128 $ -- $ --
======== ======== ======= ======= ====== ======
</TABLE>
Investment and Mortgage-backed Securities Held-To-Maturity.
Securities that Sovereign has the intent and ability to hold to
maturity are classified as held-to-maturity and reported at
amortized cost. This portfolio is primarily comprised of
U.S. Treasury and government agency securities; corporate debt
securities; mortgage-backed securities issued by FHLMC, FNMA, the
Government National Mortgage Association ("GNMA"), the RTC and
private issuers; and collateralized mortgage obligations.
Table 7 presents the amortized cost and estimated fair value
of investment and mortgage-backed securities held-to-maturity at
the dates indicated (in thousands):
<PAGE>
Table 7: Investment and Mortgage-backed Securities
Held-To-Maturity
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
----------------------- --------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury and government
agency securities . . . . . . . $ 4,993 $ 5,030 $ 159,353 $ 146,695 $ 125,077 $ 125,021
Corporate securities . . . . . . 1,010 1,070 4,025 3,982 14,070 14,332
Other securities . . . . . . . . 482 482 420 416 81,754 82,930
Mortgage-backed Securities: . . . .
FHLMC . . . . . . . . . . . . . . 168,713 169,169 336,556 310,446 190,076 192,459
FNMA . . . . . . . . . . . . . . 221,046 220,260 316,968 290,595 243,688 246,417
GNMA . . . . . . . . . . . . . . 170,064 176,532 237,308 234,578 47,783 50,043
RTC . . . . . . . . . . . . . . . 28,954 24,498 33,976 28,749 44,744 44,757
Private issues . . . . . . . . . 284,640 282,636 272,833 252,341 361,826 361,346
Collateralized mortgage obligations 1,197,310 1,207,679 455,401 433,341 580,286 579,565
---------- ---------- ---------- ---------- ---------- ----------
Total investment and mortgage-
backed securities held-to-maturity $2,077,212 $2,087,356 $1,816,840 $1,701,143 $1,689,304 $1,696,870
========== ========== ========== ========== ========== ==========
</TABLE>
In January 1994, Sovereign adopted SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities," which
requires management to classify investments in equity securities
that have readily determinable fair values and all investments in
debt securities as either held-to-maturity and reported at
amortized cost, available-for-sale and reported at fair value
with unrealized gains and losses reported in a separate component
of stockholders' equity, or trading securities and reported at
fair value with unrealized gains and losses included in earnings.
Effective January 1, 1994, Sovereign adopted SFAS No. 115 and
classified $1.29 billion of securities as held-to-maturity,
$391.0 million of securities as available-for-sale and
$6.5 million of securities as trading securities. The adoption
of SFAS No. 115 resulted in an $836,000 increase to stockholders'
equity accounted for as the cumulative effect of a change in
accounting principle in 1994.
On November 15, 1995, the FASB issued a Special Report, "A
Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities". On
December 7, 1995, in accordance with provisions in that Special
Report, Sovereign reclassified $750.2 million of securities from
held-to-maturity to available-for-sale. This reclassification
resulted in a $2.8 million unrealized gain which is included in
Sovereign's stockholders' equity at December 31, 1995.
Prior to the adoption of SFAS No. 115, management determined
the appropriate classification of securities at the time of
purchase. If Sovereign had the intent and the ability at the
time of purchase to hold securities until maturity or on a
long-term basis, they were classified as investments and carried
at amortized historical cost. Securities to be held for
indefinite periods of time and not intended to be
held-to-maturity or on a long-term basis were classified as
available-for-sale and carried at the lower of cost or estimated
fair value. Securities held for indefinite periods of time
included securities that management intended to use as part of
its asset/liability management strategy and that may have been
sold in response to changes in interest rates, resultant
prepayment risk, and other factors related to interest rate and
resultant prepayment risk changes.
Other Assets. Other assets at December 31, 1995, were
$26.3 million compared to $46.2 million at December 31, 1994.
Premises and equipment at December 31, 1995, was
$57.0 million compared to $48.1 million at December 31, 1994.
The increase is primarily due to capital expenditures related to
system conversions and the expansion of Sovereign's market.
Goodwill and intangible assets at December 31, 1995, were
$123.2 million compared to $64.6 million at December 31, 1994.
The increase is primarily related to the Berkeley acquisition in
January 1995.
Deposits. Deposits are attracted from within Sovereign's
primary market area through the offering of various deposit
instruments including NOW accounts, money market accounts,
savings accounts, certificates of deposit and retirement savings
plans.
Total deposits at December 31, 1995, were $5.04 billion
compared to $4.03 billion at December 31, 1994. The increase was
primarily the result of the acquisition of the Berkeley deposits
which added $909.3 million of deposits.
Table 8 presents the composition of Sovereign's deposits at
the dates indicated (in thousands):
Table 8: Deposit Portfolio Composition
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1995 1994 1993
---------------------- --------------------- ---------------------
% OF % OF % OF
ACCOUNT TYPE BALANCE DEPOSITS BALANCE DEPOSITS BALANCE DEPOSITS
------------ ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Savings accounts . . . . . . . . . $ 925,842 18.37% $ 925,667 22.98% $ 779,016 24.48%
NOW and money market accounts . . 1,101,472 21.86 696,781 17.30 557,465 17.51
Demand deposit accounts . . . . . 168,757 3.35 118,346 2.94 105,787 3.32
Retail certificates of deposit . . 2,731,009 54.20 2,207,531 54.82 1,637,721 51.45
---------- ------ ---------- ------ ---------- ------
Total retail deposits . . . . . . 4,927,080 97.78 3,948,325 98.04 3,079,989 96.76
Jumbo certificates of deposit . . . 112,063 2.22 78,794 1.96 103,118 3.24
---------- ------ ---------- ------ ---------- ------
Total deposits . . . . . . . . . $5,039,143 100.00% $4,027,119 100.00% $3,183,107 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
Borrowings. Sovereign utilizes borrowings as a source of
funds for its asset growth and its asset/liability management.
Collateralized advances are available from the FHLB provided
certain standards related to creditworthiness have been met.
Another source of funds for Sovereign is reverse repurchase
agreements. Reverse repurchase agreements are short-term
obligations collateralized by securities fully guaranteed as to
principal and interest by the U.S. Government or an agency
thereof.
Total borrowings at December 31, 1995, were $2.53 billion of
which $1.51 billion were short-term compared to total borrowings
of $2.16 billion of which $1.72 billion were short-term at
December 31, 1994.
Table 9 presents information regarding borrowings at the
dates indicated (in thousands):
Table 9: Borrowings
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE BALANCE AVERAGE RATE
------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Securities sold under
repurchase agreements . . $ 382,279 6.38% $ 608,810 5.72% $ 315,616 3.40%
FHLB advances . . . . . . . 1,979,551 5.75 1,434,081 5.25 929,106 4.39
Other borrowings . . . . . 168,826 7.49 119,696 7.71 122,378 7.84
---------- ----- ---------- ----- ---------- -----
Total borrowings . . . . $2,530,656 5.96% $2,162,587 5.52% $1,367,100 4.47%
========== ===== ========== ===== ========== =====
</TABLE>
Of the above advances, $280.0 million have been effectively
converted to fixed rate obligations through the use of interest
rate swaps.
Of the other borrowings, $50.0 million of subordinated
debentures have, through the use of an interest rate swap, been
converted from a fixed rate obligation to a variable rate
obligation.
In addition, $996.0 million of borrowings have been
protected from upward repricing through the use of interest rate
caps.
Stockholders' Equity. Total stockholders' equity at
December 31, 1995, was $427.0 million compared to $303.9 million
at December 31, 1994. The increase in stockholders' equity was
primarily attributable to the retention of earnings of
$56.4 million and the issuance of $100.0 million of preferred
stock.
LIQUIDITY AND CAPITAL RESOURCES
Sovereign Bank is required under applicable federal
regulations to maintain specified levels of "liquid" investments
in cash and U.S. Treasury and other qualifying investments.
Regulations currently in effect require Sovereign Bank to
maintain liquid assets of not less than 5% of its net
withdrawable accounts plus short-term borrowings, of which
short-term liquid assets must consist of not less than 1%. These
levels are changed from time to time by the OTS to reflect
economic conditions. Sovereign Bank's liquidity ratio was 12.80%
for December 1995.
Sovereign's primary financing sources are deposits obtained
in its own market area and borrowings in the form of securities
sold under repurchase agreements and advances from the FHLB.
During 1995, Sovereign increased its deposit base and market
share when it acquired the Berkeley offices. At December
31, 1995, Sovereign had $2.37 billion in unpledged investment and
mortgage-backed securities which could be used to collateralize
additional borrowings. Sovereign Bank can also borrow from the
FHLB, subject to required collateralization. Other sources of
funds include operating activities, repayments of principal on
investment and mortgage-backed securities, repayment of principal
on loans and other investing activities. The interest rate
environment experienced in 1995 resulted in slower prepayments of
mortgage-backed securities and loans than in prior years.
Therefore, Sovereign obtained required funding in the form of
borrowings and additional deposits.
Cash and cash equivalents increased $8.4 million for 1995.
Net cash provided by operating activities was $5.7 million for
1995. Net cash used by investing activities for 1995 was
$1.33 billion consisting primarily of purchases of
mortgage-backed securities which were classified as
held-to-maturity. In the fourth quarter of 1995, $587.0 million
of these mortgage-backed securities were transferred to the
available-for-sale portfolio. The considerable flattening of the
yield curve has diminished the market for originating adjustable
rate mortgage loans. As a result, Sovereign has focused on the
mortgage-backed security portfolio to provide earning assets.
Net cash provided by financing activities for 1995 was
$1.33 billion which includes the assumption of $818.9 million of
deposits from recent acquisitions net of sales, and proceeds from
long-term borrowings of $905.5 million which was partially offset
by a decrease in short-term borrowings due to Sovereign's effort
to extend borrowings to manage its interest rate risk.
The Financial Institutions Reform, Recovery and Enforcement
Act ("FIRREA") requires the OTS to prescribe uniformly applicable
capital standards for all savings associations. These standards
currently require institutions to maintain a minimum tangible
capital ratio of not less than 1.5%, a minimum leverage capital
ratio of not less than 3% of tangible assets and not less than 4%
of risk-adjusted assets and a minimum risk-based capital ratio
(based upon credit risk) of not less than 8%. In all cases,
these standards are to be no less stringent than the capital
standards that are applicable to national banks. The OTS
requires a minimum leverage capital requirement of 3% for
associations rated composite 1 under the OTS MACRO rating system.
For all other savings associations, the minimum leverage capital
requirement will be 3% plus at least an additional 100 to 200
basis points.
The OTS issued its final regulations on incorporating an
interest rate risk component into its risk-based capital
requirements. Under the regulation, savings associations which
are deemed to have an "above normal" level of interest rate risk
must deduct a portion of that risk from total capital for
regulatory capital purposes. Implementation of this interest
rate risk capital deduction has been delayed by the OTS until
further notification.
The Federal Deposit Insurance Corporation Improvement Act
("FDICIA") established five capital tiers: well capitalized,
adequately capitalized, under capitalized, significantly under
capitalized and critically under capitalized. A depository
institution's capital tier depends upon its capital levels in
relation to various relevant capital measures, which include
leverage and risk-based capital measures and certain other
factors. Depository institutions that are not classified as well
capitalized or adequately capitalized are subject to various
restrictions regarding capital distributions, payment of
management fees, acceptance of brokered deposits and other
operating activities.
At December 31, 1995, Sovereign Bank and Colonial Bank were
classified as well capitalized and were in compliance with all
capital requirements. The following table sets forth the capital
ratios of Sovereign Bank, Colonial Bank and Sovereign Bancorp and
the current regulatory requirements at December 31, 1995:
<TABLE>
<CAPTION>
SOVEREIGN COLONIAL SOVEREIGN
BANK BANK BANCORP(1) REQUIREMENT
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Tangible capital to tangible assets . . . . . . . 5.12% 6.26% 3.79% 1.50%
Leverage (core) capital to tangible assets . . . 5.12 6.26 3.79 3.00
Leverage (core) capital to risk-adjusted assets . 11.80 9.23 8.53 4.00
Risk-based capital to risk-adjusted assets . . . 12.64 10.38 14.27 8.00
</TABLE>
(1) OTS capital regulations do not apply to holding companies.
These ratios are computed as if those regulations did apply
to Sovereign Bancorp.
ASSET AND LIABILITY MANAGEMENT
The objective of Sovereign's asset and liability management
is to identify, measure and control its interest rate risk in
order to produce consistent earnings that are not contingent upon
favorable trends in interest rates. Sovereign manages its assets
and liabilities to attain a stable net interest margin across a
wide spectrum of interest rate environments. This is attained by
monitoring the levels of interest rates, the relationships
between the rates earned on assets and the rates paid on
liabilities, the absolute amount of assets and liabilities which
reprice or mature over similar periods, off-balance sheet
positions and the effect of all these factors on the estimated
level of net interest income.
There are a number of industry standards used to measure an
institution's interest rate risk position. Most common among
these is the one year gap which is the ratio representing the
difference between assets, liabilities and off-balance sheet
positions which will mature or reprice within one year expressed
as a percentage of total assets. Using management's estimates of
asset prepayments, core deposit decay and core deposit repricing
in its computation, Sovereign estimates that its cumulative one
year gap position was a negative .29% at December 31, 1995.
Sovereign also utilizes income simulation modeling in
measuring its interest rate risk and managing its interest rate
sensitivity. Income simulation considers not only the impact of
changing market interest rates on forecasted net interest income,
but also other factors such as yield curve relationships, the
volume and mix of assets and liabilities, customer preferences
and general market conditions.
Pursuant to its interest rate risk management strategy,
Sovereign enters into off-balance sheet transactions which
involve interest rate exchange agreements (swaps, caps and
floors) for interest rate risk management purposes. Sovereign's
objective in managing its interest rate risk is to provide
sustainable levels of net interest income while limiting the
impact changes in interest rates have on net interest income.
Amortizing and non-amortizing interest rate swaps are
generally used to convert fixed rate assets and liabilities to
variable rate assets and liabilities and vice versa. Sovereign
utilizes amortizing interest rate swaps to convert discounted
adjustable rate loans to fixed rates for a period of time. The
amortization of the notional amount of the interest rate swaps
are tied to the level of an index such as the One Year Treasury
Constant Maturity, LIBOR, or a prepayment rate of a pool of
mortgage-backed securities. In order for interest rate swaps to
achieve the desired objective, Sovereign selects interest rate
swaps that will have a high degree of correlation to the related
financial instrument. Sovereign utilizes non-amortizing interest
rate swaps to convert fixed rate liabilities to floating, and
floating rate liabilities to fixed, to reduce Sovereign's overall
cost of funds.
Interest rate caps are generally used to limit the exposure
from the repricing and maturity of liabilities and interest rate
floors are generally used to limit the exposure from the
repricing and maturity of assets. Interest rate caps and floors
are also used to limit the exposure created by other interest
rate swaps. In certain cases, interest rate caps or floors are
simultaneously bought and sold to create a range of protection
against changing interest rates while limiting the cost of that
protection.
Due to competitive conditions, Sovereign originates fixed
rate residential mortgages. It exchanges the majority of these
loans with FHLMC, FNMA and private investors. The loans are
exchanged for cash or marketable fixed rate mortgage-backed
securities which are generally sold. This helps insulate
Sovereign from the interest rate risk associated with these fixed
rate assets. Sovereign uses forward sales, cash sales and
options on mortgage-backed securities as means of hedging loans
in the mortgage pipeline which are originated for resale.
Sovereign's primary funding source is deposits obtained in
its own marketplace. Deposit programs at Sovereign are priced to
meet management's asset/liability objectives, while taking into
account the rates available on investment opportunities and also
considering the cost of alternative funding sources. Borrowings
are a significant funding source for Sovereign and have primarily
been in the form of securities sold under repurchase agreements
and advances from the FHLB. Since borrowings are not subject to
the market constraints to which deposits are, Sovereign uses
borrowings to add flexibility to its interest rate risk position.
<PAGE>
Table 10 presents the amounts of interest-earning assets and
interest-bearing liabilities that are assumed to mature or
reprice during the periods indicated at December 31, 1995, and
their related average yields and costs. Adjustable and floating
rate loans and securities are included in the period in which
interest rates are next scheduled to adjust rather than the
period in which they mature (in thousands).
Table 10: Gap Analysis
<TABLE>
<CAPTION>
2-3 3-5 OVER 5
1 YEAR YEARS YEARS YEARS TOTAL
------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) . . . . . . . . . . . . . $ 2,680,622 $ 1,400,761 $ 280,801 $ 347,836 $ 4,710,020
7.78% 7.02% 7.51% 8.41% 7.46%
Investment and mortgage-backed
securities(2)(3) . . . . . . . . 1,284,229 1,042,269 398,366 258,787 2,983,651
7.08% 6.48% 6.88% 6.94% 6.94%
----------- ------------ --------- ---------- -----------
Total interest-earning assets . . . . . 3,964,851 2,443,030 679,167 606,623 7,693,671
7.56% 6.79% 7.14% 7.79% 7.26%
Non-interest-earning assets . . . . . . -- -- -- 384,616 384,616
----------- ------------ --------- ---------- -----------
Total assets . . . . . . . . . . . . . $ 3,964,851 $ 2,443,030 $ 679,167 $ 991,239 $ 8,078,287
7.56% 6.79% 7.14% 4.76% 7.01%
Interest-bearing liabilities:
Deposits(4) . . . . . . . . . . . $ 3,243,138 $ 379,477 $ 723,052 $ 693,476 $ 5,039,143
5.05% 4.94% 2.28% 2.15% 4.24%
Borrowings . . . . . . . . . . . 1,685,354 689,763 98,831 56,708 2,530,656
5.79% 5.95% 7.73% 9.32% 5.96%
----------- ------------ --------- ---------- -----------
Total interest-bearing liabilities . . 4,928,492 1,069,240 821,883 750,184 7,569,799
5.30% 5.59% 2.93% 2.69% 4.83%
Non-interest-bearing liabilities . . . -- -- -- 81,463 81,463
Stockholders' equity . . . . . . . . . -- -- -- 427,025 427,025
----------- ------------ --------- ---------- -----------
Total liabilities and stockholders' equity $ 4,928,492 $ 1,069,240 $ 821,883 $1,258,672 $ 8,078,287
5.30% 5.59% 2.93% 1.60% 4.55%
----------- ------------ --------- ---------- -----------
Excess assets (liabilities) before effect
of off-balance sheet positions . . . $ (963,641) $ 1,373,790 $(142,716) $ (267,433)
----------- ------------ --------- ----------
To total assets . . . . . . . . . . (11.93)% 17.01% (1.77)% (3.31)% 2.46%
=========== ============ ========= ========== ===========
Cumulative excess assets (liabilities)
before effect of off-balance sheet
positions . . . . . . . . . . . . $ (963,641) $ 410,149 $ 267,433 $ --
=========== ============ ========= ==========
To total assets . . . . . . . . . (11.93)% 5.08% 3.31%
Effect of off-balance sheet positions on
assets and liabilities . . . . . $ 940,262 $ (1,276,000) $ 254,948 $ 80,790
----------- ------------ --------- ----------
Excess assets (liabilities) after effect of
off-balance sheet positions . . . $ (23,379) $ 97,790 $ 112,232 $ (186,643)
=========== ============ ========= ==========
To total assets . . . . . . . . . (.29)% 1.21% 1.39% (2.31)%
Cumulative excess assets (liabilities)
after off-balance sheet positions $ (23,379) $ 74,411 $ 186,643 $ --
=========== ============ ========= ==========
To total assets . . . . . . . . . (.29)% .92% 2.31%
</TABLE>
(1) Loan balances include annual prepayment and repayment
assumptions between 6% and 35% initially with gradual
slowing thereafter. Loan balances are presented net of
deferred loan fees and include loans held for resale and the
allowance for loan losses.
(2) Mortgage-backed securities include annual prepayment and
repayment assumptions between 6% and 30% initially with
gradual slowing thereafter. Balances on these securities are
presented net of deferred loan fees.
(3) Includes interest-earning deposits.
(4) Savings, NOW, money market and demand deposit accounts have
been assumed to decay at an annual rate of 20%.
Table 11 presents selected quarterly consolidated financial
data (in thousands, except per share data):
Table 11: Selected Quarterly Consolidated Financial Data
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1995 1995 1995 1995 1994 1994 1994 1994
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income . . . . . . . $ 136,575 $ 128,827 $ 116,220 $ 111,409 $ 102,367 $ 94,366 $ 80,715 $ 76,693
Total interest expense . . . . . . 90,137 85,150 74,845 68,673 60,881 53,871 43,657 40,332
--------- --------- --------- --------- --------- -------- --------- --------
Net interest income . . . . . . . . 46,438 43,677 41,375 42,736 41,486 40,495 37,058 36,361
Provision for possible loan
losses . . . . . . . . . . . . . 250 250 250 250 600 950 1,013 1,537
--------- --------- --------- --------- --------- -------- --------- --------
Net interest income after
provision . . . . . . . . . . . 46,188 43,427 41,125 42,486 40,886 39,545 36,045 34,824
Other income . . . . . . . . . . . 6,774 4,894 9,294 4,867 4,389 4,016 2,972 3,177
Other expenses . . . . . . . . . . 28,940 26,447 28,929 28,792 26,744 23,137 20,579 20,529
--------- --------- --------- --------- --------- -------- --------- --------
Income before income taxes . . . . 24,022 21,874 21,490 18,561 18,531 20,424 18,438 17,472
Income tax provision . . . . . . . 8,325 7,436 7,347 6,431 6,964 8,188 6,769 6,546
--------- --------- --------- --------- --------- -------- --------- --------
Net income . . . . . . . . . . . . $ 15,697 $ 14,438 $ 14,143 $ 12,130 $ 11,567 $ 12,236 $ 11,669 $ 10,926
========= ========= ========= ========= ========= ======== ========= ========
Net income applicable to common
stock . . . . . . . . . . . . . . $ 14,134 $ 12,875 $ 12,580 $ 12,130 $ 11,567 $ 12,236 $ 11,669 $ 10,926
========= ========= ========= ========= ========= ======== ========= ========
Earnings per share:(1) . . . . . . $ .27 $ .24 $ .25 $ .24 $ .22 $ .24 $ .23 $ .21
Market Prices(1)
High . . . . . . . . . . . . . . 10 3/8 10 1/4 9 3/16 8 13/16 9 1/16 10 3/16 10 7/16 11
Low . . . . . . . . . . . . . . 9 3/16 8 15/16 7 5/8 7 7 8 3/4 8 3/4 7 13/16
Dividends per share(1) . . . . . . .0210 .0209 .0209 .0209 .0209 .0258 .0256 .0336
</TABLE>
(1) All per share data have been adjusted to reflect all stock
dividends and stock splits.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND
1993
Net Income. Net income for the year ended December 31,
1994, was $46.4 million, a 30% increase over $35.6 million for
the year ended December 31, 1993. On a per share basis, net
income rose to $.90 in 1994 from $.70 in 1993. Return on average
assets was .84% for 1994, compared to .81% for 1993. Return on
average equity for 1994 was 16.47% compared to 14.77% for 1993.
The 1993 results presented above exclude a $4.8 million
increase to net income from the adoption of SFAS No. 109.
Net Interest Income. Net interest income was $155.4 million
for 1994 compared to $129.5 million for 1993. The increase was
primarily due to an increase in the size of the balance sheet
resulting from the Shadow Lawn acquisition and strong loan
growth.
Interest and fees on loans were $248.7 million in 1994
compared to $186.9 million in 1993. Loans averaged $3.58 billion
with an average yield of 6.95% in 1994 compared to $2.55 billion
with an average yield of 7.34% in 1993. The increase in average
balance was primarily due to the Shadow Lawn acquisition and the
origination of $1.66 billion of residential mortgage loans of
which $1.44 billion were retained in Sovereign's loan portfolio.
The decrease in yield was the result of discounted rates during
the initial term on newly originated adjustable rate loans
somewhat offset by generally higher interest rates.
Interest on investment and mortgage-backed securities
available-for-sale was $6.2 million with an average yield of
6.27% for 1994. There were no investment and mortgage-backed
securities classified as available-for-sale in 1993.
Interest on investment and mortgage-backed securities
held-to-maturity was $96.7 million for 1995 compared to
$92.5 million for 1993. The average balance of investment and
mortgage-backed securities held-to-maturity was $1.55 billion
with an average yield of 6.24% for 1994 compared to an average
balance of $1.53 billion with an average yield of 6.06% for 1993.
Interest on deposits was $121.8 million for 1994 compared to
$108.1 million for 1993. Average deposits were $3.58 billion for
1994 compared to $3.05 billion for 1993. The increase in average
balance was primarily due to the Shadow Lawn acquisition. The
average rate paid on deposits was 3.40% for 1994 compared to
3.54% for 1993. The decrease in the average cost of deposits was
a result of a change in deposit composition toward lower cost
transaction accounts.
Interest on borrowings was $76.9 million for 1994 compared
to $45.2 million for 1993. During 1994, average outstanding
borrowings were $1.59 billion with a cost of 4.84% compared to
$1.00 billion for 1993 with a cost of 4.52%. The increase in
average balance is the result of the significant loan growth
being funded principally by borrowings. The increase in average
cost of borrowings is a result of the general rise in interest
rates and the full year effect of the cost of subordinated
debentures issued during 1993.
Provision for Possible Loan Losses. The provision for
possible loan losses for 1994 was $4.1 million compared to
$8.7 million in 1993. This decreased provision was the result of
improved asset quality.
Other Income. Other income was $14.6 million for 1994
compared to $15.2 million for 1993.
Mortgage banking gains were $1.5 million for 1994 compared
to $2.4 million for 1993. During 1994, Sovereign recognized a
gain of $1.1 million on the sale of servicing rights related to
$111.4 million of residential mortgage loans.
Other loan fees and service charges were $5.0 million for
1994 compared to $4.4 million for 1993. This increase was
primarily due to an increase in Sovereign's servicing portfolio.
Deposit fee income was $5.8 million for 1994 compared to
$4.4 million for 1993. This increase was the result of the
Shadow Lawn acquisition.
General and Administrative Expenses. Total general and
administrative expenses were $84.4 million for 1994 compared to
$73.3 million for 1993. The 15% increase in general and
administrative expenses from 1993 to 1994 compares to a 26%
increase in the average balance sheet over the same time period.
Other operating expenses were $6.6 million for 1994 compared
to $4.1 million for 1993. Amortization of goodwill and other
intangible assets was $6.5 million for 1994 compared to
$3.5 million for 1993. This increase was primarily the result of
the Shadow Lawn acquisition and a full year of amortization of
core deposit intangible resulting from the Home Unity
acquisition. Net REO losses were $91,000 for 1994 compared to
$603,000 for 1993.
Income Tax Provision. The income tax provision was
$28.5 million for 1994 compared to $23.0 million for 1993. The
effective tax rate for 1994 was 38.0% compared to 39.2% for 1993.
MARKET AND DIVIDEND INFORMATION
Sovereign's common and preferred stock is traded and listed
on the NASDAQ Stock market under the symbol "SVRN" and "SVRNP",
respectively. Options on Sovereign common stock are traded on
the Philadelphia Stock Exchange (PHLX) under the symbol "SVRN" or
"SQV". At December 31, 1995, the total number of holders of
record of Sovereign's common stock was 8,338.
Holders of Sovereign's 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 including the amounts of dividends
payable to Sovereign by its subsidiaries. The current quarterly
dividend is $.021 per share.
Holders of Sovereign's preferred stock are entitled to
receive, when and as declared by the Board of Directors, out of
assets of the Corporation legally available for payment, cash
dividends payable quarterly at the rate of 6-1/4% per annum.
Dividends on the preferred stock, calculated as a percentage of
the liquidation preference, are payable quarterly on February 15,
May 15, August 15 and November 15 of each year.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sovereign Bancorp, Inc.
We have audited the accompanying consolidated balance sheets
of Sovereign Bancorp, Inc. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the
1993 financial statements of Charter FSB Bancorp, Inc., a company
acquired on November 1, 1994 as more fully described in Note 2,
which statements reflect net income constituting 12% of the
related 1993 consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Charter FSB
Bancorp, Inc., is based solely on the report of other auditors.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant assumptions made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1993, the
report of other auditors, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Sovereign Bancorp, Inc. and
subsidiaries at December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
In 1995, the Company changed its method of accounting for
mortgage servicing rights, as discussed in Note 1, to the
consolidated financial statements. In 1994, the Company changed
its method of accounting for investment and mortgage-backed
securities, as discussed in Note 1 to the consolidated financial
statements. In 1993, the Company changed its method of
accounting for income taxes, as discussed in Note 13 to the
consolidated financial statements.
/s/ ERNST & YOUNG LLP
January 17, 1996
Reading, Pennsylvania
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions . . . . . . . . . . . . $ 130,841 $ 110,270
Interest-earning deposits . . . . . . . . . . . . . . . . . . . . . . . . . 16,930 29,131
Loans held for resale (approximate fair value of $71,297 and $7,666
at December 31, 1995 and 1994, respectively) . . . . . . . . . . . . . . 70,512 7,666
Investment and mortgage-backed securities available-for-sale . . . . . . . 889,509 87,128
Investment and mortgage-backed securities held-to-maturity
(approximate fair value of $2,087,356 and $1,701,143 at
December 31, 1995 and 1994, respectively) . . . . . . . . . . . . . . . 2,077,212 1,816,840
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,674,364 4,350,898
Allowance for possible loan losses . . . . . . . . . . . . . . . . . . . . (34,856) (36,289)
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 56,951 48,096
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,514 9,191
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . 42,785 30,369
Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . 123,243 64,553
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,282 46,229
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,078,287 $ 6,564,082
=========== ===========
LIABILITIES
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,039,143 $ 4,027,119
Borrowings
Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,512,720 1,722,726
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,017,936 439,861
Advance payments by borrowers for taxes and insurance . . . . . . . . . . 22,117 25,893
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,346 44,583
----------- -----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,651,262 $ 6,260,182
=========== ===========
STOCKHOLDERS' EQUITY
Preferred stock; 7,500,000 shares authorized; 2,000,000 shares
issued at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 96,446 --
Common stock; no par value; 100,000,000 shares authorized;
48,438,944 shares issued at December 31, 1995
and 45,566,971 shares issued at December 31, 1994 . . . . . . . . . . . . 248,875 224,958
Unallocated Common stock held by ESOP at cost;
2,974,346 shares at December 31, 1995 . . . . . . . . . . . . . . . . . . (28,772) --
Unrecognized gain (loss) on investment and mortgage-backed securities
available-for-sale, net of tax . . . . . . . . . . . . . . . . . . . . . 3,988 (887)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,488 79,829
----------- -----------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 427,025 303,900
----------- -----------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . . $ 8,078,287 $ 6,564,082
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and dividends on investment and mortgage-backed
securities and other interest-earning deposits . . . . . . . . . . . . . $ 165,581 $ 105,425 $ 95,878
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . 327,450 248,716 186,912
--------- --------- --------
Total interest income . . . . . . . . . . . . . . . . . . . . . . . 493,031 354,141 282,790
--------- --------- --------
INTEREST EXPENSE:
Interest on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,267 121,812 108,070
Interest on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,538 76,929 45,248
--------- --------- --------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . 318,805 198,741 153,318
--------- --------- --------
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,226 155,400 129,472
Provision for possible loan losses . . . . . . . . . . . . . . . . . . . . . . . . 1,000 4,100 8,650
--------- --------- --------
Net interest income after provision for possible loan losses . . . . . . . . . . . 173,226 151,300 120,822
--------- --------- --------
OTHER INCOME:
Other loan fees and service charges . . . . . . . . . . . . . . . . . . . . . 4,445 5,018 4,431
Deposit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,427 5,755 4,364
Gain on loans and investment and mortgage-backed securities . . . . . . . . . 419 494 2,173
Mortgage banking gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,079 1,486 2,367
Miscellaneous income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,459 1,801 1,832
--------- --------- --------
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . 25,829 14,554 15,167
--------- --------- --------
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . 41,158 33,896 32,414
Occupancy and equipment expenses . . . . . . . . . . . . . . . . . . . . . . . 19,286 15,908 12,543
Outside services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,890 7,627 6,360
Deposit insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 10,423 7,627 6,444
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,602 4,013 3,356
Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . 13,908 15,319 12,195
--------- --------- --------
Total general and administrative expenses . . . . . . . . . . . . . 100,267 84,390 73,312
--------- --------- --------
OTHER OPERATING EXPENSES:
Amortization of goodwill and other intangible assets . . . . . . . . . . . . . 12,184 6,508 3,462
Real estate owned losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 657 91 603
--------- --------- --------
Total other operating expenses . . . . . . . . . . . . . . . . . . . 12,841 6,599 4,065
--------- --------- --------
Income before income taxes and cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,947 74,865 58,612
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,539 28,467 22,998
--------- --------- --------
Income before cumulative effect of change in accounting principle . . . . . . . . . 56,408 46,398 35,614
Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . -- -- 4,800
--------- --------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414
========= ========= ========
NET INCOME APPLICABLE TO COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . $ 51,719 $ 46,398 $ 40,414
========= ========= ========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:(1)
Before cumulative effect of change in accounting principle . . . . . . . . . . $ 1.00 $ .90 $ .70
========= ========= ========
After cumulative effect of change in accounting principle . . . . . . . . . . $ 1.00 $ .90 $ .80
========= ========= ========
DIVIDENDS PER COMMON SHARE(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .084 $ .106 $ .099
========= ========= ========
</TABLE>
(1) All per share data have been adjusted to reflect all stock
dividends and stock splits.
See accompanying notes to consolidated financial statements.
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON PREFERRED
SHARES SHARES COMMON PREFERRED RETAINED TREASURY
OUTSTANDING OUTSTANDING STOCK STOCK EARNINGS STOCK
----------- ----------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 . . . . . . . 40,682 -- $ 182,543 $ -- $ 39,834 $ (1,958)
Net income . . . . . . . . . . . . . . . -- -- -- -- 40,414 --
Exercise of stock options . . . . . . . . 403 -- 727 -- -- --
Cash in lieu of fractional shares . . . . (4) -- (45) -- -- --
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . 229 -- 1,605 -- -- --
Dividends paid, $.0993 per share . . . . -- -- -- -- (4,570) --
Other . . . . . . . . . . . . . . . . . . 47 -- 56 -- 515 --
---------- ---------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 1993 . . . . . . . 41,357 -- 184,886 -- 76,193 (1,958)
---------- ---------- --------- -------- --------- --------
Net income . . . . . . . . . . . . . . . -- -- -- -- 46,398 --
Exercise of stock options . . . . . . . . 552 -- 1,318 -- -- --
Cash in lieu of fractional shares . . . . (1) -- (14) -- -- --
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . 191 -- 2,580 -- -- --
Stock Dividends . . . . . . . . . . . . . 3,468 -- 38,135 -- (38,135) --
Dividends paid, $.1059 per share . . . . -- -- -- -- (5,252) --
Treasury stock retired . . . . . . . . . -- -- (1,958) -- -- 1,958
Unrecognized loss on investment
and mortgage-backed securities
available-for-sale, net of tax . . . -- -- -- -- -- --
Other . . . . . . . . . . . . . . . . . . -- -- 11 -- 625 --
---------- ---------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 1994 . . . . . . . 45,567 -- 224,958 -- 79,829 --
---------- ---------- --------- -------- --------- --------
Net Income . . . . . . . . . . . . . . . -- -- -- -- 56,408 --
Exercise of stock options . . . . . . . . 377 -- 840 -- -- --
Cash in lieu of fractional shares . . . . -- -- (2) -- -- --
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . 209 -- 1,963 -- -- --
Stock dividends . . . . . . . . . . . . . 2,286 -- 20,571 -- (20,571) --
Dividends paid on common stock,
$.0837 per share . . . . . . . . . . -- -- -- -- (3,945) --
Preferred Stock offering . . . . . . . . -- 2,000 -- 96,446 -- --
Dividends paid on preferred stock,
$2.34 per share . . . . . . . . . . -- -- -- -- (4,688) --
Unrecognized gain on investment
and mortgage-backed securities
available-for-sale, net of tax . . . -- -- -- -- -- --
Purchase of shares under Employee
Stock Ownership Plan . . . . . . . . (3,131) -- -- -- -- --
Allocation of shares under Employee
Stock Ownership Plan . . . . . . . . 157 -- -- -- -- --
Other . . . . . . . . . . . . . . . -- -- 545 -- (545) --
---------- ---------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 1995 . . . . . . . 45,465 2,000 $ 248,875 $ 96,446 $ 106,488 --
========== ========== ========= ======== ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNALLOCATED UNRECOGNIZED
COMMON LOSS/GAIN ON
STOCK AVAILABLE- TOTAL
HELD BY FOR-SALE STOCKHOLDERS'
ESOP PORTFOLIO EQUITY
----------- ----------- ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 . . . . . . . $ -- -- $ 220,419
Net income . . . . . . . . . . . . . . . -- -- 40,414
Exercise of stock options . . . . . . . . -- -- 727
Cash in lieu of fractional shares . . . . -- -- (45)
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . -- -- 1,605
Dividends paid, $.0993 per share . . . . -- -- (4,570)
Other . . . . . . . . . . . . . . . . . . -- -- 571
--------- ------- --------
BALANCE, DECEMBER 31, 1993 . . . . . . . -- -- 259,121
--------- ------- --------
Net income . . . . . . . . . . . . . . . -- -- 46,398
Exercise of stock options . . . . . . . . -- -- 1,318
Cash in lieu of fractional shares . . . . -- -- (14)
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . -- -- 2,580
Stock Dividends . . . . . . . . . . . . . -- -- --
Dividends paid, $.1059 per share . . . . -- -- (5,252)
Treasury stock retired . . . . . . . . . -- -- --
Unrecognized loss on investment
and mortgage-backed securities
available-for-sale, net of tax . . . -- (887) (887)
Other . . . . . . . . . . . . . . . . . . -- -- 636
--------- ------- --------
BALANCE, DECEMBER 31, 1994 . . . . . . . -- (887) 303,900
--------- ------- --------
Net Income . . . . . . . . . . . . . . . -- -- 56,408
Exercise of stock options . . . . . . . . -- -- 840
Cash in lieu of fractional shares . . . . -- -- (2)
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . -- -- 1,963
Stock dividends . . . . . . . . . . . . . -- -- --
Dividends paid on common stock,
$.0837 per share . . . . . . . . . . -- -- (3,945)
Preferred Stock offering . . . . . . . . -- -- 96,446
Dividends paid on preferred stock,
$2.34 per share . . . . . . . . . . -- -- (4,688)
Unrecognized gain on investment
and mortgage-backed securities
available-for-sale, net of tax . . . -- 4,875 4,875
Purchase of shares under Employee
Stock Ownership Plan . . . . . . . . (30,286) -- (30,286)
Allocation of shares under Employee
Stock Ownership Plan . . . . . . . . 1,514 -- 1,514
Other . . . . . . . . . . . . . . . -- -- --
--------- ------- --------
BALANCE, DECEMBER 31, 1995 . . . . . . . $ (28,772) $ 3,988 $427,025
========= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses and deferred taxes . . . . . . . . . . . . 5,269 9,837 8,452
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,154 4,873 4,144
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,162 (533) 3,626
Gain on loans, investment and mortgage-backed securities and real estate
owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,538) (1,504) (1,570)
Cumulative effect of change in accounting principle . . . . . . . . . . . . . -- -- (4,800)
Net change in:
Loans held for resale . . . . . . . . . . . . . . . . . . . . . . . . . . (62,846) 44,901 9,166
Official checks and other liabilities . . . . . . . . . . . . . . . . . . 14,647 (4,826) (19,350)
Accrued interest receivable and other assets . . . . . . . . . . . . . . . (15,586) (79,698) (11,858)
---------- ----------- -----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . 5,670 19,448 28,224
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment and mortgage-backed securities:
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,393 750,441 --
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 45,366
Proceeds from repayments and maturities of investment and mortgage-backed securities:
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,961 --
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,313 333,412 650,792
Purchases of investment and mortgage-backed securities:
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (83,860) (337,046) --
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,322,625) (655,664) (1,387,913)
Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,307 6,515 19,423
Purchase of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (305,794) (72,808) (49,075)
Net change in loans other than purchases and sales . . . . . . . . . . . . . . . . (3,933) (1,012,243) (546,783)
Proceeds from sales of premises and equipment . . . . . . . . . . . . . . . . . . 10,729 2,060 115
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . (18,551) (4,820) (5,726)
Proceeds from sales of real estate owned . . . . . . . . . . . . . . . . . . . . . 6,972 12,556 6,940
Net cash received from business combinations . . . . . . . . . . . . . . . . . . . 5,569 46,659 --
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (4,395) 13,896
---------- ----------- -----------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . (1,331,480) (931,372) (1,252,965)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Assumption of deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 818,913 13,687 233,703
Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . . . . . . . 88,085 101,535 (15,473)
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . (535,669) 731,231 229,175
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . 905,499 75,000 714,000
Repayments of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . (714) (3,019) (1,540)
Net increase (decrease) in advance payments by borrowers for taxes and insurance . (3,776) 3,992 (3,700)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . 2,801 3,884 2,287
Proceeds from issuance of preferred stock . . . . . . . . . . . . . . . . . . . . 96,446 -- --
Allocation of ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,514 -- --
Advance to the ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,286) -- --
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,633) (5,252) (4,570)
---------- ----------- -----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . 1,334,180 921,058 1,153,882
---------- ----------- -----------
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 8,370 9,134 (70,859)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . 139,401 130,267 201,126
---------- ----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . $ 147,771 $ 139,401 $ 130,267
========== =========== ===========
RECONCILIATION OF CASH AND CASH EQUIVALENTS TO CONSOLIDATED BALANCE SHEETS:
Cash and amounts due from depository institutions . . . . . . . . . . . . . . . . . . . $ 130,841 $ 110,270 $ 77,107
Interest-earning deposits and federal funds sold . . . . . . . . . . . . . . . . . . . 16,930 29,131 53,160
---------- ----------- -----------
$ 147,771 $ 139,401 $ 130,267
========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURES:
Income tax payments totaled $20.6 million in 1995, $23.7
million in 1994 and $17.1 million in 1993. Interest payments
totaled $303.6 million in 1995, $196.0 million in 1994 and $145.8
million in 1993. Noncash activity consisted of mortgage loan
securitization of $200.9 million in 1995, $159.5 million in 1994
and $243.1 million in 1993; reclassification of long-term
borrowings to short-term borrowings of $315.8 million in 1995,
$159.5 million in 1994 and $190.0 million in 1993; and
reclassification of mortgage loans to real estate owned of $4.5
million in 1995, $7.2 million in 1994 and $4.3 million in 1993.
See accompanying notes to consolidated financial statements.
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting
policies of Sovereign Bancorp, Inc. and subsidiaries
("Sovereign"). Such accounting policies are in accordance with
generally accepted accounting principles and have been followed
on a consistent basis, except as separately noted herein.
a. Principles of Consolidation -- The accompanying
financial statements include the accounts of the parent company,
Sovereign Bancorp, Inc. and its wholly-owned subsidiaries:
Sovereign Bank, FSB ("Sovereign Bank") and its wholly-owned
subsidiaries, Colonial Bank for Savings, FSB ("Colonial Bank")
and its wholly-owned subsidiary and Sovereign Investment Company.
All material intercompany balances and transactions have been
eliminated in consolidation.
b. Use of Estimates -- The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
c. Per Share Information -- Earnings per share have been
calculated based on the average common shares outstanding
(including assumed conversion of preferred shares) for the
respective periods. Stock options are considered common stock
equivalents and are included in the computation of the number of
outstanding shares using the treasury stock method, unless
anti-dilutive. The number of shares used in the computation of
fully diluted earnings per share for the years ended December 31,
1995, 1994, and 1993 were 56.6 million, 51.4 million and
50.9 million, respectively. All per share data have been
restated to reflect the effect of the 5% stock dividends which
were authorized on December 20, 1995 and February 22, 1995, with
record dates of February 1, 1996 and March 31, 1995,
respectively, the 10% stock dividend which was authorized on
April 19, 1994, with a record date of April 29, 1994, the 20%
stock splits which were authorized on October 19, 1993 and
April 7, 1993, with record dates of November 15, 1993 and
April 30, 1993, respectively, the 5% stock dividend which was
authorized on December 22, 1992, with a record date of January 5,
1993, the 20% stock split which was authorized on October 13,
1992, with a record date of November 2, 1992, the 10% stock
dividends which were authorized on July 21, 1992, April 21, 1992,
and January 21, 1992, with record dates of August 4, 1992,
April 30, 1992, and February 17, 1992, respectively, the 25%
stock splits which were authorized on September 17, 1991,
June 18, 1991, and April 16, 1991 with record dates of
September 30, 1991, June 30, 1991, and April 30, 1991,
respectively, the 20% stock dividend which was authorized on
December 19, 1990, with a record date of January 31, 1991, and
the 25% stock dividend which was authorized on October 17, 1989,
with a record date of December 1, 1989.
d. Interest-Earning Deposits -- Interest-earning deposits
consist of deposit accounts with the Federal Home Loan Bank of
Pittsburgh ("FHLB") and deposits with other financial
institutions generally having maturities of three months or less.
e. Investment and Mortgage-backed Securities -- Effective
January 1, 1994, Sovereign adopted Statement of Financial
Accounting Standard ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115,
debt securities that the company has the intent and ability to
hold to maturity are classified as held-to-maturity and reported
at amortized cost. Securities expected to be held for an
indefinite period of time are classified as available-for-sale
and are carried at fair value with unrealized gains and losses
reported as a separate component of stockholders' equity, net of
estimated income taxes. Securities that are bought and held
principally for the purpose of selling are classified as trading
and reported at fair value, with unrealized gains and losses
included in earnings. Sovereign has no securities held for
trading. Gains or losses on the sales of securities are
recognized at trade date utilizing the specific identification
method. In 1993 and prior periods, investment and
mortgage-backed securities were intended to be held-to-maturity
and were generally carried at cost, adjusted for amortization of
premiums and accretion of discounts, because Sovereign had both
the intent and ability to hold these securities to maturity or on
a long-term basis. Marketable equity securities were carried at
the lower of cost or estimated fair value on an aggregate basis.
Trading securities were carried at fair value.
f. Forward Commitments and Options -- Sovereign utilizes
forward commitments and/or options to hedge interest rate risk
associated with loans held for resale and/or, commitments to fund
loans. Gains and losses on these transactions are included in
the net gain or loss when the asset is sold.
g. Mortgage Banking Activity -- Loans held for resale
consist of residential mortgage loans and mortgage-backed
securities originated or purchased by Sovereign. They are
recorded at the lower of cost or estimated fair value on an
aggregate basis. Gains and losses are included in the
consolidated statements of operations. The fair value
calculation includes consideration of all open positions,
outstanding commitments and related fees paid. Excess servicing
fees are computed as the present value of the difference between
the estimated future net revenues and normal servicing net
revenues as established by the federally sponsored secondary
market makers. Resultant premiums are deferred and amortized
over the estimated life of the related mortgages using the
constant yield method.
Effective July 1, 1995, Sovereign prospectively adopted SFAS
No. 122 "Accounting for Mortgage Servicing Rights". SFAS No. 122
requires that management recognize as separate assets, rights to
service mortgage loans for others, however these servicing rights
are acquired. Management should allocate the total cost of
mortgage loans, either purchased or originated, to the loans and
the mortgage servicing rights based on their relative fair value.
The Statement also requires that management assess its
capitalized mortgage servicing rights for impairment based on
the fair value of those rights, and that this impairment be
recognized through a valuation allowance. The adoption of SFAS
No. 122 will not have a material effect on Sovereign's
operations.
h. Allowance for Possible Loan Losses -- An allowance for
possible loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the loan portfolio.
Management's evaluation takes into consideration the risks
inherent in the loan portfolio, past loan loss experience,
specific loans which have loss potential, geographic and industry
concentrations, delinquency trends, economic conditions, the
level of originations and other relevant factors. While
management uses the best information available to make such
evaluations, future adjustments to the allowance may be necessary
if conditions differ substantially from the assumptions used in
making the evaluations.
i. Interest on Loans -- Interest on loans is credited to
income as it is earned. Interest income is not recognized for
those loans when interest is 90 days or more delinquent (unless
government guaranteed) or sooner if management feels the
possibility for receiving interest payments in the future is
doubtful. When a loan is placed on non-accrual, all uncollected
interest is reversed.
j. Loan Fees, Discounts and Premiums -- Loan origination
fees and certain direct loan origination costs are deferred and
recognized as interest income in the consolidated statement of
operations over the contractual life of the loan utilizing the
level yield method, except in the case of certain discounted
loans in which a portion of the net deferred fee may be amortized
over the discount period. Discounts and premiums on loans
purchased are amortized into income utilizing methods which
approximate the level yield method.
k. Premises and Equipment -- Premises and equipment are
carried at cost, less accumulated depreciation. Depreciation is
calculated utilizing both accelerated and straight-line methods.
Estimated useful lives are as follows:
Office buildings . . . . . . . . . . . . . . . 15 to 50 years
Leasehold improvements . . . . . . . . . . . . 5 to 10 years
Furniture, fixtures and equipment . . . . . . 3 to 10 years
Automobiles . . . . . . . . . . . . . . . . . 3 years
Expenditures for maintenance and repairs are charged to
expense as incurred.
l. Real Estate Owned -- Real estate owned consists of
properties acquired by or in lieu of foreclosure and properties
that qualify for in-substance foreclosure. Real estate owned is
stated at the lower of cost or estimated fair value minus
estimated costs to sell. Write-downs of real estate owned which
occur after the initial transfer from the loan portfolio are
recorded as other operating expenses. Costs of holding
foreclosed property are charged to expense in the current period,
except for significant property improvements which are
capitalized to the extent that carrying value does not exceed
estimated fair value.
m. Income Taxes -- Deferred income taxes are provided on
temporary differences between amounts reported for financial
statement and tax purposes in accordance with SFAS No. 109
"Accounting for Income Taxes".
n. Interest Rate Exchange Agreements (Including Swaps,
Caps, and Floors) -- Sovereign has entered into certain interest
rate exchange agreements in connection with its asset/liability
management program as hedges. Related fees are deferred and
amortized on a straight line basis over the life of the interest
rate exchange agreement. Net interest payments/receipts are
accrued as an adjustment of interest expense/income on the hedged
assets or liabilities. Gains or losses resulting from early
termination of interest rate exchange agreements are deferred and
amortized over the remaining term of the original exchange
agreements. In the event the related asset/liability is disposed
of, such deferred gains or losses are recognized as an adjustment
to the respective gain or loss on disposition. Changes in the
value of interest rate exchange agreements are not recorded in
the financial statements because the interest rate exchange
agreements are designated as hedges.
o. General and Administrative Expenses -- General and
administrative expenses are classified on a functional basis,
except for salaries and employee benefits. Certain direct loan
origination costs are deferred and are being amortized as a yield
adjustment through net interest income (see note 1-j).
p. Consolidated Statement of Cash Flows -- For purposes of
reporting cash flows, cash and cash equivalents include cash and
amounts due from depository institutions, interest-earning
deposits, federal funds sold and securities purchased under
resale agreements with an original maturity of three months or
less.
q. Reclassifications -- Certain amounts in the financial
statements of prior periods have been reclassified to conform
with the presentation used in these financial statements. These
reclassifications have no effect on net income.
r. Long-Lived Assets -- In March 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of", which requires impairment
losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less
than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed
of. Sovereign will adopt SFAS No. 121 in the first quarter of
1996, and based on current circumstances, Sovereign does not
believe the effect of adoption will be material.
s. Intangibles -- Core deposit intangibles are a measure of
the value of consumer demand and savings deposits acquired in
business combinations accounted for as purchases. Core deposit
intangibles are being amortized on accelerated bases pursuant to
core deposit studies and in accordance with SFAS No. 72
"Accounting for Certain Acquisitions of Banking or Thrift
Institutions," over the estimated lives of the existing deposit
relationships acquired, but not exceeding 15 years. Goodwill is
the excess of the purchase price over the fair value of net
assets of companies acquired through business combinations
accounted for as purchases. Goodwill is being amortized using
the straight line method over various periods not exceeding 20
years. The carrying amount of the goodwill is reviewed if facts
and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as
determined based on the loss of economic value, the carrying
amount of the goodwill is reduced by the estimated loss of value.
In addition, goodwill associated with impaired long-lived assets
is included in the impairment evaluation which Sovereign assesses
under the rules of SFAS No. 121. The carrying amount of the
goodwill is reviewed if facts and circumstances suggest that it
may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based on the loss of economic
value, the carrying amount of the goodwill is reduced by the
estimated loss of value.
(2) BUSINESS COMBINATIONS
On November 17, 1995, Sovereign acquired two branch offices
and related deposits of Berkeley Federal Bank & Trust, FSB
("Berkeley"). Sovereign assumed approximately $111.7 million of
deposits for a premium of $5.5 million. Of this premium,
$604,000 was recorded as a core deposit intangible and
$4.9 million was recorded as goodwill. The balances of this core
deposit intangible and goodwill at December 31, 1995 were
$579,000 and $4.9 million, respectively.
On November 15, 1995, Sovereign acquired Colonial State Bank
("Colonial") in a transaction accounted for as a purchase.
Sovereign acquired $46.5 million of assets consisting principally
of loans and investment securities. Sovereign also assumed
approximately $42.0 million of deposit liabilities. Sovereign
acquired Colonial in exchange for $6.3 million in cash. This
transaction added goodwill of $3.3 million to Sovereign's balance
sheet. The balance of the goodwill at December 31, 1995 was
$3.3 million. Colonial will operate as a separate Banking
subsidiary of Sovereign under the name Colonial Bank for Savings,
FSB ("Colonial Bank").
On November 10, 1995, Sovereign completed the sale of its
Pottsville, Pennsylvania branch office with related deposits
totalling $23.9 million to Northwest Savings Bank ("Northwest")
and the sale of its English Village branch office in North Wales,
Pennsylvania with related deposits of $12.4 million to Union
National Bank & Trust Company ("Union National"). As a result of
these transactions, Sovereign recognized a pre-tax gain of
$1.1 million and reduced goodwill by $568,000, respectively.
On April 21, 1995, Sovereign completed its sale of seven
southern New Jersey offices with related deposits totalling
$106.7 million to Collective Bancorp, Inc. ("Collective"). Six
of these offices had previously been purchased from Berkeley as
part of a transaction which occurred on January 1, 1995. In
addition, Sovereign acquired $7.0 million of deposits from
Collective's Wilmington, Delaware branch office. As a result of
this transaction, Sovereign recognized a pre-tax gain of
$1.5 million and reduced its existing core deposit intangible by
approximately $6.0 million.
On January 1, 1995, Sovereign acquired 23 branch offices
located in New Jersey and Delaware with $909.3 million of deposit
liabilities from Berkeley. In exchange for assuming the deposits
of the Berkeley offices, Sovereign acquired principally cash and
fixed assets, net of a deposit premium of $66.6 million which was
recorded as $7.6 million of core deposit intangible and
$59.0 million of goodwill. The balances of this core deposit
intangible and goodwill at December 31, 1995 were $4.5 million
and $52.0 million, respectively.
On November 1, 1994, Sovereign acquired Charter FSB Bancorp,
Inc. ("Charter"). Sovereign exchanged a total of 7.0 million new
shares (7.7 million shares as adjusted for all subsequent stock
dividends) of Sovereign common stock for all of the outstanding
shares of Charter common stock. The acquisition of Charter was
accounted for as a pooling-of-interests and accordingly, the
consolidated financial statements have been restated to include
the accounts of Charter for all periods presented. Charter's
fiscal year end was September 30, and accordingly, Sovereign's
consolidated results of operations for the years ended
December 31, 1993 and 1992 include Charter's results of
operations for the twelve-month period ended September 30, 1993
and 1992, respectively. Sovereign's consolidated results of
operations for the year ended December 31, 1994, include
Charter's results of operations for the twelve-month period ended
December 31, 1994. A net increase to Sovereign's stockholders'
equity of $636,000 has been made to reflect Charter's activity
for the three-month period ended December 31, 1993. That
activity consisted of proceeds from the exercise of stock options
of $11,000, net income of $1.0 million and dividends paid of
$397,000.
On September 16, 1994, Sovereign acquired the Chadds Ford,
Pennsylvania office and related deposits of Second National
Federal Savings Association ("Second National") from the
Resolution Trust Corporation ("RTC"), receiver for Second
National. Sovereign assumed approximately $14.4 million of
deposits from the Chadds Ford office for a premium of $675,000
which was recorded as a core deposit intangible. The balance of
this core deposit intangible was $472,000 at December 31, 1995.
On August 5, 1994, Sovereign acquired Shadow Lawn Savings
Bank ("Shadow Lawn") in a transaction accounted for as a
purchase. Sovereign acquired $787.5 million of assets consisting
principally of investment and mortgage-backed securities and
loans. Sovereign also assumed approximately $730.6 million of
deposit liabilities. Sovereign acquired Shadow Lawn in exchange
for an estimated purchase price of $78.4 million of cash. This
transaction added a core deposit intangible of $13.0 million and
goodwill of $26.7 million to Sovereign's balance sheet. The
balances of this core deposit intangible and goodwill at
December 31, 1995 were $9.4 million and $25.7 million,
respectively.
On November 5, 1993, Sovereign acquired Valley Federal
Savings and Loan Association ("Valley Federal"). At
September 30, 1993, Valley Federal had total assets, deposits and
stockholders' equity of $315.7 million, $256.4 million and
$18.6 million, respectively. Sovereign exchanged a total of
2.9 million new shares (3.5 million shares as adjusted for all
subsequent stock dividends) of Sovereign common stock with a
value of $32.3 million for all of the outstanding shares of
Valley Federal common stock.
The acquisition of Valley Federal was accounted for as a
pooling-of-interests and accordingly, the consolidated financial
statements have been restated to include the accounts of Valley
Federal for all periods presented. Valley Federal's fiscal year
end was September 30, and accordingly, Sovereign's consolidated
results of operations for the year ended December 31, 1992
include Valley Federal's results of operations for the
twelve-month period ended September 30, 1992. Sovereign's
consolidated results of operations for the year ended
December 31, 1993 include Valley's Federal's results of
operations for the twelve-month period ended December 31, 1993.
A net increase to Sovereign's stockholders' equity of $571,000
has been made to reflect Valley Federal's activity for the
three-month period ended December 31, 1992. That activity
consisted of proceeds from the exercise of stock options of
$56,000, net income of $603,000 and dividends paid of $88,000.
On August 27, 1993, Sovereign assumed $252.3 million of
deposit liabilities in exchange for $233.7 million in cash from
the RTC as receiver for Home Unity Federal Savings and Loan
Association ("Home Unity"). This transaction added a
$5.0 million core deposit intangible and $13.5 million of
goodwill to Sovereign's balance sheet. The balances of this core
deposit intangible and goodwill at December 31, 1995 were
$2.4 million and $10.6 million, respectively.
On January 15, 1993, Sovereign formally acquired Harmonia
Bancorp, Inc. ("Harmonia") in a transaction accounted for as a
purchase. Pursuant to Accounting Principles Board ("APB")
Opinion No. 16, the Harmonia acquisition was accounted for as
having been completed at the close of business on December
31, 1992 because control of Harmonia had been transferred to
Sovereign as of that date. Sovereign acquired total assets of
$621.0 million representing the historical amount of Harmonia's
assets, purchase accounting adjustments and the elimination of
intercompany accounts. The total assets acquired consisted
principally of cash and interest-earning deposits, federal funds
sold, investment and mortgage-backed securities, and performing
loans. Sovereign assumed liabilities consisting principally of
deposits. Sovereign acquired Harmonia in exchange for
$19.6 million in cash and 9.6 million new shares (11.6 million
shares as adjusted for all subsequent stock dividends) of
Sovereign common stock which were issued at a value of
$66.1 million. The transaction added a core deposit intangible
of $2.1 million to Sovereign's balance sheet. The balance of this
core deposit intangible at December 31, 1995 was $756,000. Since
the Harmonia acquisition was accounted for at the close of
business on December 31, 1992, Sovereign's consolidated balance
sheet at December 31, 1992 includes Harmonia. Sovereign's
consolidated results of operations include Harmonia's results of
operations from January 1, 1993 and thereafter.
On September 11, 1992, Sovereign acquired Jersey Shore
Savings and Loan Association ("Jersey Shore") in a transaction
accounted for as a purchase and supervised by the Office of
Thrift Supervision ("OTS"). Sovereign acquired total assets of
$505.4 million consisting principally of cash and
interest-earning deposits, investment and mortgage-backed
securities and performing loans. Sovereign assumed liabilities
consisting principally of deposits. Sovereign paid one thousand
dollars for Jersey Shore and the transaction added a $7.2 million
core deposit intangible to Sovereign's balance sheet. The
balance of this core deposit intangible at December 31, 1995 was
$3.3 million. Jersey Shore's results of operations from
September 11, 1992 and thereafter have been included in
Sovereign's consolidated results of operations.
On August 23, 1991, Sovereign assumed $153.6 million of
deposit liabilities from the RTC as receiver for Nassau Federal
Savings and Loan Association, Princeton, New Jersey. On
September 6, 1991, Sovereign assumed $169.7 million of deposit
liabilities from the RTC as receiver for United Savings and Loan
Association of Trenton, F.A., Lawrenceville, New Jersey. In
connection with these transactions, Sovereign received assets of
$320.2 million consisting almost entirely of cash. These
transactions added a $3.3 million core deposit intangible and
$135,000 of goodwill to Sovereign's balance sheet. The balances
of this core deposit intangible and goodwill at December 31, 1995
were $1.2 million and $96,000, respectively.
The pre-merger results of operations for Sovereign and
Charter (which was acquired pursuant to a transaction accounted
for as a pooling-of-interests) were as follows (in thousands):
<TABLE>
<CAPTION>
SOVEREIGN CHARTER COMBINED
--------- ------- --------
<S> <C> <C> <C>
Year ended December 31, 1993
Net interest income . . . . . . . . . . . . . . . . . . . $ 115,396 $14,076 $129,472
Provision for possible loan losses . . . . . . . . . . . . 8,050 600 8,650
Other income . . . . . . . . . . . . . . . . . . . . . . . 14,456 711 15,167
Non-interest expense . . . . . . . . . . . . . . . . . . . 70,734 6,643 77,377
Income tax provision . . . . . . . . . . . . . . . . . . . 20,470 2,528 22,998
Cumulative effect of change in accounting principle . . . . 4,800 -- 4,800
--------- ------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 35,398 $ 5,016 $ 40,414
========= ======= ========
</TABLE>
Following are selected unaudited pro forma results of
operations for 1995, 1994 and 1993 as if the Colonial, Shadow
Lawn and Harmonia acquisitions (which were accounted for as
purchases) had occurred at the beginning of 1993 (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Total interest and non-interest income . . . . . . . . . . . . $ 522,160 $ 403,772 $ 358,638
Net interest income . . . . . . . . . . . . . . . . . . . . . . 176,016 171,531 154,828
Net income before cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . 56,602 47,313 39,783
Cumulative effect of change in accounting principle . . . . . -- -- 6,892
Net income after cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . 56,602 47,313 46,675
Earnings per share:
Before cumulative effect of change in accounting principle 1.00 .92 .78
After cumulative effect of change in accounting principle 1.00 .92 .92
</TABLE>
On October 2, 1995, Sovereign executed an agreement to
acquire West Jersey Bancshares, Inc. ("West Jersey"), a
commercial bank headquartered in Fairfield, New Jersey. The
transaction will be accounted for as a pooling-of-interests and
is expected to close in the second quarter of 1996. Under the
terms of the agreement, Sovereign would exchange $8.40 in
Sovereign Common Stock (subject to adjustment) in exchange for
each share of West Jersey Common Stock. The transaction is
valued at approximately $17.2 million and Sovereign expects to
issue about 1.6 million new shares.
At December 31, 1995, West Jersey has assets, deposits and
stockholders' equity of $101.6 million, $92.3 million and
$8.5 million, respectively.
(3) RESTRICTIONS ON CASH AND AMOUNTS DUE FROM DEPOSITORY
INSTITUTIONS
Sovereign Bank is required to maintain certain average
reserve balances as established by the Federal Reserve Board.
The amounts of those reserve balances for the reserve computation
periods which included December 31, 1995 and 1994 were
$50.8 million and $34.8 million, respectively.
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of investment
and mortgage-backed securities are as follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
1995 1994
----------------------------------------------- ---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE COST APPRECIATION DEPRECIATION VALUE
---- ------------ ------------ ----- ---- ------------ ------------ -----
INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury and
government agency
securities . . . . . . . . $ 4,993 $ 37 $ -- $ 5,030 $ 159,353 $ 17 $ 12,675 $ 146,695
Corporate securities . . . . 1,010 60 -- 1,070 4,025 -- 43 3,982
Other securities . . . . . . 482 -- -- 482 420 -- 4 416
Mortgage-backed Securities:
FHLMC . . . . . . . . . . . . 168,713 1,730 1,274 169,169 336,556 396 26,506 310,446
FNMA . . . . . . . . . . . . 221,046 1,240 2,026 220,260 316,968 17 26,390 290,595
GNMA . . . . . . . . . . . . 170,064 6,548 80 176,532 237,308 147 2,877 234,578
RTC . . . . . . . . . . . . . 28,954 -- 4,456 24,498 33,976 -- 5,227 28,749
Private issues . . . . . . . 284,640 622 2,626 282,636 272,833 10 20,502 252,341
Collateralized mortgage
obligations . . . . . . . 1,197,310 10,556 187 1,207,679 455,401 6,801 28,861 433,341
---------- --------- -------- ----------- ---------- -------- --------- -----------
Total investment and
mortgage-backed securities
held-to-maturity . . . . . . $2,077,212 $ 20,793 $ 10,649 $ 2,087,356 $1,816,840 $ 7,388 $ 123,085 $ 1,701,143
========== ========= ======== =========== ========== ======== ========= ===========
<CAPTION>
INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury and government
agency securities . . . . . $ 150,242 $ 131 $ 1,264 $ 149,109 $ -- $ -- $ -- $ --
Equity Securities . . . . . . 135,494 1,166 89 136,571 88,583 366 1,821 87,128
Mortgage-backed Securities:
FHLMC . . . . . . . . . . . . 156,123 763 1,357 155,529 -- -- -- --
FNMA . . . . . . . . . . . . 136,861 2,241 657 138,445 -- -- -- --
GNMA . . . . . . . . . . . . 59,215 2,697 -- 61,912 -- -- -- --
Collateralized mortgage
obligations . . . . . . . 245,037 3,568 662 247,943 -- -- -- --
---------- -------- -------- ----------- ---------- -------- --------- -----------
Total investment and
mortgage-backed securities
available-for-sale . . . . . $ 882,972 $ 10,566 $ 4,029 $ 889,509 $ 88,583 $ 366 $ 1,821 $ 87,128
========== ======== ======== =========== ========== ======== ========= ===========
</TABLE>
The amortized cost and estimated fair value of investment
and mortgage-backed securities at December 31, 1995 by
contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties (in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,192 $ 5,194
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,174 88,689
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . 39,180 39,622
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,945,666 1,953,851
----------- -----------
Total investment and mortgage-backed securities held-to-maturity . . . . . . . . . . . . . $ 2,077,212 $ 2,087,356
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,001 $ 11,934
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,728 196,895
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . 201,231 200,119
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,518 343,990
No stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,494 136,571
--------- ---------
Total investment and mortgage-backed securities available-for-sale . . . . . . . . . . . . $ 882,972 $ 889,509
========= =========
</TABLE>
Proceeds from sales of investment and mortgage-backed
securities and the realized gross gains and losses from those
sales are as follows (in thousands):
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------------- ---------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------- ---------------------------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales . . . . . . . . $ -- $ -- $ 45,366 $ 37,393 $ 750,441 $ --
====== ======= ======== ======== ========= ======
Gross realized gains . . . . . . . . $ -- $ -- $ 231 $ 326 $ 2,377 $ --
Gross realized losses . . . . . . . . -- -- 16 7 840 --
------ ------- -------- -------- --------- ------
Net realized gains . . . . . . . . . $ -- $ -- $ 215 $ 319 $ 1,537 $ --
====== ======= ======== ======== ========= ======
</TABLE>
Included in investment securities held-to-maturity at
December 31, 1993 was a portfolio of $6.5 million of marketable
equity securities which was carried at fair value. Sovereign
recognized a gain of $1.6 million for the year ended December 31,
1993 from appreciation of this portfolio.
Investment and mortgage-backed securities with an estimated
fair value of $578.3 million and $707.9 million were pledged as
collateral for borrowings, interest rate agreements and public
deposits at December 31, 1995 and 1994, respectively.
In May 1993, the FASB issued SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No.
115 requires management to classify investments in equity
securities that have readily determinable fair values and all
investments in debt securities as either held-to-maturity and
reported at amortized cost, available-for-sale and reported at
fair value with unrealized gains and losses reported in a
separate component of stockholders' equity, or trading securities
and reported at fair value with unrealized gains and losses
included in earnings. Effective January 1, 1994, Sovereign
adopted SFAS No. 115 and classified $1.29 billion of securities
as held-to-maturity, $391.0 million of securities as
available-for-sale and $6.5 million of securities as trading
securities. The adoption of SFAS No. 115 resulted in an $836,000
increase to stockholders' equity accounted for as the cumulative
effect of a change in accounting principle in 1994.
On November 15, 1995, the FASB issued a Special Report, "A
Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities". On
December 7, 1995, in accordance with provisions in that Special
Report, Sovereign reclassified $750.2 million of securities from
held-to-maturity to available-for-sale. This reclassification
resulted in a $1.7 million unrealized gain, net of tax, which is
included in Sovereign's stockholders' equity at December 31,
1995.
(5) LOANS
A summary of loans included in the consolidated balance
sheets follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . $ 3,998,048 $ 3,710,150
Real estate construction loans:
Residential (net of loans in process of $23,365 and $33,095,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,151 49,094
Residential development (net of loans in process of $736 and
$1,382, respectively) . . . . . . . . . . . . . . . . . . . . . . . . 1,676 3,226
Multi-family loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,218 95,216
Home equity loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456,922 413,037
----------- -----------
Total Residential Loans . . . . . . . . . . . . . . . . . . . . . . . 4,570,015 4,270,723
Commercial real estate loans . . . . . . . . . . . . . . . . . . . . . . . 47,177 39,717
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,831 5,730
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,341 34,728
----------- -----------
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,674,364 $ 4,350,898
----------- -----------
Total Loans with:
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,134,542 $ 1,097,469
Adjustable rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,539,822 3,253,429
----------- -----------
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,674,364 $ 4,350,898
=========== ===========
</TABLE>
As a result of Sovereign's use of interest rate swaps,
$426.1 million of variable rate mortgage loans have been
effectively converted to fixed rate mortgage loans. Also,
$295.7 million of intermediate variable rate mortgage loans
(loans with a five-year fixed rate period) have effectively been
converted to a variable rate over the fixed rate period.
The majority of all loans are located in Sovereign's
marketplace (eastern Pennsylvania, New Jersey and northern
Delaware). This is Sovereign's only significant geographic
concentration.
The total amount of loans being serviced for the benefit of
others was $947.1 million and $1.11 billion at December 31, 1995
and 1994, respectively. During 1995, Sovereign recognized a gain
of $3.6 million on the sale of servicing rights related to
$238.5 million of residential mortgage loans. At December 31,
1995 and 1994, Sovereign had capitalized excess servicing assets
of $2.3 million and $4.5 million, respectively and no purchased
servicing assets.
Effective July 1, 1995, Sovereign prospectively adopted SFAS
No. 122 "Accounting for Mortgage Servicing Rights". SFAS No.
122 requires that management recognize as separate assets, rights
to service mortgage loans for others, however those servicing
rights are acquired. Management should allocate the total cost
of mortgage loans, either purchased or originated, to the loans
and the mortgage servicing rights based on their relative fair
value. The Statement also requires that management assess its
capitalized mortgage servicing rights for impairment based on the
fair value of those rights, and that this impairment be
recognized through a valuation allowance. The adoption of SFAS
No. 122 will not have a material effect on Sovereign's
operations.
The activity in the allowance for possible loan losses is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period . . . . . . . . . . . . . . . $ 36,289 $ 33,099 $ 26,562
Acquired reserves and other additions . . . . . . . . . . 485 4,712 44
Provision for possible loan losses . . . . . . . . . . . . 1,000 4,100 8,650
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . 3,580 6,428 2,264
Recoveries . . . . . . . . . . . . . . . . . . . . . . . 662 806 107
-------- -------- --------
Balance, end of period . . . . . . . . . . . . . . . . . . $ 34,856 $ 36,289 $ 33,099
======== ======== ========
</TABLE>
In May 1993, the FASB issued SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 requires that
certain impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if
the loan is collateral dependent. In October 1994, the FASB
issued SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures", that amends SFAS
No. 114 and eliminates its provisions regarding how a creditor
should report income on an impaired loan. Originally, SFAS
No. 114 would have required creditors to apply one of two
allowable methods. As a result of the amendment, creditors may
now continue to use existing methods for recognizing income on
impaired loans, including methods that are required by certain
industry regulators. SFAS No. 118 also clarified SFAS No. 114's
disclosure requirements. SFAS No. 114 and SFAS No. 118 were
adopted by Sovereign beginning January 1, 1995. The effect of
SFAS No. 114 and SFAS No. 118 on Sovereign was not significant.
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment, less accumulated
depreciation and amortization, follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,067 $ 9,934
Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,133 36,697
Furniture, fixtures, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,681 36,995
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,937 3,161
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 914 758
-------- --------
100,732 87,545
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,781) (39,449)
-------- --------
$ 56,951 $ 48,096
======== ========
</TABLE>
Sovereign is committed under various non-cancelable
operating leases relating to branch facilities having initial or
remaining terms in excess of one year. The minimum annual rental
commitments under these leases at December 31, 1995, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996 $ 2,340
1997 1,733
1998 1,496
1999 995
2000 756
Thereafter 3,473
--------
$ 10,793
========
</TABLE>
Total rental expense for all leases for the years ended
December 31, 1995, 1994 and 1993 was $2.7 million, $2.1 million,
and $1.6 million, respectively.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
Accrued interest receivable on:
Investment and mortgage-backed securities . . . . . . . . . . . . . . . . . $ 17,106 $ 10,721
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,679 19,648
-------- --------
$ 42,785 $ 30,369
======== ========
</TABLE>
Accrued interest receivable is stated net of an allowance
for potentially uncollected interest (for loans on non-accrual
and for loans that have been restructured). If these non-accruing
and restructured loans had been current in accordance with their
original terms and had been outstanding throughout the period,
gross interest income for the years ended December 31,1995, 1994
and 1993 would have increased by approximately $2.5 million,
$1.7 million and $2.3 million, respectively. Interest income
which was recorded on these loans for the years ended
December 31, 1995, 1994 and 1993 was $1.1 million, $1.1 million
and $545,000, respectively.
(8) DEPOSITS
Deposits are summarized as follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------
1995 1994
----------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
TYPE OF ACCOUNT BALANCE PERCENT AVERAGE RATE BALANCE PERCENT AVERAGE RATE
--------------- ------- ------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Retail certificates . . . . . . . . . . $ 2,731,009 54% 5.48% $ 2,207,531 55% 4.75%
Jumbo certificates . . . . . . . . . . . 112,063 2 5.70 78,794 2 4.86
Savings accounts . . . . . . . . . . . . 925,842 19 2.31 925,667 23 2.34
Demand deposit accounts . . . . . . . . . 168,757 3 -- 118,346 3 --
NOW accounts . . . . . . . . . . . . . . 380,475 8 1.26 308,202 8 1.82
Money market accounts . . . . . . . . . . 720,997 14 4.36 388,579 9 2.44
----------- --- ---- ----------- --- -----
$ 5,039,143 100% 4.24% $ 4,027,119 100% 3.61%
=========== === ==== =========== === =====
</TABLE>
While certificate accounts frequently are renewed at
maturity rather than paid out, they were scheduled to mature
contractually at December 31, 1995 as follows (in thousands):
<TABLE>
<CAPTION>
WITHIN SIX MOS. - ONE - THREE - FIVE - OVER
SIX MOS. ONE YR. THREE YRS. FIVE YRS. TEN YRS. TEN YRS. TOTAL
----------- ---------- ---------- --------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts
by rate:
2.001 -- 4.000% . . . . . . . . $ 75,982 $ 9,532 $ 2,279 $ 948 $ 241 $ 13 $ 88,995
4.001 -- 6.000% . . . . . . . . 933,899 740,019 312,146 51,496 5,202 80 2,042,832
6.001 -- 8.000% . . . . . . . . 552,435 36,087 42,187 24,039 32,792 3,403 690,943
8.001 -- 10.000% . . . . . . . 5,990 1,146 4,706 2,914 741 747 16,244
Above 10.000% . . . . . . . . . 347 690 483 832 1,706 -- 4,058
----------- -------- -------- ------- ------- ------ ----------
Total certificate
accounts . . . . . . . . . . $ 1,568,643 $787,474 $361,801 $80,229 $40,682 $4,243 $2,843,072
=========== ======== ======== ======= ======= ====== ==========
</TABLE>
Interest expense on deposits is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Certificates of deposit . . . . . . . . . . . . . . . . . . . . $ 157,208 $ 85,135 $ 69,702
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . 23,158 24,267 24,209
NOW and money market accounts . . . . . . . . . . . . . . . . . . 29,901 12,410 14,159
--------- --------- --------
$ 210,267 $ 121,812 $108,070
========= ========= ========
</TABLE>
Sovereign Bank is insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") and pays insurance fees equal to $.23 per
$100.00 (23 basis points) of insured deposits annually, the
lowest rate permitted. The average SAIF premium is 24 basis
points. Colonial Bank is insured by the Bank Insurance Fund
("BIF") of the FDIC. During recent years, the FDIC's BIF, which
insures commercial banks and certain savings banks, has also
charged an average premium to its members of 24 basis points, and
a minimum assessment of 23 basis points.
Effective September 30, 1995, the average BIF premium was
reduced from 24 basis points to 4.4 basis points, with the
minimum assessment being reduced from 23 basis points to 4 basis
points. Subsequently, the minimum BIF assessment was reduced to
0 basis points effective January 1, 1996, subject to the minimum
FDIC annual assessment of $1,000. The average and minimum SAIF
premiums remain at 24 and 23 basis points, respectively, until
the SAIF reserves reach $1.25 per $100.00 in insured deposits.
In order to accelerate the recapitalization of the SAIF, it
has been proposed that SAIF-insured institutions such as
Sovereign Bank be assessed a one-time charge of between 85 and
90 basis points of their insured deposits as of March 31, 1995.
If enacted, this assessment would result in a pre-tax charge to
Sovereign Bank's earnings of approximately $36.0 million to
$38.1 million. This charge would have a significant negative
impact on earnings in the period enacted. In accordance with
FASB guidance on this specific issue, no liability or charge for
this assessment is included in the 1995 audited financial
statements.
While it cannot be determined at this time what the outcome
of these events and proposals will be, Sovereign Bank has been
placed at a significant competitive disadvantage which will
remain until the BIF and SAIF insurance premiums are again made
equal.
(9) SHORT-TERM AND LONG-TERM BORROWINGS
Short-term Borrowings. Short-term borrowings included in
the consolidated balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . $ 382,279 $ 608,810
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . 1,128,886 1,113,916
Amortizing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,555 --
----------- -----------
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,512,720 $ 1,722,726
=========== ===========
</TABLE>
Included in short-term borrowings are sales of securities
under repurchase agreements. Securities underlying these
repurchase agreements consisted of mortgage-backed securities
which had a book value of $387.2 million and $335.3 million and a
market value of $392.6 million and $321.7 million at December 31,
1995 and 1994, respectively.
At December 31, 1995, short-term borrowings include an
11.60% amortizing loan with principal of $714,000 which is
collateralized by 15% of the outstanding shares of common stock
of Sovereign Bank (all of the outstanding shares of Sovereign
Bank are owned by Sovereign Bancorp).
Qualifying repurchase agreements are treated as financings
and the obligations to repurchase securities sold are reflected
as a liability in the balance sheet. The dollar amount of
securities underlying the agreements remains in the asset
accounts, although the securities underlying the agreements are
delivered to the brokers who arranged the transactions. In
certain instances, the broker may have sold, loaned, or disposed
of the securities to other parties in the normal course of their
operations, and have agreed to resell to Sovereign substantially
similar securities at the maturity of the agreements. The
broker/dealers who participate with Sovereign in these agreements
are primary broker/dealers reporting to the Federal Reserve Bank
of New York. The following table summarizes information
regarding securities sold under repurchase agreements (in
thousands):
Securities Sold Under Repurchase Agreements
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 382,279 $ 608,810 $ 315,616
Weighted average interest rate . . . . . . . . . . . . . . . . . 6.38% 5.72% 3.40%
Maximum amount outstanding at any month-end
during the period . . . . . . . . . . . . . . . . . . . . . . . $ 630,077 $ 608,810 $ 315,616
Average amount outstanding during the period . . . . . . . . . . $ 477,195 $ 427,509 $ 140,968
Weighted average interest rate during the period . . . . . . . . 6.01% 4.49% 3.61%
</TABLE>
The following table summarizes information regarding
short-term FHLB advances (in thousands):
Federal Home Loan Bank Advances
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,128,886 $ 1,113,916 $ 314,941
Weighted average interest rate . . . . . . . . . . . . . . . . . 5.65% 5.33% 4.16%
Maximum amount outstanding at any month-end
during the period . . . . . . . . . . . . . . . . . . . . . . . $ 1,128,886 $ 1,113,916 $ 434,901
Average amount outstanding during the period . . . . . . . . . . $ 792,450 $ 616,869 $ 350,866
Weighted average interest rate during the period . . . . . . . . 5.54% 4.57% 3.94%
</TABLE>
Long-term Borrowings. Long-term FHLB advances had weighted
average interest rates of 5.88% and 4.96% at December 31, 1995
and 1994, respectively. Long-term borrowings are as follows (in
thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1995 1994
---- ----
<S> <C> <C>
FHLB advances, maturing January 1997 to May 1998 . . . . . . . . . . . . . . $ 850,665 $ 320,165
Amortizing loan at 11.60%, maturing March 1996 . . . . . . . . . . . . . . . -- 2,143
6.75% subordinated debentures, due 2000 . . . . . . . . . . . . . . . . . . . 98,851 49,359
8.50% subordinated debentures, due 2002 . . . . . . . . . . . . . . . . . . . 19,471 19,392
8.00% subordinated debentures, due 2003 . . . . . . . . . . . . . . . . . . . 48,949 48,802
----------- ---------
$ 1,017,936 $ 439,861
=========== =========
</TABLE>
The 6.75% debentures are non-amortizing and are not
redeemable prior to maturity. The 6.75% debentures have, through
the use of an interest rate swap, been effectively converted from
a fixed rate obligation to a variable rate obligation tied to the
3-month LIBOR plus 140.5 basis points. The 8.50% debentures are
non-amortizing and are redeemable at the option of Sovereign in
whole or in part at any time on or after September 15, 1999. The
8.00% debentures are non-amortizing and are not redeemable prior
to maturity.
(10) STOCKHOLDERS' EQUITY
In conformity with the OTS regulations, a "liquidation
account" was established for Sovereign Bank and acquired banks at
the time of their conversion to the stock form of ownership. In
the unlikely event of a complete liquidation of Sovereign Bank,
holders of savings accounts with qualifying deposits, who
continue to maintain their savings accounts, would be entitled to
a distribution from the "liquidation account" in an amount equal
to their then current adjusted savings account balance before any
liquidation distribution could be made with respect to capital
stock. The balance in the "liquidation account" was
$11.1 million at December 31, 1995, for Sovereign Bank. This
amount may not be utilized for the payment of cash dividends to
the holding company.
The Financial Institutions Reform, Recovery and Enforcement
Act ("FIRREA") requires institutions regulated by the OTS to have
minimum regulatory tangible capital equal to 1.5% of total
tangible assets, a minimum leverage capital ratio equal to 3% of
tangible assets and 4% of risk-adjusted assets and a risk-based
capital ratio equal to 8%. Sovereign Bank was in compliance with
all of these capital requirements as of December 31, 1995. The
following schedule summarizes the actual capital balances of
Sovereign Bank and Colonial Bank at December 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
RISK-BASED
LEVERAGE CAPITAL TO CAPITAL TO
TANGIBLE CAPITAL TO LEVERAGE CAPITAL TO RISK-ADJUSTED RISK-ADJUSTED
SOVEREIGN BANK TANGIBLE ASSETS TANGIBLE ASSETS ASSETS ASSETS
- -------------- ------------------- ------------------- -------------------- -------------
<S> <C> <C> <C> <C>
Regulatory capital . . . . . . . . . . . . . $ 404,470 $ 404,470 $ 404,470 $433,211
Minimum capital requirement . . . . . . . . . 118,586 237,172 137,075 274,151
--------- --------- --------- --------
Excess . . . . . . . . . . . . . . . . . . $ 285,884 $ 167,298 $ 267,395 $159,060
========= ========= ========= ========
Capital ratio . . . . . . . . . . . . . . . . 5.12% 5.12% 11.80% 12.64%
COLONIAL BANK
- -------------
Regulatory capital . . . . . . . . . . . . . $ 2,855 $ 2,855 $ 2,855 $ 3,210
Minimum capital requirement . . . . . . . . . 684 1,369 1,237 2,474
--------- --------- --------- --------
Excess . . . . . . . . . . . . . . . . . . $ 2,171 $ 1,486 $ 1,618 $ 736
========= ========= ========= ========
Capital ratio . . . . . . . . . . . . . . . . 6.26% 6.26% 9.23% 10.38%
</TABLE>
OTS capital regulations do not apply to holding companies.
The following schedule summarizes actual capital balances of
Sovereign Bancorp as if those regulations did apply to Sovereign
Bancorp (in thousands):
<TABLE>
<CAPTION>
RISK-BASED
LEVERAGE CAPITAL TO CAPITAL TO
TANGIBLE CAPITAL TO LEVERAGE CAPITAL TO RISK-ADJUSTED RISK-ADJUSTED
SOVEREIGN BANCORP TANGIBLE ASSETS TANGIBLE ASSETS ASSETS ASSETS
- ----------------- ------------------- ------------------- ------------------- -------------
<S> <C> <C> <C> <C>
Regulatory capital . . . . . . . . . . . . . $295,397 $295,397 $295,397 $494,493
Minimum capital requirement . . . . . . . . . 116,989 233,979 138,600 277,200
-------- -------- -------- --------
Excess . . . . . . . . . . . . . . . . . . . $178,408 $ 61,418 $156,797 $217,293
======== ======== ======== ========
Capital ratio . . . . . . . . . . . . . . . . 3.79% 3.79% 8.53% 14.27%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act
("FDICIA") established five capital tiers: well capitalized,
adequately capitalized, under capitalized, significantly under
capitalized and critically under capitalized. A depository
institution's capital tier depends upon its capital levels in
relation to various relevant capital measures, which include
leverage and risk-based capital measures and certain other
factors. Depository institutions that are not classified as well
capitalized or adequately capitalized are subject to various
restrictions regarding capital distributions, payment of
management fees, acceptance of brokered deposits and other
operating activities. At December 31, 1995, Sovereign Bank was
classified as well capitalized.
For income tax return purposes, Sovereign Bank is permitted
a special bad debt deduction limited generally to a percentage of
otherwise taxable income and subject to certain limitations based
on aggregate loans and savings account balances at the end of the
year. If these reserves, created from taxable deductions, are
subsequently used for purposes other than to absorb loan losses,
the amount used will be subject to federal income tax at the then
prevailing corporate tax rate. It is not contemplated that the
accumulated reserves will be used in a manner that will create
income tax liabilities. Retained earnings at December 31, 1995
includes $47.9 million representing such bad debt deduction
reserves, for which no provision for federal income taxes has
been made.
Sovereign maintains a Dividend Reinvestment and Stock
Purchase Plan which permits holders of record of Sovereign common
stock to purchase additional shares of common stock directly from
Sovereign via reinvestment of cash dividends and optional cash
purchases. At December 31, 1995, purchases of common stock with
reinvested dividends are made at a 5% discount from current
market price as defined and optional cash purchases are limited
to a maximum of $5,000 per quarter.
Sovereign maintains a Stockholder Rights Plan (the "Rights
Plan"). The Rights Plan is designed to protect stockholders from
attempts to acquire control of Sovereign at an inadequate price.
Under the Rights Plan, Sovereign distributed a dividend of one
right to purchase a unit of preferred stock on each outstanding
share of Sovereign's common stock. The rights are not currently
exercisable or transferable and no separate certificates
evidencing such rights will be distributed, unless certain events
occur. The rights attach to shares of common stock outstanding
on October 2, 1989, and will expire on September 27, 2004 as
stated in the amendment to the Rights Plan dated September 27,
1995. The rights will entitle the holders to purchase either
Sovereign's common stock or the common stock of the potential
acquirer at a substantially reduced price.
On November 21, 1994, Sovereign's Board of Directors
authorized an amendment to Sovereign's tax-qualified Employee
Stock Ownership Plan ("ESOP") to add a leverage feature to
purchase up to 4.2 million shares of Sovereign's outstanding
common stock in the open market or in negotiated transactions.
On May 17, 1995, Sovereign completed the sale of 2.0 million
shares of Convertible Preferred Stock, raising $96.7 million in
capital. The 6 1/4%, non-voting, Cumulative Convertible
Preferred Stock is convertible at the option of the holder at any
time, unless previously redeemed, at a conversion rate of
4.989 shares of common stock for each share of preferred stock,
equivalent to a conversion price of $10.022 per share of common
stock. 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 $52.188 per share
during the twelve months beginning May 15, 1998, and thereafter
at prices declining ratably to par on and after May 15, 2005.
(11) STOCK OPTION PLANS
Sovereign grants stock options for a fixed number of shares
to key officers and directors with an exercise price equal to the
fair value of the shares at the date of grant. Sovereign
accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and
accordingly, recognizes no compensation expense for the stock
option grants. There are 4.0 million shares of common stock
reserved for issuance under the plans. These shares, along with
the per share data in the following summary of option
transactions, have been adjusted to reflect all stock dividends
and stock splits.
<TABLE>
<CAPTION>
1986 PLAN 1988 PLAN 1990 PLAN 1993 PLAN
------------ --------- --------- ---------------------
OPTION PRICE $1.38-$10.00 $1.82 $1.87 $5.80 $6.30 TOTAL
------------ --------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
December 31, 1993 . . . . . . 1,280,051 182,957 513,360 -- 630,433 2,606,801
------------ ------- -------- ------- ------- ---------
Granted . . . . . . . . . . . -- -- -- 184,616 -- 184,616
Exercised . . . . . . . . . . (292,591) (96,662) (150,878) (69,912) -- (610,043)
Forfeited . . . . . . . . . . -- -- -- -- (29,688) (29,688)
------------ ------- -------- ------- ------- ---------
Options outstanding
December 31, 1994 . . . . . . 987,460 86,295 362,482 114,704 600,745 2,151,686
------------ ------- -------- ------- ------- ---------
Granted . . . . . . . . . . . 7,350 -- -- -- -- 7,350
Exercised . . . . . . . . . . (146,887) (86,295) (134,820) (34,298) -- (402,300)
Forfeited . . . . . . . . . . -- -- -- (1,499) (96,050) (97,549)
------------ ------- -------- ------- ------- ---------
Options outstanding
December 31, 1995 . . . . . . 847,923 -- 227,662 78,907 504,695 1,659,187
------------ ------- -------- ------- ------- ---------
Options exercisable
December 31, 1995 . . . . . . 840,573 -- 227,662 78,907 -- 1,147,142
============ ======= ======== ======= ======= =========
</TABLE>
In October 1995, the FASB issued SFAS No. 123 "Accounting
for Stock-Based Compensation" which provides companies with a
choice either to expense the fair value of employee stock options
over the vesting period (recognition method) or to continue the
previous practice but disclose the pro forma effects on net
income and earnings per share had the fair value method been used
(disclosure only method). Companies electing the disclosure only
method will be required to include the pro forma effects of all
awards granted in fiscal years beginning after December 15, 1994.
Sovereign plans to adopt the disclosure only method during 1996.
(12) EMPLOYEE BENEFIT PLANS
Sovereign sponsors a non-contributory defined benefit
pension plan which covers substantially all employees who have
attained the age of 21 and completed one year of service.
Benefits under the plan are based upon years of service and the
employees' average compensation computed based upon the five
consecutive plan years of highest pay during the ten years
preceding retirement or termination.
It is Sovereign's policy to fund the minimum contribution as
determined by an actuarial valuation. The net periodic pension
costs for this plan for 1995, 1994 and 1993 were $526,000,
$929,000 and $841,000, respectively, and are comprised of the
following components (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned during the period . . . . . . . . . . . . . . . . . . . $ 851 $ 1,082 $ 1,111
Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . 1,378 1,333 1,215
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,656) 181 (1,496)
Amortization of unrecognized net assets and other deferred amounts, net . . . . . . . 2,953 (1,667) 11
------- ------- -------
Net periodic pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 526 $ 929 $ 841
======= ======= =======
</TABLE>
The following table sets forth the pension plan's funded
status at December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,225 $ 18,613
======== ========
Projected benefit obligation:
Vested benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,800 $ 16,435
Non-vested benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 233
Effect of projected future salary increases . . . . . . . . . . . . . . . . . 1,701 2,165
-------- --------
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,836 $ 18,833
======== ========
Plan assets in excess of (less than) the projected benefit obligation . . . . . . $ 1,389 $ (220)
Unrecognized net (asset) liability existing at transition date . . . . . . . . . . (205) 34
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,720 2,446
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . (112) (103)
-------- --------
Net pension asset included in balance sheet . . . . . . . . . . . . . . . . . . $ 2,792 $ 2,157
======== ========
</TABLE>
In determining the projected benefit obligation, the assumed
discount rates at December 31, 1995, 1994 and 1993 were 7.00%,
8.00% and 7.00%, respectively. The weighted average rate of
salary increase was 5.00% for 1995, 4.75% for 1994 and 5.00% for
1993. The expected long-term rate of return on assets used in
determining net periodic pension expense was 9.00% for all three
years.
The pension plan's assets consist primarily of common stock,
fixed income securities such as corporate bonds and U.S. Treasury
securities and units of certain common trust funds.
Sovereign also maintains a 401(k) savings plan.
Substantially all employees of Sovereign are eligible to
participate in the 401(k) savings plan on the January 1 and
July 1 following their completion of one year of service and
attaining age 21. Sovereign's contributions to this plan were
$109,000, $111,000 and $114,000 during 1995, 1994 and 1993,
respectively. Pursuant to this plan, employees can contribute up
to 10% of their compensation to the plan. Sovereign contributes
50% of the employee contribution up to 6% of compensation in the
form of Sovereign common stock.
Sovereign maintains an ESOP. Substantially all employees of
Sovereign are eligible to participate in the ESOP on the
January 1 or July 1 following their completion of one year of
service and attaining age 21. The ESOP is a deferred
contribution plan which provides retirement benefits for
participants and beneficiaries by purchasing Sovereign common
stock in the open market. The amount of annual contributions to
the ESOP by Sovereign is determined by the Board of Directors
based upon the financial performance of Sovereign each year.
Sovereign contributed and recognized as expense $1.5 million and
$1.1 million to the ESOP during 1994 and 1993, respectively.
On November 21, 1994, Sovereign's Board of Directors
authorized an amendment to Sovereign's ESOP to add a leverage
feature to purchase up to 4.2 million shares of Sovereign's
outstanding common stock in the open market or in negotiated
transactions. The ESOP is funded through direct loans from
Sovereign totalling $30.0 million in 1995. The proceeds from
these loans were used to purchase outstanding shares of
Sovereign's common stock. As the debt on these loans is repaid,
shares of Sovereign common stock are released and become eligible
for allocation to employee accounts. In addition, dividends are
paid on all shares of Sovereign common stock, including
unallocated shares held by the ESOP. Dividends on the
unallocated shares are allocated on a pro-rata basis when
purchased shares are released. Compensation expense is
recognized based on the fair value of the shares committed to be
released to employees and the shares then become outstanding for
earnings per share computations. Compensation expense of
$1.6 million was recognized in 1995. Sovereign has committed to
make contributions sufficient to provide for the ESOP debt
requirements. At December 31, 1995, the ESOP held 3.1 million
shares of which 157,000 shares are allocated to employee
accounts. The outstanding loan balances of $28.8 million are
presented as a reduction of stockholders' equity in the
consolidated financial statements. At December 31, 1995, the
fair value of the unallocated shares held by the ESOP was
$30.1 million.
Sovereign's Compensation Committee administers the ESOP.
Under the ESOP, the trustees are directed to vote all shares held
in the ESOP in accordance with the instructions of the
participants to whom the shares have been allocated. In
addition, the trustees shall vote in their discretion any shares
in the unallocated suspense account.
In 1992, Sovereign implemented the Employee Stock Purchase
Plan which permits eligible employees to purchase Sovereign
common stock directly from Sovereign. Purchases of common stock
are limited to 15% of a participant's compensation. During 1995,
1994 and 1993, participants purchased Sovereign common stock at a
price equal to 92.5% of the fair value of Sovereign common stock
on the offering date. Compensation expense for this plan for the
year ended December 31, 1995, 1994 and 1993 was $31,000, $31,000
and $21,000, respectively.
(13) INCOME TAXES
Effective January 1, 1993, Sovereign adopted SFAS No. 109
"Accounting for Income Taxes". SFAS 109 requires a change from
the deferred method of accounting for income taxes to the asset
and liability method which recognizes deferred tax assets and
liabilities for the temporary differences between the financial
statement carrying amounts of assets and liabilities and their
respective tax bases. Sovereign has reported the cumulative
effect of that change in the method of accounting for income
taxes in the 1993 consolidated statement of operations. The
cumulative effect of this change of $4.8 million was determined
as of January 1, 1993, and is reported separately in the
consolidated statement of operations for the year ended
December 31, 1993.
The provision for income taxes in the consolidated statement
of operations consists of the following components (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . $ 23,251 $ 12,986 $ 20,133
State . . . . . . . . . . . . . . . . . . . . . . . 2,931 3,155 3,063
-------- -------- --------
26,182 16,141 23,196
Deferred . . . . . . . . . . . . . . . . . . . . . . . 3,357 12,326 (198)
-------- -------- --------
Total income tax expense . . . . . . . . . . . . . . . $ 29,539 $ 28,467 $ 22,998
======== ======== ========
</TABLE>
The following is a reconciliation of the actual tax
provisions with taxes computed at the federal statutory rate of
35% for 1995, 1994 and 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . (.3) (.4) (.4)
State income taxes, net of federal tax benefit . . . . . . . . . . . . . . 2.2 2.8 3.5
Amortization of intangible assets and other
purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . 2.4 1.7 1.5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.9) (1.1) (.4)
----- ----- ----
34.4% 38.0% 39.2%
===== ===== ====
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Allowance for possible loan losses . . . . . . . . . . . . . . . . . . . . $ 13,937 $ 14,106 $ 12,203
Merger related liabilities . . . . . . . . . . . . . . . . . . . . . . . . 785 392 163
Purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . . . 3,538 7,846 6,229
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 411
Unrealized loss on available-for-sale
portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 567 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,003 1,374 479
--------- --------- --------
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . 19,263 24,285 19,485
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . (900) (900) (900)
--------- --------- --------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,363 $ 23,385 $ 18,585
--------- --------- --------
Deferred tax liabilities:
Purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . . . $ (8,559) $ (9,038) $ (1,581)
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,952) (2,088) --
Unrealized gain on available-for-sale
portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,708) -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,684) (183) (491)
--------- --------- --------
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . $ (19,903) $ (11,309) $ (2,072)
--------- --------- --------
Net deferred tax (liability) asset . . . . . . . . . . . . . . . . . . . . $ (1,540) $ 12,076 $ 16,513
========= ========= ========
</TABLE>
The valuation for deferred tax assets is unchanged from the
balance at January 1, 1993, and is primarily related to state
deductible temporary differences resulting from the Harmonia
acquisition.
Sovereign has determined that it is not required to
establish any additional valuation reserve for deferred tax
assets since it is more likely than not that deferred tax assets
(other than those for which the valuation allowance has been
established) will be principally realized through carry back to
taxable income in prior years. Sovereign's conclusion that it is
"more likely than not" that the deferred tax assets will be
realized is based on a history of growth in earnings and the
prospects for continued growth including an analysis of potential
uncertainties that may affect future operating results.
Sovereign will continue to review the criteria related to the
recognition of deferred tax assets on a quarterly basis.
(14) COMMITMENTS AND CONTINGENCIES
Financial Instruments
Sovereign is a party to financial instruments with
off-balance sheet risk in the normal course of business to meet
the financing needs of its customers and to manage its own
exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters
of credit, loans sold with recourse, forward contracts and
interest rate swaps, caps and floors. These financial
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheet. The contract or notional amounts of
these financial instruments reflect the extent of involvement
Sovereign has in particular classes of financial instruments.
Sovereign's exposure to credit loss in the event of
non-performance by the other party to the financial instrument
for commitments to extend credit, standby letters of credit and
loans sold with recourse is represented by the contractual
notional amount of those instruments. Sovereign uses the same
credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. For interest rate
swaps, caps and floors and forward contracts, the contract or
notional amounts do not represent exposure to credit loss.
Sovereign controls the credit risk of its interest rate swaps,
caps and floors, and forward contracts through credit approvals,
limits and monitoring procedures. Unless noted otherwise,
Sovereign does not require and is not required to pledge
collateral or other security to support financial instruments
with credit risk.
The following schedule summarizes Sovereign's off-balance
sheet financial instruments (in thousands):
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
AT DECEMBER 31,
--------------------------
1995 1994
---- ----
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . $ 420,763 $ 474,621
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 648 510
Loans sold with recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,193 73,880
Financial instruments whose notional or contract amounts exceed the amount
of credit risk:
Forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,250 9,600
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,211,130 1,335,645
Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,446,000 450,000
</TABLE>
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Sovereign
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained upon extension of
credit is based on management's credit evaluation of the
counterparty. Collateral held usually consists of real estate
but may include securities, accounts receivable, inventory and
property, plant and equipment.
Standby letters of credit are conditional commitments issued
by Sovereign to guarantee the performance of a customer to a
third party. The guarantees are primarily issued to support
public and private borrowing arrangements. One guarantee for
$17,000 expires in June 1996, one guarantee for $10,000 expires
in August 1996, three guarantees totaling $79,000 expire in
September 1996, one guarantee for $10,000 expires in October
1996, one guarantee for $75,000 expires in August 1997, and one
guarantee for $457,000 expires in September 2000. The credit
risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Sovereign holds various collateral to support the commitments.
The extent of collateral held for the commitments at December 31,
1995 and December 31, 1994 varies from 100% to 120%; the average
amount collateralized is 115%.
Loans sold with recourse primarily represent residential
loans that were originated and sold by Jersey Shore and acquired
by Sovereign as part of the Jersey Shore acquisition.
The forward contracts used by Sovereign in its mortgage
banking activities are contracts for delayed delivery of
securities in which Sovereign agrees to make delivery of a
specified instrument, at a specified future date, at a specified
price or yield. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from
movements in securities' values and interest rates.
Interest rate swaps, caps and floors enable Sovereign to
transfer, modify or reduce its interest rate risk and are used as
part of asset and liability management. Sovereign may become a
principal in the exchange of interest payments with another party
and therefore, is exposed to loss should one of the other parties
default. Sovereign minimizes this risk by performing credit
reviews on counterparties. Notional principal amounts often are
used to express the volume of these transactions, but the amounts
potentially subject to credit risk are much smaller.
Litigation
At December 31, 1995, Sovereign was party to a number of
lawsuits. While any litigation has an element of uncertainty,
management, after reviewing these actions with legal counsel is
of the opinion that the liability, if any, resulting from these
actions will not have a material effect on the financial
condition or results of operations of Sovereign.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents disclosures about fair value of
financial instruments. These fair values are presented based
upon subjective estimates of relevant market conditions at a
specific point in time and information about each financial
instrument. In cases where quoted market prices are not
available, fair values are based on estimates using present value
or other valuation techniques. These techniques involve
uncertainties resulting in variability in estimates affected by
changes in assumptions and risks of the financial instruments at
a certain point in time. Therefore, the derived fair value
estimates cannot be substantiated by comparison to independent
markets. In addition, the fair values do not reflect any premium
or discount that could result from offering for sale at one time
an entity's entire holdings of a particular financial instrument
nor does it reflect potential taxes and the expenses that would
be incurred in an actual sale or settlement. Accordingly, the
aggregate fair value amounts presented do not represent the
underlying value of Sovereign (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1995 1994
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---- ----- ----- -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash and amounts due from depository institutions . . . . $ 130,841 $ 130,841 $ 110,270 $ 110,270
Interest-earning deposits . . . . . . . . . . . . . . . 16,930 16,930 29,131 29,131
Loans held for resale . . . . . . . . . . . . . . . . . . 70,512 71,297 7,666 7,666
Investment and mortgage-backed securities available-
for-sale . . . . . . . . . . . . . . . . . . . . . . 889,509 889,509 87,128 87,128
Investment and mortgage-backed securities
held-to-maturity . . . . . . . . . . . . . . . . . . 2,077,212 2,087,356 1,816,840 1,701,143
Loans, net . . . . . . . . . . . . . . . . . . . . . . . 4,639,508 4,669,233 4,314,609 4,198,886
Excess servicing . . . . . . . . . . . . . . . . . . . . 2,328 7,330 4,459 8,678
Originated mortgage servicing rights . . . . . . . . . . 1,894 2,840 -- --
Financial Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . 5,039,143 5,050,523 4,027,119 3,985,208
Borrowings(1) . . . . . . . . . . . . . . . . . . . . . . 2,542,465 2,557,990 2,162,587 2,131,250
Unrecognized Financial Instruments:(2)
Commitments to extend credit . . . . . . . . . . . . . . 930 869 687 481
Standby letters of credit . . . . . . . . . . . . . . . . 4 6 4 5
Loans sold with recourse . . . . . . . . . . . . . . . . 391 156 369 236
Interest rate swaps, caps and floors . . . . . . . . . . 12,777 (9,873) 2,310 (77,685)
- ----------------
</TABLE>
(1) Borrowings are shown without unamortized cap premiums, as
cap premiums are reflected separately below in "Interest
rate swaps, caps and floors".
(2) The amounts shown under "carrying value" represent accruals
or deferred income (cost) arising from those unrecognized
financial instruments.
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
Cash and amounts due from depository institutions and
interest-earning deposits. For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Loans held for resale. Fair values are estimated using
quoted rates based upon secondary market sources for securities
backed by similar loans. Fair value estimates include
consideration of all open positions (including forward
contracts), outstanding commitments and related fees paid.
Investment and mortgage-backed securities
available-for-sale. The fair value of investment and
mortgage-backed securities available-for-sale are based on quoted
market prices as of the balance sheet date.
Investment and mortgage-backed securities held-to-maturity.
The carrying amounts for short-term investment and
mortgage-backed securities held-to-maturity approximate fair
value because of the short maturity of these instruments and they
do not present unanticipated credit concerns. The fair value of
long-term investments and mortgage-backed securities
held-to-maturity is estimated based upon bid quotations received
from securities dealers and an independent pricing servicing
bureau.
Loans. Fair value is estimated by discounting cash flows
using estimated market discount rates at which similar loans
would be made to borrowers and reflect similar credit ratings and
interest rate risk for the same remaining maturities.
Excess servicing and originated mortgage servicing rights.
The fair value of excess servicing is estimated using quoted
rates based upon secondary market sources. The estimated fair
value approximates the amount for which the servicing could
currently be sold.
Deposits. The fair value of deposits with no stated
maturity, such as non-interest bearing demand deposits, NOW
accounts, savings accounts and certain money market accounts, is
equal to the amount payable on demand as of December 31, 1995.
The fair value of fixed-maturity certificates of deposit is
estimated by discounting cash flows using currently offered rates
for deposits of similar remaining maturities.
Borrowings. Fair value is estimated by discounting cash
flows using rates currently available to Sovereign for other
borrowings with similar terms and remaining maturities.
Commitments to extend credit. The fair value of commitments
to extend credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates.
Standby letters of credit. The fair value of letters of
credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties.
Loans sold with recourse. The fair value of loans sold with
recourse is estimated based upon the cost to terminate
Sovereign's obligations under the recourse provisions.
Interest rate swaps, caps and floors. The fair value of
interest rate swaps, caps and floors which represent the
estimated amount Sovereign would receive or pay to terminate the
contracts or agreements, taking into account current interest
rates and when appropriate, the current creditworthiness of the
counterparties are obtained from dealer quotes.
(16) INTEREST RATE EXCHANGE AGREEMENTS
Amortizing and non-amortizing interest rate swaps are
generally used to convert fixed rate assets and liabilities to
variable rate assets and liabilities and vice versa. Interest
rate caps are generally used to limit the exposure from the
repricing and maturity of liabilities. Interest rate floors are
generally used to limit the exposure from repricing and maturity
of assets. Interest rate caps and floors are also used to limit
the exposure created by other interest rate swaps. In certain
cases, interest rate caps or floors are simultaneously bought and
sold to create a range of protection against changing interest
rates while limiting the cost of that protection. The following
table presents information regarding interest rate exchange
agreements at the dates indicated (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
----------------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NOTIONAL BOOK ESTIMATED MATURITY NOTIONAL BOOK ESTIMATED MATURITY
AMOUNT VALUE FAIR VALUE IN YEARS AMOUNT VALUE FAIR VALUE IN YEARS
------ ----- ---------- -------- ------ ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amortizing interest rate swaps:
Pay variable-receive
fixed(1) . . . . . . . . . . $ 585,429 $ -- $ (4,066) 4.2 $ 1,085,645 $ -- $ (84,349) 3.9
Pay fixed-receive
variable(2) . . . . . . . . . 295,701 -- (3,653) 3.3 -- -- -- ---
Non-amortizing interest rate swaps:
Pay variable-receive
fixed(3) . . . . . . . . . . . 50,000 -- (837) 4.6 250,000 -- (7,931) 1.5
Pay fixed-receive
variable (4) . . . . . . . . . 280,000 -- (2,780) 1.8 -- -- -- ---
Interest rate caps(5) . . . . . . . 1,446,000 12,777 1,463 1.6 450,000 2,310 14,595 1.6
--------- ------- -------- ----------- ------- ---------
$2,657,130 $12,777 $ (9,873) $ 1,785,645 $ 2,310 $ (77,685)
========== ======= ======== =========== ======= =========
</TABLE>
(1) The weighted average pay rate was 5.56% and 6.28% and the
weighted average receive rate was 5.61% and 5.91% at
December 31, 1995 and 1994, respectively.
(2) The weighted average pay rate was 6.87% and the weighted
average receive rate was 6.92%.
(3) The weighted average pay rate was 7.28% and 6.59% and the
weighted average receive rate was 6.75% and 5.73% at
December 31, 1995 and 1994, respectively.
(4) The weighted average pay rate was 5.91% and the weighted
average receive rate was 5.89%.
(5) The weighted average contract rate was 6.36% and 5.50% at
December 31, 1995 and 1994, respectively.
The following table summarizes by notional amounts the
activity of Sovereign's interest rate exchange agreements (in
thousands):
<TABLE>
<CAPTION>
AMORTIZING INTEREST NON-AMORTIZING INTEREST INTEREST RATE
RATE SWAPS RATE SWAPS CAPS
---------- ---------- ----
<S> <C> <C> <C>
Balance, December 31, 1992 . . . . . . . . . . . . . . . $ -- $ -- $ 50,000
---------- --------- -----------
Additions . . . . . . . . . . . . . . . . . . . . . 655,166 50,000 250,000
Maturities/Amortization . . . . . . . . . . . . . . 34,232 -- --
Terminations . . . . . . . . . . . . . . . . . . . -- -- --
---------- --------- -----------
Balance, December 31, 1993 . . . . . . . . . . . . . . . 620,934 50,000 300,000
---------- --------- -----------
Additions . . . . . . . . . . . . . . . . . . . . . 591,800 200,000 980,000
Maturities/Amortization . . . . . . . . . . . . . . 127,089 -- 50,000
Terminations . . . . . . . . . . . . . . . . . . . -- -- 780,000
---------- --------- -----------
Balance, December 31, 1994 . . . . . . . . . . . . . . . 1,085,645 250,000 450,000
---------- --------- -----------
Additions . . . . . . . . . . . . . . . . . . . . . 300,000 280,000 996,000
Maturities/Amortization . . . . . . . . . . . . . . 326,795 200,000 --
Terminations . . . . . . . . . . . . . . . . . . . 177,720 -- --
---------- --------- -----------
Balance, December 31, 1995 . . . . . . . . . . . . . . . $ 881,130 $ 330,000 $ 1,446,000
========== ========= ===========
</TABLE>
At December 31, 1993, Sovereign's balance sheet included a
net deferred gain of $132,000 related to interest rate exchange
agreements terminated in November, 1994 and December, 1995 which
were originally accounted for as hedges. Of this net deferred
gain, $152,000 will amortize into interest income in 1996 and
$20,000 will amortize into interest expense in 1997.
Net interest income includes $(1.9) million in 1995,
$8.0 million in 1994 and $2.0 million in 1993 of income (expense)
resulting from interest rate exchange agreements.
(17) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Sovereign Bancorp, Inc.
is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE SHEETS
-------------------------------
AT DECEMBER 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Assets
Interest-earning deposits . . . . . . . . . . . . . . $ 280 $ 1,041
Investment securities . . . . . . . . . . . . . . . . . 9,129 9,634
Investment in subsidiaries . . . . . . . . . . . . . . 542,869 412,858
Other assets . . . . . . . . . . . . . . . . . . . . . 46,342 1,065
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . $ 598,620 $ 424,598
========= =========
Liabilities and Stockholders' Equity
Short-term borrowings . . . . . . . . . . . . . . . . . $ 714 $ --
Long-term borrowings . . . . . . . . . . . . . . . . . 167,271 119,696
Other liabilities . . . . . . . . . . . . . . . . . . . 3,610 1,002
Stockholders' equity . . . . . . . . . . . . . . . . . 427,025 303,900
--------- ---------
Total Liabilities and Stockholders' Equity . . . . . . . . $ 598,620 $ 424,598
========= =========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
---------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income . . . . . . . . . . . . . . . . . . . . $ 4,308 $ 192 $ 1,426
Other income . . . . . . . . . . . . . . . . . . . . . 2,791 13,008 7,607
-------- -------- --------
Total income . . . . . . . . . . . . . . . . . . . . . 7,099 13,200 9,033
-------- -------- --------
Interest expense . . . . . . . . . . . . . . . . . . . 11,758 9,341 6,116
Other expense . . . . . . . . . . . . . . . . . . . . . 4,532 3,858 2,846
-------- -------- --------
Total expense . . . . . . . . . . . . . . . . . . . . . 16,290 13,199 8,962
-------- -------- --------
Income before taxes, dividends and equity in
undistributed earnings of subsidiaries . . . . . . . (9,191) 1 71
Income taxes . . . . . . . . . . . . . . . . . . . . . (4,181) -- 64
-------- -------- --------
Income before earnings of subsidiaries . . . . . . . . (5,010) 1 7
Distributed earnings from subsidiaries . . . . . . . . 19,544 18,246 2,564
Undistributed earnings of subsidiaries . . . . . . . . 41,874 28,151 37,843
-------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414
Adjustments to reconcile net income to net cash
provided by operating activities:
Dividends received from subsidiaries . . . . . . 19,544 18,246 2,564
Earnings from subsidiaries . . . . . . . . . . . (61,418) (46,397) (40,407)
Change in other assets . . . . . . . . . . . . . (45,277) 10,439 (8,629)
Change in other liabilities . . . . . . . . . . . 2,608 (3,168) (16,906)
-------- -------- --------
Net cash (used) provided by operating activities . . . (28,135) 25,518 (22,964)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries . . . . . . . . . . . . . (88,137) (17,140) (91,876)
Maturity and repayments of investment
securities . . . . . . . . . . . . . . . . . . . 505 5,319 3,567
Purchase of investment securities . . . . . . . . . -- (10,096) (4,857)
Other, net . . . . . . . . . . . . . . . . . . . . . 4,875 (251) (635)
-------- -------- --------
Net cash used by investing activities . . . . . . . . . (82,757) (22,168) (93,801)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to stockholders . . . . . . . . (8,633) (5,252) (4,570)
Net cash received from debt offering . . . . . . . . 49,379 -- 97,985
Net proceeds from issuance of common stock . . . . . 2,801 3,884 2,287
Net proceeds from issuance of preferred stock . . . 96,446 -- --
Purchase of ESOP shares . . . . . . . . . . . . . . (30,286) -- --
Allocation of ESOP shares . . . . . . . . . . . . . 1,514 -- --
Repayment of long-term debt borrowings . . . . . . . (376) (1,092) (1,429)
Net change in short-term borrowings . . . . . . . . (714) -- --
-------- -------- --------
Net cash provided (used) by financing activities . . . 110,131 (2,460) 94,273
-------- -------- --------
Increase (decrease) in cash and cash equivalents . . . (761) 890 (22,492)
Cash and cash equivalents at beginning of period . . . 1,041 151 22,643
-------- -------- --------
Cash and cash equivalents at end of period . . . . . . $ 280 $ 1,041 $ 151
======== ======== ========
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to executive officers of Sovereign
is included under Item 4A in Part I hereof. The information
required by this item relating to directors of Sovereign is
incorporated herein by reference to (i) that portion of the
section captioned "Election of Directors" located on pages 5
through 8 of the definitive Proxy Statement to be used in
connection with Sovereign's 1996 Annual Meeting of Shareholders
(the "Proxy Statement"). The information required by this item
relating to compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference to the
section captioned "Additional Information Regarding Directors and
Officers" on page 15 of the Proxy Statement.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein
by reference to (i) the sections captioned "Compensation Paid to
Directors" through "Indemnification" on pages 8 through 15 of the
Proxy Statement and (ii) the section captioned "Performance
Graph" on page 16 of the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is incorporated herein
by reference to (i) the section captioned "Principal
Shareholders" on page 17 of the Proxy Statement and (ii) that
portion of the section captioned "Election of Directors" located
on pages 5 through 8 of the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein
by reference to the sections captioned "Indebtedness of
Management" on page 15 of the Proxy Statement.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
The following consolidated financial statements
are included by reference in Part II, Item 8
hereof:
Sovereign Bancorp, Inc. and Subsidiaries.
Independent Auditors' Report
Consolidated Balance Sheets.
Consolidated Statements of Operations.
Consolidated Statements of Stockholders'
Equity.
Consolidated Statements of Cash Flows.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Financial statement schedules are omitted because
the required information is either not applicable,
not required or is shown in the respective
financial statements or in the notes thereto.
3. Exhibits.
(3.1) Articles of Incorporation, as amended and restated,
of Sovereign Bancorp, Inc.
(3.2) By-Laws of Sovereign Bancorp, Inc.
(Incorporated by reference to Exhibit 3.2
to Sovereign's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993.)
(4.1) Sovereign Bancorp, Inc. has certain
long-term debt outstanding. None of the
instruments evidencing such debt authorizes
an amount of securities in excess of 10% of
the total assets of Sovereign Bancorp, Inc.
and its subsidiaries on a consolidated basis;
therefore, copies of such instruments are not
included as exhibits to this Annual Report on
Form 10-K. Sovereign Bancorp, Inc. agrees to
furnish copies of such instruments to the
Commission on request.
(10.1) Sovereign Bancorp, Inc. Stock Option Plan.
(Incorporated by reference to Exhibit 10.1
to Sovereign's Annual Report on Form 10-K
for the fiscal year ended December 32 1994.)
(10.2) Sovereign Bancorp, Inc. Employee Stock
Purchase Plan. (Incorporated by reference
to Exhibit 4.1 to Sovereign's Registration
Statement No. 33-44108 on Form S-8.)
(10.3) Agreement dated as of September 15, 1992,
between Sovereign Bancorp, Inc., Sovereign
Bank, a Federal Savings Bank, and Jay S.
Sidhu. (Incorporated by reference to
Exhibit 10.3 to Sovereign's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1992.)
(10.4) Agreement dated as of September 15, 1992,
between Sovereign Bank, a Federal Savings
Bank and Karl D. Gerhart. (Incorporated by
reference to Exhibit 10.4 to Sovereign's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.)
(10.5) Agreement dated as of September 15, 1992,
between Sovereign Bank, a Federal Savings
Bank and Lawrence M. Thompson, Jr.
(Incorporated by reference to Exhibit 10.5
to Sovereign's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992.)
(10.6) Penn Savings Bank Senior Officer Incentive
Plan. (Incorporated by reference to
Exhibit 10.6 to Sovereign's Annual Report
on Form 10-K for the year ended December
31, 1994.)
(10.11) Rights Agreement dated September 19, 1989,
between Sovereign Bancorp, Inc. and Harris
Trust Company of New York. (Incorporated by
reference to Exhibit 4.3 to Sovereign's
Registration Statement No. 33-89586 on
Form S-8).
(10.12) Sovereign Bancorp, Inc. Non-Employee Director
Incentive Compensation Plan. (Incorporated by
reference to Exhibit 10.12 to Sovereign's
Registration Statement No. 33-43195 on Form
S-1).
(10.14) 1993 Sovereign Bancorp, Inc. Stock Option Plan.
(Incorporated by reference to Exhibit 10.23 to
Sovereign's Annual Report on Form 10-K for the
year ended December 31, 1992).
(10.15) Indemnification Agreement dated December 21,
1993, between Sovereign Bank and Jay S. Sidhu.
(Incorporated by reference to Exhibit 10.25 to
Sovereign's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.)
(10.16) Agreement and Plan of Merger, dated
June 16, 1994, by and between Sovereign
Bancorp, Inc. and Charter FSB Bancorp, Inc.
(Incorporated by reference to Exhibit 2.1 to
Sovereign's Registration Statement No. 33-82846
on Form S-4.)
(10.17) Branch Purchase and Deposit Assumption
Agreement, dated September 19, 1994, between
Berkeley Federal Bank & Trust FSB and Sovereign
Bank, a Federal Savings Bank. (Incorporated by
reference to Exhibit 2.1 to Sovereign's Current
Report on Form 8-K dated September 16, 1994.)
(10.18) Employment Agreement dated as of August 8,
1988, between Charter Federal Savings Bank
and Patrick J. Petrone. (Incorporated by
reference to Exhibit 10.23 to Sovereign's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.)
(10.19) Amendment to Employment Agreement between
Patrick J. Petrone and Charter Federal
Savings Bank, dated October 17, 1994.
(Incorporated by reference to Exhibit 10.24
to Sovereign's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.)
(10.20) Charter One Bancorp, Inc. Stock Incentive
Plan. (Incorporated by reference to
Exhibit 4.1 to Registration Statement No.
33-36895 of Charter FSB Bancorp, Inc. on
Form S-8).
(10.21) Amendments to Charter FSB Bancorp, Inc.
Stock Incentive Plan. (Incorporated herein
by reference to Exhibit 4.2 to Registration
Statement No. 33-36895 of Charter FSB Bancorp,
Inc. on Form S-8.)
(10.22) Charter One Bancorp, Inc. Stock Option Plan
for Non-Employee Directors. (Incorporated by
reference to Exhibit 4.1 to Registration
Statement No. 33-36896 of Charter FSB Bancorp,
Inc. Form S-8.)
(10.23) Amendments to Charter FSB Bancorp, Inc. Stock
Option Plan for Non-Employee Directors.
(Incorporated herein by reference to
Exhibit 4.2 to Registration Statement No.
33-36896 of Charter FSB Bancorp, Inc. on
Form S-8).
(10.24) Amendment to Rights Agreement, dated as of
September 27, 1995, between Sovereign Bancorp,
Inc. and Chemical Bank, as successor to Harris
Trust Company of New York, as Rights Agent.
(Incorporated by reference to Exhibit 2.2 of
Amendment No. 1 of Sovereign's Registration
Statement on Form 8-A.)
(10.25) Agreement and Plan of Merger, dated March 23,
1995, by and between Sovereign Bancorp, Inc.
and Colonial State Bank.
(10.26) Agreement and Plan of Merger, dated
September 29, 1995, between Sovereign
Bancorp, Inc. and West Jersey Bancshares,
Inc. (Incorporated by reference to
Exhibit 2.1 to Sovereign's Registration
Statement 33-64807 on Form S-4.)
(11.1) Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23.1) Consent of Ernst & Young LLP, Independent
Auditors.
(23.2) Consent of BDO Seidman, LLP, Independent Auditors.
(27) Financial Data Schedule.
(99.1) Report of BDO Seidman, LLP, Independent Auditors.
(b) Reports on Form 8-K.
1. Report on Form 8-K, dated
October 23, 1995 (date of earliest
event reported - October 18, 1995)
re: Sovereign's Press Release,
dated October 18, 1995, announcing,
among other things, earnings for
the third quarter of 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOVEREIGN BANCORP, INC.
(Registrant)
March 27, 1996 By /s/ Jay S. Sidhu
Jay S. Sidhu, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title
/s/ Howard D. Mackey Director March 27, 1996
Howard D. Mackey
/s/ Richard E. Mohn Chairman of March 27, 1996
Richard E. Mohn Board and
Director
/s/ Rhoda S. Oberholtzer Director March 27, 1996
Rhoda S. Oberholtzer
/s/ Patrick J. Petrone Director March 27, 1996
Patrick J. Petrone
/s/ Daniel K. Rothermel Director March 27, 1996
Daniel K. Rothermel
/s/ Jay S. Sidhu Director, March 27, 1996
Jay S. Sidhu President and
Chief Executive
Officer (Principal
Executive Officer)
/s/ G. Arthur Weaver Director March 27, 1996
G. Arthur Weaver
/s/Samuel R. Willard, Jr. Director March 27, 1996
Samuel R. Willard, Jr.
/s/ Theodore Ziaylek, Jr. Director March 27, 1996
Theodore Ziaylek, Jr.
/s/ Karl D. Gerhart Chief Financial March 27, 1996
Karl D. Gerhart Officer (Principal
Financial Officer
and Principal
Accounting Officer)
<PAGE>
EXHIBIT INDEX
Page number in
manually signed
original
(3.1) Articles of Incorporation, as
amended and restated, of
Sovereign Bancorp, Inc.
(10.25) Agreement and Plan of Merger, dated
March 23, 1995, by and between
Sovereign Bancorp, Inc. and
Colonial State Bank.
(11.1) Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23.1) Consent of Ernst & Young LLP, Independent
Auditors.
(23.2) Consent of BDO Seidman, LLP, Independent
Auditors.
(27) Financial Data Schedule.
(99.1) Report of BDO Seidman, LLP, Independent
Auditors.
RESTATED ARTICLES OF INCORPORATION
OF
SOVEREIGN BANCORP, INC.
FIRST. The name of the Corporation is Sovereign Bancorp,
Inc.
SECOND. The location and post office address of the
Corporation's registered office in this Commonwealth is
1130 Berkshire Boulevard, Wyomissing, Berks County, Pennsylvania
19610.
THIRD. The Corporation was incorporated on March 24, 1987,
under the provisions of the Business Corporation Law, the Act
approved May 5, 1933, P.L. 364, as amended (the "Pennsylvania
Business Corporation Law"). The purpose of the Corporation is
and it shall have unlimited power to engage in and to do any
lawful act concerning any or all lawful business for which
corporations may be incorporated under such Law.
FOURTH. The term of the Corporation's existence is
perpetual.
FIFTH. The aggregate number of shares of capital stock
which the Corporation shall have authority to issue is
107,500,000 shares, divided into two classes consisting of
100,000,000 shares of common stock without par value ("Common
Stock") and 7,500,000 shares of preferred stock, having such par
value as the board of directors shall fix and determine, as
provided in Article SIXTH below ("Preferred Stock").
SIXTH. The Preferred Stock may be issued from time to time
as a class without series or, if so determined by the board of
directors of the Corporation, either in whole or in part, in one
or more series. There is hereby expressly granted to and vested
in the board of directors of the Corporation authority to fix and
determine (except as fixed and determined herein), by resolution,
the par value, voting powers, full or limited, or no voting
powers, and such designations, preferences and relative,
participating, optional or other special rights, if any, and the
qualifications, limitations or restrictions thereof, if any,
including specifically, but not limited to, the dividend rights,
conversion rights, redemption rights and liquidation preferences,
if any, of any wholly unissued series of Preferred Stock (or the
entire class of Preferred Stock if none of such shares have been
issued), the number of shares constituting any such series and
the terms and conditions of the issue thereof. Prior to the
issuance of any shares of Preferred Stock, a statement setting
forth a copy of each such resolution or resolutions and the
number of shares of Preferred Stock of each such class or series
shall be executed and filed in accordance with the Pennsylvania
Business Corporation Law. Unless otherwise provided in any such
resolution or resolutions, the number of shares of capital stock
of any such class or series so set forth in such resolution or
resolutions may thereafter be increased or decreased (but not
below the number of shares then outstanding), by a statement
likewise executed and filed setting forth a statement that a
specified increase or decrease therein had been authorized and
directed by a resolution or resolutions likewise adopted by the
board of directors of the Corporation. In case the number of
such shares shall be decreased, the number of shares so specified
in the statement shall resume the status they had prior to the
adoption of the first resolution or resolutions.
SEVENTH. Each holder of record of Common Stock shall have
the right to one vote for each share of Common Stock standing in
such holder's name on the books of the Corporation. No
shareholder shall be entitled to cumulate any votes for the
election of directors.
EIGHTH. The management, control and government of the
Corporation shall be vested in a board of directors consisting of
not less than six (6) nor more than twenty-five (25) members in
number, as fixed by the board of directors of the Corporation
from time to time. The directors of the Corporation shall be
divided into three classes: Class I, Class II and Class III.
Each Class shall be as nearly equal in number as possible. If
the number of Class I, Class II or Class III directors is fixed
for any term of office, it shall not be increased during that
term, except by a majority vote of the board of directors. The
term of office of each Class shall be three (3) years, so that
the term of office of one class of directors shall expire each
year when their respective successors have been duly elected by
the shareholders and qualified. At each annual election by the
shareholders of the Corporation, the directors chosen to succeed
those whose terms then expire shall be identified as being of the
same class as the directors they succeed. If, for any reason, a
vacancy occurs on the board of directors of the Corporation, a
majority of the remaining directors shall have the exclusive
power to fill the vacancy by electing a director to hold office
for the unexpired term in respect of which the vacancy occurred.
No director of the Corporation shall be removed from office, as a
director, by the vote of shareholders, unless the votes of
shareholders cast in favor of the resolution for the removal of
such director constitute at least a majority of the votes which
all shareholders would be entitled to cast at an annual election
of directors.
NINTH. [Intentionally omitted.]
TENTH. No holder of any class of capital stock of the
Corporation shall have preemptive rights, and the Corporation
shall have the right to issue and to sell to any person or
persons any shares of its capital stock or any option, warrant or
right to acquire capital stock, or any securities having
conversion or option rights without first offering such shares,
rights or securities to any holder of any class of capital stock
of the Corporation.
ELEVENTH. Except as set forth below, the affirmative vote
of shareholders entitled to cast at least 80 percent (80%) of the
votes which all shareholders of the Corporation are entitled to
cast, and if any class of shares is entitled to vote as a
separate class, the affirmative vote of shareholders entitled to
cast at least a majority of the votes entitled to be cast by the
outstanding shares of such class (or such greater amount as
required by the provisions of these Articles of Incorporation
establishing such class) shall be required to approve any of the
following:
(a) any merger or consolidation of the Corporation
with or into any other corporation;
(b) any share exchange in which a corporation, person
or entity acquires the issued or outstanding shares of
capital stock of the Corporation pursuant to a vote of
shareholders;
(c) any sale, lease, exchange or other transfer of
all, or substantially all, of the assets of the Corporation
to any other corporation, person or entity; or
(d) any transaction similar to, or having similar
effect as, any of the foregoing transactions,
if, in any case, as of the record date for the determination of
shareholders entitled to notice thereof and to vote thereon, such
other corporation, person or entity is the beneficial owner,
directly or indirectly, of shares of capital stock of the
Corporation issued, outstanding and entitled to cast five percent
(5%) or more of the votes which all shareholders of the
Corporation are then entitled to cast.
If any of the transactions identified above in this Article
ELEVENTH is with a corporation, person or entity that is not the
beneficial owner, directly or indirectly, of shares of capital
stock of the Corporation issued, outstanding and entitled to cast
five percent (5%) or more of the votes which all shareholders of
the Corporation are then entitled to cast, then the affirmative
vote of shareholders entitled to cast at least a majority of the
votes which all shareholders are entitled to cast shall be
required to approve any such transaction. An affirmative vote as
provided in the foregoing provisions shall, to the extent
permitted by law, be in lieu of the vote of the shareholders
otherwise required by law.
The board of directors of the Corporation shall have the
power and duty to determine, for purposes of this Article
ELEVENTH, on the basis of information known to the board, if and
when such other corporation, person or entity is the beneficial
owner, directly or indirectly, of shares of capital stock of the
Corporation issued, outstanding and entitled to cast five percent
(5%) or more of the votes which all shareholders of the
Corporation are then entitled to cast, and/or if any transaction
is similar to, or has an effect similar to, any of the
transactions identified above in this Article ELEVENTH. Any such
determination shall be conclusive and binding for all purposes of
this Article ELEVENTH. The Corporation may voluntarily
completely liquidate and/or dissolve only in accordance with all
applicable laws and only if the proposed liquidation and/or
dissolution is approved by the affirmative vote of shareholders
entitled to cast at least 80 percent (80%) of the votes which all
shareholders are entitled to cast. The provisions of this
Article ELEVENTH shall not apply to any transaction which is
approved in advance by 66-2/3 percent (66-2/3%) of the members of
the board of directors of the Corporation, at a meeting duly
called and held.
TWELFTH. [Intentionally omitted.]
THIRTEENTH. No action required to be taken or which may be
taken at any annual or special meeting of shareholders of the
Corporation may be taken without a meeting, and the power of the
shareholders of the Corporation to consent in writing to action
without a meeting is specifically denied. The presence, in
person or by proxy, of shareholders entitled to cast at least a
majority of the votes which all shareholders are entitled to cast
shall constitute a quorum of shareholders at any annual or
special meeting of shareholders of the Corporation.
FOURTEENTH. The authority to make, amend, alter, change or
repeal the By-Laws of the Corporation is hereby expressly and
solely granted to and vested in the board of directors of the
Corporation, subject always to the power of the shareholders to
change such action by the affirmative vote of shareholders of the
Corporation entitled to cast at least 66-2/3 percent (66-2/3%) of
the votes which all shareholders are entitled to cast, except
that Article Eight of the By-Laws of the Corporation relating to
limitations on directors' liabilities and indemnification of
directors, officers and others may not be amended to increase the
exposure to liability for directors or to decrease the
indemnification of directors, officers and others except by the
affirmative vote of 66-2/3 percent (66-2/3%) of the entire board
of directors or by the affirmative vote of shareholders of the
Corporation entitled to cast at least 80 percent (80%) of the
votes which all shareholders are entitled to cast.
FIFTEENTH. The board of directors of the Corporation, when
evaluating any offer of another party to (a) make a tender or
exchange offer for any equity security of the Corporation,
(b) merge or consolidate the Corporation with another
corporation, (c) purchase or otherwise acquire all or
substantially all of the properties and assets of the
Corporation, or (d) engage in any transaction similar to, or
having similar effects as, any of the foregoing transactions,
shall, in connection with the exercise of its judgment in
determining what is in the best interests of the Corporation and
its shareholders, give due consideration to all relevant factors,
including without limitation the social and economic effects of
the proposed transaction on the depositors, employees, suppliers,
customers and other constituents of the Corporation and its
subsidiaries and on the communities in which the Corporation and
its subsidiaries operate or are located, the business reputation
of the other party, and the board of directors' evaluation of the
then value of the Corporation in a freely negotiated sale and of
the future prospects of the Corporation as an independent entity.
SIXTEENTH. If any corporation, person, entity, or group
becomes the beneficial owner, directly or indirectly, of shares
of capital stock of the Corporation having the right to cast in
the aggregate 25 percent (25%) or more of all votes entitled to
be cast by all issued and outstanding shares of capital stock of
the Corporation entitled to vote, such corporation, person,
entity or group shall within thirty (30) days thereafter offer to
purchase all shares of capital stock of the Corporation issued,
outstanding and entitled to vote. Such offer to purchase shall
be at a price per share equal to the highest price paid for
shares of the respective class or series of capital stock of the
Corporation purchased by such corporation, person, entity or
group within the preceding twelve months. If such corporation,
person, entity or group did not purchase any shares of a
particular class or series of capital stock of the Corporation
within the preceding twelve months, such offer to purchase shall
be at a price per share equal to the fair market value of such
class or series of capital stock on the date on which such
corporation, person, entity or group becomes the beneficial
owner, directly or indirectly, of shares of capital stock of the
Corporation having the right to cast in the aggregate 25 percent
(25%) or more of all votes entitled to be cast by all issued and
outstanding capital stock of the Corporation. Such offer shall
provide that the purchase price for such shares shall be payable
in cash. The provisions of this Article SIXTEENTH shall not
apply if 80 percent (80%) or more of the members of the board of
directors of the Corporation approve in advance the acquisition
of beneficial ownership by such corporation, person, entity or
group, of shares of capital stock of the Corporation having the
right to cast in the aggregate 25 percent (25%) or more of all
votes entitled to be cast by all issued and outstanding shares of
capital stock of the Corporation. The provisions of this Article
SIXTEENTH shall be in addition to and not in lieu of any rights
granted under Section 910 of the Pennsylvania Business
Corporation Law and any amendment or restatement of such section
("Section 910"); provided, however, that if the provisions of
this Article SIXTEENTH and Section 910 are both applicable in any
given instance, the price per share to be paid for shares of
capital stock of the Corporation issued, outstanding and entitled
to vote shall be the higher of the price per share determined in
accordance with this Article SIXTEENTH or the price per share
determined in accordance with the provisions of Section 910.
SEVENTEENTH. The Corporation reserves the right to amend,
alter, change or repeal any provision contained in its Articles
of Incorporation in the manner now or hereafter prescribed by
statute and all rights conferred upon shareholders and directors
herein are hereby granted subject to this reservation; provided,
however, that the provisions set forth in Articles SEVENTH,
EIGHTH, ELEVENTH and THIRTEENTH through FIFTEENTH, inclusive, of
these Articles of Incorporation may not be repealed, altered or
amended, in any respect whatsoever, unless such repeal,
alteration or amendment is approved by either (a) the affirmative
vote of shareholders of the Corporation entitled to cast at least
80 percent (80%) of the votes which all shareholders of the
Corporation are then entitled to cast or (b) the affirmative vote
of 80 percent (80%) of the members of the board of directors of
the Corporation and the affirmative vote of shareholders of the
Corporation entitled to cast at least a majority of the votes
which all shareholders of the Corporation are then entitled to
cast.
<PAGE>
APPENDIX I
SOVEREIGN BANCORP, INC.
RESOLUTION OF THE BOARD OF DIRECTORS
ADOPTED ON SEPTEMBER 19, 1989, AND
FILED WITH THE SECRETARY OF THE COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE ON OCTOBER 16, 1989
TERMS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
RESOLVED that, pursuant to the authority vested in the
Board of Directors of the Corporation by the Articles of
Incorporation, the Board of Directors does hereby provide for the
issue of a series of Preferred Stock, without par value, of the
Corporation, to be designated "Series A Junior Participating
Preferred Stock" (hereinafter referred to as the "Series A
Preferred Stock" or "this Series"), initially consisting of
25,000 shares, and to the extent that the designations, powers,
preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series A
Preferred Stock are not stated and expressed in the Articles of
Incorporation, does hereby fix and herein state and express such
designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions
thereof, as follows (all terms used herein which are defined in
the Articles of Incorporation shall be deemed to have the
meanings provided therein):
1. Designation and Amount. The designation of the
series of Preferred Stock created by this resolution shall be
"Series A Junior Participating Preferred Stock" and the number of
shares constituting such Series is Twenty-Five Thousand (25,000).
Such number of shares may be increased or decreased by resolution
of the Board of Directors; provided, that no decrease shall
reduce the number of shares of Series A Preferred Stock to a
number less than the number of shares then outstanding plus the
number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of
any outstanding securities of the Corporation convertible into
shares of this Series.
2. Dividends.
(A) Subject to the prior and superior rights of
the holders of any shares of any series of Preferred Stock
ranking prior and superior to the shares of this Series with
respect to dividends, the holders of shares of this Series shall
be entitled to receive, when and as declared by the Board of
Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on April 1, July 1,
October 1, and January 1 of each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of this Series,
in an amount per share (rounded to the nearest cent) equal to the
greater of (a) $10.00 or (b) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per
share amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or
other distributions other than a dividend payable in Common Stock
or a subdivision of the outstanding Common Stock (by
reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of
this Series. In the event the Company shall at any time after
September 19, 1989 (the "Rights Declaration Date") declare any
dividend on the Common Stock payable in Common Stock, subdivide
the outstanding Common Stock, or combine the outstanding Common
Stock into a smaller number of shares, then in each such case the
amount to which holders of shares of this Series were entitled
immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of Common Stock
outstanding immediately after such event and the denominator of
which is the number of Common Stock that were outstanding
immediately prior to such event.
(B) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in
paragraph (A) of this Section immediately after it declares a
dividend or distribution on the Common Stock (other than a
dividend payable in Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $10.00 per share on Series A Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
(C) Dividends shall begin to accrue and be
cumulative on outstanding shares of Series A Preferred Stock from
the Quarterly Dividend Payment Date next preceding the date of
issue of such shares of this Series, unless the date of issue of
such shares is prior to the record date for the first Quarterly
Dividend Payment Date in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders
of shares of this Series entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued
but unpaid dividends shall not bear interest. Dividends paid on
the shares of this Series in an amount less than the total amount
of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may
fix a record date for the determination of holders of shares of
this Series entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more
than days prior to the date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Preferred Stock
shall entitle the holder thereof to 100 votes on all matters
submitted to a vote of the shareholders of the Corporation. In
the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in Common Stock, or effect a
subdivision or combination or consolidation of the outstanding
Common Stock (by reclassification or otherwise than by payment of
a dividend in Common Stock) into a greater or lesser number of
Common Stock, then in each such case the number of votes per
share to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction, the numerator of which is
the number of Common Stock outstanding immediately after such
event and the denominator of which is the number of Common Stock
that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any
other resolutions creating a series of Preferred Stock or any
similar stock, or by law, the holders of shares of Series A
Preferred Stock and the holders of Common Stock and any other
capital stock of the Corporation having general voting rights
shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise
provided by law, holders of Series A Preferred Stock shall have
no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate
action.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other
dividends or distributions payable on the Series A Preferred
Stock as provided in Section 2 are in arrears, thereafter and
until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall
not:
(i) declare or pay dividends, or make any
other distributions, on any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any
other distributions, on any shares of stock ranking on a
parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise
acquire for consideration shares of any stock ranking junior
(either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock, provided that
the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock;
or
(iv) redeem or purchase or otherwise acquire
for consideration any shares of Series A Preferred stock, or
any shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any
subsidiary of the Corporation to purchase or otherwise acquire
for consideration any shares of stock of the Corporation unless
the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series A
Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and
cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but
unissued shares of Preferred Sock and may be reissued as part of
a new series of Preferred Stock subject to the conditions and
restrictions on issuance set forth herein, in the Articles of
Incorporation, or in any other resolutions creating a series of
Preferred Stock or any similar stock or as otherwise required by
law.
6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (A) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100.00 per share, plus an
amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series A Preferred stock
shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth,
equal to 100 times the aggregate amount to be distributed per
share to holders of Common Stock, or (B) to the holders of shares
of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such parity stock in proportion
to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up. In
the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in Common Stock, or effect a
subdivision or combination or consolidation of the outstanding
Common Stock (by reclassification or otherwise than by payment of
a dividend in Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the aggregate
amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event under the proviso
in clause (A) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to
such event.
7. Consolidation, Merger, Etc. In case the
Corporation shall enter into any consolidation, merger,
combination or other transaction in which the Common Shares are
exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly
exchanged or changed into an amount per share, subject to the
provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash and/or
any other property (payable in kind), as the case may be, into
which or for which each Common Stock is changed or exchanged. In
the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in Common Stock, or effect a
subdivision or combination or consolidation of the outstanding
Common Stock (by reclassification or otherwise than by payment of
a dividend in Common Stock) into a greater or lesser number of
shares of Common Stock then in each such case the amount set
forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to
such event.
8. No Redemption. The shares of Series A Preferred
Stock shall not be redeemable.
9. Rank. The Series A Preferred Stock shall rank,
with respect to the payment of dividends and the distribution of
assets, junior to all series of any other class of the
Corporation's Preferred Stock.
10. Amendment. The Articles of Incorporation of the
Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special
rights of the Series A Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock,
voting together as a single class.
<PAGE>
APPENDIX II
SOVEREIGN BANCORP, INC.
RESOLUTION OF THE BOARD OF DIRECTORS
ADOPTED ON MAY 9, 1995, AND FILED WITH
THE SECRETARY OF THE COMMONWEALTH OF PENNSYLVANIA,
DEPARTMENT OF STATE ON MAY 15, 1995
TERMS OF 6-1/4% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
RESOLVED that, pursuant to the authority vested in the
Board of Directors of the Corporation by the Articles of
Incorporation, the Board of Directors does hereby provide for the
issue of a series of Preferred Stock, without par value, of the
Corporation, to be designated "6-1/4% Cumulative Convertible
Preferred Stock, Series B" (hereinafter referred to as the
"Series B Preferred Stock" or "this Series"), initially
consisting of 2,000,000 shares, and to the extent that the
designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions of
the Series B Preferred Stock are not stated and expressed in the
Articles of Incorporation, does hereby fix and herein state and
express such designations, powers, preferences and relative and
other special rights and the qualifications, limitations and
restrictions thereof, as follows (all terms used herein which are
defined in the Articles of Incorporation shall be deemed to have
the meanings provided therein):
1. Designation and Amount. The designation of the
series of Preferred Stock created by this resolution shall be
"6-1/4% Cumulative Convertible Preferred Stock, Series B" and the
number of shares constituting such Series is Two Million
(2,000,000). Such number of shares may be increased or decreased
by resolution of the Board of Directors; provided, that no
decrease shall reduce the number of shares of Series B Preferred
Stock to a number less than the number of shares then
outstanding.
2. Dividends.
(a) The holders of record of Series B Preferred
Stock shall be entitled to receive, as and if declared by the
Board of Directors of the Corporation, out of any funds legally
available for the purpose, cumulative cash dividends on each
share of Series B Preferred Stock in the amount of 6-1/4% per
annum (calculated as a percentage of the liquidation preference
applicable to the Series B Preferred Stock as provided herein).
Dividends shall accrue from the date of original issuance and
shall be payable, as and if declared by the Board of Directors,
on February 15, May 15, August 15, and November 15 of each year,
commencing August 15, 1995. Each such dividend shall be paid to
the holders of record of shares of Series B Preferred Stock as
they appear on the stock register of the Corporation on the
applicable record date, which shall be a date not more than
30 days nor less than 10 days preceding the dividend payment
date, as shall be fixed by the Board of Directors of the
Corporation.
(b) If there shall be outstanding shares of any
other series of Preferred Stock ranking on a parity as to
dividends with the Series B Preferred Stock, the Corporation, in
making any dividend payment on account of arrears on the Series B
Preferred Stock or such other series of Preferred Stock, shall
make payments ratably upon all outstanding shares of Series B
Preferred Stock and such other series of Preferred Stock in
proportion to the respective amounts of dividends in arrears upon
all such outstanding shares of Series B Preferred Stock and such
other series of Preferred Stock to the date of such dividend
payment.
(c) No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or
payments which may be in arrears.
(d) Dividends payable on the Series B Preferred
Stock for any period less than a full quarterly 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 and the actual number of
days elapsed in the period for which payable.
3. Redemption.
(a) The Corporation, at its option, may redeem
shares of the Series B Preferred Stock, in whole or in part, at
any time or from time to time, at a redemption price as set forth
below, plus accrued and unpaid dividends thereon to the date
fixed for redemption:
If Redeemed During the Twelve Months Redemption
Beginning May 15, Price
1998 ............................................. $52.188
1999 ............................................. 51.075
2000 ............................................. 51.563
2001 ............................................. 51.250
2002 ............................................. 50.938
2003 ............................................. 50.625
2004 ............................................. 50.313
2005 and thereafter............................... 50.000
Notwithstanding the foregoing, no shares of Series B Preferred
Stock shall be redeemed hereunder prior to May 15, 1998.
If the Corporation shall redeem shares of Series B
Preferred Stock pursuant to this subparagraph (a), notice of such
redemption shall be mailed by first-class mail, postage prepaid,
not less than 30 nor more than 60 days prior to the redemption
date, to each holder of record of the shares to be redeemed, at
such holder's address as the same appears on the stock register
of the Corporation. Each such notice shall state: (a) the
redemption date; (b) the number of shares of Series B Preferred
Stock to be redeemed and, if less than all the shares held by
such holder are to be redeemed, the number of such shares to be
redeemed from such holder; (c) the redemption price; (d) the
place or places where certificates for such shares are to be
surrendered for payment of the redemption price; and (e) that
dividends on the shares to be redeemed will cease to accrue on
such redemption date. Notice having been mailed as aforesaid,
from and after the redemption date (unless default shall be made
by the Corporation in providing money for the payment of the
redemption price) dividends on the shares of the Series B
Preferred Stock so called for redemption shall cease to accrue,
and said shares shall no longer be deemed to be outstanding, and
all rights of the holders thereof as shareholders of the
Corporation (except the right to receive from the Corporation the
redemption price) shall cease. Upon surrender in accordance with
said notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of
Directors of the Corporation shall so require and the notice
shall so state), such shares shall be redeemed by the Corporation
at the redemption price aforesaid. If less than all the
outstanding shares of Series B Preferred Stock are to be
redeemed, shares to be redeemed shall be selected by the
Corporation from outstanding shares of Series B Preferred Stock
are to be deemed, shares to be redeemed shall be selected by the
Corporation from outstanding shares of Series B Preferred Stock
not previously called for redemption by lot or pro rata (as
nearly as may be) in any method determined by the Corporation in
its sole discretion to be equitable.
(b) In no event shall the Corporation redeem or
purchase any shares of Series B Preferred Stock pursuant to this
Section 4 unless full cumulative dividends shall have been paid
or declared and set apart for payment upon all outstanding shares
of Series B Preferred Stock, or any other series of Preferred
Stock then outstanding ranking on a parity with or prior to the
Series B Preferred Stock as to dividends, for all past dividend
periods, and unless all matured obligations of the Corporation
with respect to all sinking funds, retirement funds or purchase
funds for all series of Preferred Stock then outstanding have
been met.
(c) All shares of Series B Preferred Stock
redeemed by the Corporation shall be restored to the status of
authorized but unissued shares of Preferred Stock, without
designation as to series, and may thereafter be reissued by the
Corporation as shares of one or more series of Preferred Stock
other than Series B Preferred Stock.
4. Conversion Rights.
(a) The holder of any share or shares of Series B
Preferred Stock shall have the right, at any time, to convert any
shares of Series B Preferred Stock (except any share of Series B
Preferred Stock which shall have been called for redemption
pursuant to the provisions hereof, the conversion right with
respect thereto shall terminate on the close of business of the
date fixed for redemption) into fully paid and non-assessable
shares of the Common Stock of the Corporation, at a conversion
rate of 4.752 shares of Common Stock for each share of Series B
Preferred Stock, subject to adjustment as hereinafter provided.
The conversion right herein granted shall be exercised by the
surrender of a certificate or certificates for Series B Preferred
Stock to be so converted at the office of any transfer agent for
the Series B Preferred Stock, at any time during its usual
business hours, together with written notice that the holder
elects to convert the same, or a stated number of shares thereof,
which notice shall state the name or names (with addresses) in
which the certificate or certificates of Common Stock shall be
issued. Every such notice of election to convert shall
constitute a contract between the holder of such Series B
Preferred Stock and the Corporation, whereby such holder shall be
deemed to subscribe for the amount of Common Stock which he will
be entitled to receive upon such conversion and, in payment and
satisfaction of such subscription (and any cash adjustment to
which he may be entitled), to surrender such Series B Preferred
Stock and to release the Corporation from all obligation on the
shares to be converted and whereby the Corporation shall be
deemed to agree that the surrender of such shares and the
extinguishment of obligation thereon shall constitute full
payment for the Common Stock so subscribed for and to be issued
upon such conversion.
(b) As promptly as practicable after the
conversion of any Series B Preferred Stock and the payment in
cash of any amount required by paragraph (h) of this Section 4,
the Corporation shall deliver or cause to be delivered to or upon
the written order of the holder of such Series B Preferred Stock
certificates representing the number of shares of Common Stock
issuable upon such conversion, issued in such name or names as
such holder shall have directed, together with cash in respect of
any fractional interest in a share of Common Stock issuable upon
such conversion and, if only a part of such Series B Preferred
Stock is converted, a certificate or certificates for the
unconverted shares of Series B Preferred Stock. Such conversion
shall be deemed to have been made at the close of business on the
day of surrender of the Series B Preferred Stock for conversion,
and the rights of the holder of such stock as a Series B
Preferred Shareholder, in respect of the stock surrendered for
conversion, shall cease at such time and the person or persons in
whose name or names the certificates for such shares are to be
issued shall be treated for all purposes as having become the
record holder or holders of Common Stock at such time and such
conversion shall be at the conversion rate in effect at such
time; provided, however, that no such surrender on any date when
the stock transfer books of the Corporation shall be closed shall
be effective to constitute the person or persons entitled to
receive the shares of Common Stock upon such conversion as the
record holder or holders of such shares on such date, but such
surrender shall be effective to constitute the person or persons
entitled to receive such shares of Common Stock as the record
holder or holders thereof for all purposes at the opening of
business on the next succeeding day on which such stock transfer
books are open and such conversion shall be at the conversion
rate in effect at the opening of business on such next succeeding
day.
If the last day for the exercise of the conversion is a
legal holiday in the city in which the transfer agent to which
shares are presented for conversion is located, then such
conversion right may be exercised (at the conversion rate in
effect on such last day) upon the next succeeding day not in such
city a legal holiday.
(c) No payment or adjustment shall be made upon
any conversion in respect of dividends accrued and unpaid on the
Series B Preferred Stock to the date of conversion or in respect
of any dividends on the Common Stock issued upon such conversion.
(d) The conversion rate shall be subject to
adjustment from time to time as follows:
(i) In case the Corporation shall at any
time (A) pay a dividend or make a distribution on shares of
its Common Stock in shares of its capital stock (whether
shares of Common Stock or of capital stock of any other
class), (B) subdivide or reclassify its outstanding shares
of Common Stock into a greater number of securities
(including shares of Common Stock), or (C) combine or
reclassify its outstanding shares of Common Stock into a
smaller number of shares (including shares of Common Stock),
the conversion rate in effect immediately prior thereto
shall be adjusted so that the holder of record of any shares
of Series B Preferred Stock thereafter surrendered for
conversion shall be entitled to receive the number of shares
of the Corporation which he would have owned or have been
entitled to receive after the happening of any of the events
described above had such shares of Series B Preferred Stock
been converted immediately prior to the happening of such
event. An adjustment made pursuant to this subparagraph (i)
shall become effective immediately after the record date in
the case of a dividend and shall become effective
immediately after the effective date in the case of a
subdivision or combination; provided, however, that in the
event no record date is specified for any dividend, such
adjustment shall become effective on the payment date for
such dividend. If, as a result of an adjustment made
pursuant to this subparagraph (i), the holder of any
Series B Preferred Stock thereafter converted shall become
entitled to receive shares of two or more classes of capital
stock of the Corporation, the Board of Directors of the
Corporation (whose determination shall be conclusive) shall
determine the allocation of the adjusted conversion rate
between or among shares of such classes of capital stock.
In the event that any time, as a result of an adjustment
made to this subparagraph (i), the holder of any Series B
Preferred Stock thereafter converted shall become entitled
to receive any shares or other securities of the Corporation
other than shares of Common Stock, thereafter the number of
such other shares so received upon conversion of any
Series B Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to the shares
of Common Stock contained in this paragraph 4(d), and other
provisions of this Section 4 with respect to the shares of
Common Stock shall apply on like term to any such other
shares or other securities.
(ii) In case the Corporation shall fix a
record date for the issuance of rights or warrants to all
holders of its Common Stock (or securities convertible into
Common Stock) entitling them (for a period expiring within
45 days after such record date) to subscribe for or purchase
Common Stock at a price per share (or a conversion price per
share) less than the current market price per share of
Common Stock (as defined in subparagraph (iv) below) at such
record date, the conversion rate in effect immediately prior
thereto shall be adjusted so that the same shall equal the
rate determined by multiplying the conversion rate in effect
immediately prior to such record date by a fraction of which
the numerator shall be the number of shares of Common Stock
outstanding on such record date plus the number of
additional shares of Common Stock offered for subscription
or purchase (or into which the convertible securities so
offered are initially convertible), and of which the
denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of shares
which the aggregate offering price of the total number of
shares so offered (or the aggregate initial conversion price
of the convertible securities so offered) would purchase at
such current market price. Such adjustment shall be made
successively whenever such a record date is fixed, and
become effective immediately after such record date;
provided, however, that, in the event no record date is
fixed, such adjustment shall be made successively and shall
become effective on the distribution date. In determining
whether any rights or warrants entitle the holders to
subscribe for or purchase shares of Common Stock at less
than such current market price, and in determining the
aggregate offering price of such shares, there shall be
taken into account any consideration received by the
Corporation for such rights or warrants, the value of such
consideration, if other than cash, to be determined by the
Board of Directors of the Corporation. Common Stock owned
by or held for the account of the Corporation or any
majority owned subsidiary shall not be deemed outstanding
for the purpose of any adjustment required under this
subparagraph (ii).
(iii) In case the Corporation shall fix a
record date for making a distribution to all holders of its
Common Stock evidences of its indebtedness or assets
(excluding regular quarterly or other periodic or recurring
cash dividends or distributions and cash dividends or
distributions paid from retained earnings or referred to in
subparagraph (i) above) or rights or warrants to subscribe
or purchase (excluding those referred to in
subparagraph (ii) above), then in each such case the
conversion rate shall be adjusted so that the same shall
equal the rate determined by multiplying the conversion rate
in effect immediately prior to such record date by a
fraction of which the numerator shall be the current market
price (as defined in subparagraph (iv) below) per share of
the Common Stock on such record date, and the denominator of
which shall be such current market price per share of Common
Stock, less the then fair market value (as determined in
good faith by the Board of Directors, whose determination
shall be conclusive) of the portion of the assets or
evidences of indebtedness so distributed or of such rights
or warrants applicable to one share of Common Stock. Such
adjustment shall be made successively whenever such a record
date is fixed and shall become effective immediately after
such record date. Notwithstanding the foregoing, in the
event that the Corporation shall distribute any rights or
warrants to acquire capital stock ("Rights") pursuant to
this subparagraph (iii), the distribution of separate
certificates representing such Rights subsequent to their
initial distribution (whether or not such distribution shall
have occurred prior to the date of the issuance of such
Series B Preferred Stock) shall be deemed to be the
distribution of such Rights for purposes of this
subparagraph (iii); provided that the Corporation may, in
lieu of making any adjustment pursuant to this
subparagraph (iii) upon a distribution of separate
certificates representing such Rights, make proper provision
so that each holder of such Series B Preferred Stock who
converts such Series B 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 Rights and
(B) after such record date and prior to the expiration,
redemption or termination of such 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 rights as would a holder of the number of
shares of Common Stock that such Series B Preferred Stock so
converted would have entitled the holder thereof to purchase
in accordance with the terms and provisions of and
applicable to the Rights if such Series B Preferred Stock
were converted immediately prior to the record date for such
distribution; provided, however, that, in the event no
record date is fixed, such adjustment shall be made
successively and shall become effective on the distribution
date. Common Stock owned by or held for the account of the
Corporation or any majority owned subsidiary shall not be
deemed outstanding for the purpose of any adjustment
required under this subparagraph (iii).
(iv) For the purpose of any computation
under subparagraph (ii) and (iii) above, the current market
price per share of Common Stock at any date shall be deemed
to be the average of the daily closing prices for the thirty
consecutive business days commencing forty-five business
days before the day in question. The closing price for any
day shall be (A) if the Common Stock is listed or admitted
for trading on any national securities exchange, the last
sale price (regular way), or the average of the closing bid
and ask prices, if no sale occurred, of Common Stock on the
principal securities exchange on which the Common Stock is
listed, (B) if not listed as described in (A) but if quoted
on the Nasdaq Stock Market (formerly the National Market
System of the National Association of Securities Dealers,
Inc. Automated Quotation System) the last sale price, or the
average of the closing bid and ask prices, if no sale
occurred, of Common Stock on the Nasdaq Stock Market, (C) if
not quoted as described in clause (B), the mean between the
closing high bid and low asked quotations of Common Stock on
the National Association of Securities Dealers, Inc.
Automated Quotation System, or any similar system or
automated dissemination of quotations of securities prices
then in common use, if so quoted, or (D) if not quoted as
described in clauses (B) or (C), the mean between the high
bid and low asked quotations for Common Stock as reported by
the National Quotation Bureau Incorporated if at least two
securities dealers have inserted both bid and asked
quotations for common stock on at least 5 of the 10
preceding days. If none of the conditions set forth above
is met, the closing price of Common Stock on any day or the
average of such closing prices for any period shall be the
fair market value of Common Stock as determined by a member
firm of the New York Stock Exchange, Inc. selected by the
Corporation.
(v) A. Nothing contained herein shall be
construed to require an adjustment in the conversion
rate as a result of the issuance of Common Stock
pursuant to, or the granting or exercise of any rights
under, the Corporation's Dividend Reinvestment and
Stock Purchase Plan, the Corporation's Employee Stock
Purchase Plan, the Corporation's Stock Option Plan or
any successor or similar plans providing for the
purchase of shares of Common Stock by the Corporation'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.
B. In addition, no adjustment in the
conversion rate shall be required unless such
adjustment would require an increase or decrease of at
least 1% in such rate; provided, however, that any
adjustments which by reason of this subparagraph (v)(B)
are not required to be made shall be carried forward
and taken into account in any subsequent adjustment;
further provided, however, that any adjustments which
by reason of this subparagraph (v)(B) are not otherwise
required to be made shall be made no later than 3 years
after the date on which occurs an event that requires
an adjustment to be made or carried forward.
C. All calculations under this
Section 4 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be.
Anything in this Section 4 to the contrary
notwithstanding, the Corporation shall be entitled to
make such increases in the conversion rate, in addition
to those required by this paragraph (d), as it in its
discretion shall determine to be advisable in order
that any stock dividends, subdivision of shares,
distribution of rights to purchase stock or securities,
or distribution of securities convertible into or
exchangeable for stock hereafter made by the
Corporation to its shareholders shall not be taxable.
(vi) In any case in which this paragraph (d)
provides that an adjustment shall become effective after a
record date for an event, the Corporation may defer until
the occurrence of such event (A) delivering to the holder of
any Series B Preferred Stock converted after such record
date and before the occurrence of such event the additional
shares of stock deliverable upon such conversion by reason
of the adjustment required by such event over and above the
Common Stock deliverable upon such conversion before giving
effect to such adjustment and (B) paying to such holder any
amount in cash in lieu of any fraction pursuant to
paragraph (a), provided, however, that the Corporation shall
deliver to such holder a due bill or other appropriate
instrument evidencing such holder's rights to receive such
additional shares, and such cash, upon the occurrence of the
event requiring such adjustment. If such event does not
occur, no adjustments shall be made pursuant to this
paragraph (d).
(e) No fractional shares of stock shall be issued
upon the conversion of any Series B Preferred Stock. If more
than one share of Series B Preferred Stock shall be surrendered
for conversion at one time by the same holder, the number of full
shares of stock which shall be issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares
of Series B Preferred Stock so surrendered. Instead of any
fractional share of stock which would otherwise be issuable upon
conversion of any Series B Preferred Stock, the Corporation shall
pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction of the closing price per share of
Common Stock on the business day which immediately precedes the
day of conversion. The closing price for such business day shall
be (A) if the Common Stock is listed or admitted for trading on
any national securities exchange, the last sale price (regular
way), or the average of the closing bid and ask prices, if no
sale occurred, of Common Stock on the principal securities
exchange on which the Common Stock is listed, (B) if not listed
as described in (A) but if quoted on the Nasdaq Stock Market
(formerly the National Market System of the National Association
of Securities Dealers, Inc. Automated Quotation System) the last
sale price, or the average of the closing bid and ask prices, if
no sale occurred, of Common Stock on the Nasdaq Stock Market,
(C) if not quoted as described in clause (B), the mean between
the closing high bid and low asked quotations of Common Stock on
the National Association of Securities Dealers, Inc. Automated
Quotation System, or any similar system or automated
dissemination of quotations of securities prices then in common
use, if so quoted, or (D) if not quoted as described in
clauses (B) or (C), the mean between the high bid and low asked
quotations for Common Stock as reported by the National Quotation
Bureau Incorporated if at least two securities dealers have
inserted both bid and asked quotations for common stock on at
least 5 of the 10 preceding days. If none of the conditions set
forth above is met, the closing price of Common Stock on any day
or the average of such closing prices for any period shall be the
fair market value of Common Stock as determined by a member firm
of the New York Stock Exchange, Inc. selected by the Corporation.
(f) In case of any of the following shall occur
while any Series B Preferred Stock is outstanding: (i) any
reclassification or change of the outstanding shares of Common
Stock deliverable upon conversion of the Series B Preferred Stock
(other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a
subdivision or combination, but including any change in the
shares of Common Stock into two or more classes or series of
securities); or (ii) any consolidation or merger to which the
Corporation is a party (other than a consolidation or a merger in
which the Corporation is the continuing corporation and which
does not result in any reclassification of, or change other than
a change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or
combination in, the outstanding shares of Common Stock issuable
upon conversion of the Series B Preferred Stock); or (iii) any
sale or conveyance to another corporation of the properties and
assets of the Corporation as an entirety or substantially as an
entirety; then the Corporation, or such successor or purchasing
corporation, as the case may be, shall make appropriate provision
in its charter or otherwise so that the holders of the Series B
Preferred Stock then outstanding shall have the right at any time
thereafter to convert such Series B Preferred Stock into the kind
and amount of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation,
merger, sale or conveyance by a holder of the number of shares of
Common Stock issuable upon conversion of such Series B Preferred
Stock immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Such provision shall
provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this
Section 4. The above provisions of this paragraph (f) shall
similarly apply to successive reclassifications, changes,
consolidations, mergers, sales or conveyances.
(g) The Corporation will at all times reserve and
keep available out of its authorized but unissued or treasury
stock, solely for the purpose of issue upon conversion of the
Series D Preferred Stock as provided in this Section 4, such
number of shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding Series B
Preferred Stock.
(h) The issuance of certificates for shares of
Common Stock upon conversion of Series B Preferred Stock shall be
made without charge to the converting shareholder for such
certificates or for any tax in respect of the issuance of such
certificates, and such certificates shall be issued in the name
of, or in such name or names as may be directed by, the holder of
the Series B Preferred Stock converted. However, if any such
certificate is to be issued in a name other than that of the
holder of the converted Series B Preferred Stock, the Corporation
shall not be required to issue or deliver any stock certificate
or certificates unless and until the holder has paid to the
Corporation the amount of any tax which may be payable in respect
of any transfer involved in such issuance or shall establish to
the satisfaction of the Corporation that such tax has been paid.
678 Whenever the conversion rate then in effect
is adjusted as herein provided, the Corporation shall mail to
each holder of the Series B Preferred Stock at such holder's
address as it shall appear on the books of the Corporation a
statement setting forth the adjusted conversion rate, then and
thereafter effective under the provisions hereof together with
the facts, in reasonable detail, upon which such adjustment is
based.
(j) In case any of the following shall occur
while any Series B Preferred Stock is outstanding: (i) the
Corporation shall declare a dividend (or any other distribution)
on its Common Stock other than in cash out of its current or
retained earnings; or (ii) other than pursuant to the shareholder
or employee plans, or any successor plans, in accordance with
paragraph (d)(v)(A) above, the Corporation shall authorize the
granting to the holders of its Common Stock of rights or warrants
to subscribe for or purchase any shares of capital stock of any
class or of any other rights or warrants; or (iii) any
reclassification or change of the outstanding shares of Common
Stock deliverable upon conversion of the Series B Preferred Stock
(other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a
subdivision or combination, but including any changes in the
shares of Common Stock into two or more classes or series of
securities); or any consolidation or merger to which the
Corporation is a party (other than a consolidation or a merger in
which the Corporation is the continuing corporation and which
does not result in any reclassification of, or change other than
a change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or
combination in, the outstanding shares of Common Stock issuable
upon conversion of the Series B Preferred Stock); or (iv) any
sale or conveyance to another corporation of the properties and
assets of the Corporation as an entirety or substantially as an
entirety; or (v) of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation; then the
Corporation shall mail to each holder of Series B Preferred Stock
at such holder's address as it shall appear on the books of the
Corporation, at least fifteen days prior to the applicable record
date hereinafter specified, a notice stating (x) the record date
for such dividend, distribution or rights, or, if a record is not
to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution or rights
are to be determined, or (y) the date on which such
reclassification, consolidation, merger, dissolution, liquidation
or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall
be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such
reclassification, consolidation, merger, dissolution, liquidation
or winding up. No failure to mail such notice or any defect
therein or in the mailing thereof shall affect the legality or
validity of any such transaction or any adjustment in the
conversion rate or conversion price required by this Section 4.
5. Voting. (a) Except as hereinafter in this
Section 5 expressly provided or as otherwise required by law, the
Series B Preferred Stock shall have no voting power.
(b) Whenever and as often as dividends payable on
any share or shares of the Preferred Stock of the Corporation at
the time outstanding shall be accumulated and unpaid in an amount
equivalent to or exceeding six quarterly dividends (whether or
not declared and whether or not consecutive), the number of
directors constituting the full Board of Directors shall be
increased by two in the manner prescribed by law and the Articles
of Incorporation and Bylaws of the Corporation and the holders of
record of the Preferred Stock of all series shall thereafter have
the right, voting noncumulatively separately as a single class,
to elect two directors to the Board of Directors. In any
election of directors, the holders of Series B Preferred Stock
shall be entitled to cast one vote per share.
(c) At any time when the right of holders of
Series Stock to elect two additional directors shall have so
vested, the Corporation may, and upon the written request of the
holders of record of not less than 10% of the Series B Preferred
Stock then outstanding (or 10% of all Preferred Stock having the
right to vote for such directors in case holders of shares of
other series of Preferred Stock shall also have the right to
elect directors in such circumstances) shall, call a special
meeting of holders of such Series B Preferred Stock (and other
series of Preferred Stock, if applicable) for the election of
directors. In the case of such a written request, such special
meeting shall be held within 60 days after the delivery of such
request, and, in either case, at the place and upon the notice
provided by law and in the Bylaws of the Corporation; except that
the Corporation shall not be required to call such a special
meeting if the request is received less than 120 days before the
date fixed for the next ensuing annual meeting of shareholders of
the Corporation. At all meetings of shareholders at which
holders of Preferred Stock shall be entitled to vote for
directors as a single class, the holders of a majority of the
outstanding shares of each class or series of capital stock of
the Corporation having the right to vote as a single class shall
be necessary to constitute a quorum, whether present in person or
by proxy, for the election by that class or series of its
designated directors. Directors to be elected by shareholders
voting as a class shall be elected by the vote of at least a
plurality of votes cast by such shareholders present in person or
proxy at the meeting.
(d) The two directors elected as provided in this
subsection shall serve until the next annual meeting of
shareholders of the Corporation at which directors of the class
in which such directors are serving are to be elected and until
their respective successors shall be elected and qualified or the
earlier expiration of their terms as provided in this subsection.
No such director may be removed without the vote or consent of
holders of a majority of the shares of Series B Preferred Stock
(or holders of a majority of shares of Preferred Stock having the
right to vote in the election of such director in case holders of
shares of other series of Preferred Stock shall also have the
right to elect such director). In case any vacancy shall occur
among the directors elected by such shareholders voting as a
class, such vacancy may be filled by the remaining director so
elected, or his successor then in office, and the director so
elected to fill such vacancy shall serve for the unexpired term
of the director for which the vacancy is being filled.
(e) Such voting rights of the holders of
Preferred Stock as a single class, once effective, shall continue
only until all arrears in dividends (whether or not declared) on
the Preferred Stock shall have been paid or declared and set
apart for payment at which time the right of the Preferred Stock
to vote as a single class for the election of directors, as
herein set forth, shall terminate.
(f) The consent of the holders of at least
two-thirds of the number of shares of Preferred Stock at the time
outstanding, given in person or by proxy, either in writing or at
a meeting of stockholders at which the holders of the Preferred
Stock shall vote separately as a class without regard to series,
the holders of shares of Series B Preferred Stock being entitled
to cast one vote per share thereon, shall be necessary for
effecting or validating:
(i) any change in the Articles of
Incorporation or Bylaws of the Corporation which would
materially and adversely alter or change the preferences,
privileges, rights or powers given to the holders of the
Preferred Stock, provided, that if one or more but not all
series of Preferred Stock at the time outstanding are so
affected, only the consent of the holders of at least
two-thirds of each series so affected, voting separately as
a class, shall be required; or
(ii) the issuance of any shares of any other
class of stock of the Corporation ranking prior to the
Preferred Stock.
The term "ranking prior to the Preferred Stock" shall mean
and include all shares of stock of the Corporation in
respect of which the rights of the holders thereof as to the
payment of dividends or as to distributions in the event of
a voluntary or an involuntary liquidation, dissolution or
winding up of the corporation, are given preference over the
rights of the holders of the Preferred Stock.
6. Liquidation Rights. (a) In the event of any
liquidation, dissolution or winding up of the Corporation,
voluntary or involuntary, the holders of all shares of Series B
Preferred Stock shall be entitled to be paid in full out of the
assets of the Corporation available for distribution to
shareholders, before any distribution of assets shall be made to
the holders of Common Stock or of any other shares of stock of
the Corporation ranking as to any such distribution junior to the
Series B Preferred Stock, an amount equal to $50 per share plus
an amount equal to any accrued and unpaid dividends thereon to
the date fixed for payment of such distribution. If, upon any
voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, the amounts payable with respect to the
Series B Preferred Stock and any other shares of stock of the
Corporation ranking as to any such distribution on a parity with
the Series B Preferred Stock are not paid in full, the holders of
the Series B Preferred Stock and of such other shares shall share
ratably in any such distribution of assets of the Corporation in
proportion to the full respective preferential amounts to which
they are entitled. After payment to the holders of the Series B
Preferred Stock of the full preferential amounts provided for in
this Section 6, the holders of the Series B Preferred Stock shall
be entitled to no further participation in any distribution of
assets by the Corporation.
(b) None of the following shall be considered a
liquidation, dissolution or winding up of the Corporation within
the meaning of this section:
(i) a consolidation or merger of the
Corporation with or into any other corporation;
(ii) a merger of any other corporation into
the Corporation;
(iii) a reorganization of the Corporation;
(iv) the purchase or redemption of all or
part of the outstanding shares of any class or classes of
the Corporation;
(v) a sale or transfer of all or any part of
its assets;
:\DM a share exchange to which the
Corporation is a party; or
(vii) a division of the Corporation.
7. Limitation on Dividends on Junior Stock. So long
as any Series B Preferred Stock shall be outstanding, the
Corporation shall not declare any dividends on the Common Stock
of the Corporation or any other stock of the Corporation ranking
as to dividends or distribution of assets junior to the Series B
Preferred Stock (the Common Stock and any such other stock being
herein referred to as "Junior Stock"), or make any payment on
account of, or set apart money for, a sinking or other analogous
fund for the purchase, redemption or other retirement of any
shares of Junior Stock, or make any distribution in respect
thereof, whether in cash or property or in obligations or stock
of the Corporation, other than Junior Stock (such dividends,
payments, setting apart and distributions being herein called
"Junior Stock Payments"), unless all of the conditions set forth
in the following subsections A and B shall exist at the date of
such declaration in the case of any such dividend, or the date of
such setting apart in that case of any such fund, or the date of
such payment or distribution in the case of any other Junior
Stock Payment:
A. Full cumulative dividends shall have
been paid or declared and set apart for payment upon all
outstanding shares of Preferred Stock other than Junior
Stock.
B. The Corporation shall not be in default
or in arrears with respect to any sinking or other analogous
fund or any call for tenders, obligation or other agreement
for the purchase, redemption or other retirement of any
shares of Preferred Stock other than Junior Stock.
AGREEMENT AND PLAN OF MERGER
between
SOVEREIGN BANCORP, INC.
and
COLONIAL STATE BANK
March 23, 1995
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
PLAN OF MERGER, CLOSING AND EFFECTIVE DATE.................. 2
Section 1.1 Plan of Merger.......................... 2
Section 1.2 Closing................................. 2
Section 1.3 Effective Date.......................... 2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COLONIAL.................. 2
Section 2.1 Organization and Standing................. 2
Section 2.2 Authority................................. 2
Section 2.3 No Violation.............................. 3
Section 2.4 Subsidiaries.............................. 3
Section 2.5 Capitalization............................ 4
Section 2.6 Certificate of Incorporation, Bylaws and
Minute Books.............................. 4
Section 2.7 Financial Statements...................... 4
Section 2.8 Absence of Changes........................ 6
Section 2.9 Dividends, Distributions and Stock
Purchases................................. 6
Section 2.10 Taxes..................................... 6
Section 2.11 Title To and Condition of Assets.......... 6
Section 2.12 Loan Portfolio; Portfolio Management...... 7
Section 2.13 Investment Securities..................... 8
Section 2.14 Contracts and Required Consents........... 8
Section 2.15 Litigation................................ 9
Section 2.16 Compliance with Laws; Governmental
Authorizations............................ 9
Section 2.17 Regulatory Reports of Examination......... 10
Section 2.18 Insurance................................. 10
Section 2.19 Fidelity Bonds............................ 10
Section 2.20 Labor Relations........................... 11
Section 2.21 Employee Benefit Plans.................... 11
Section 2.22 Related Party Transactions................ 12
Section 2.23 No Finder................................. 12
Section 2.24 Significant Customers..................... 12
Section 2.25 Environmental Matters..................... 12
Section 2.26 Allowance for Loan Losses................. 13
Section 2.27 Deleted................................... 13
Section 2.28 Complete and Accurate Disclosure.......... 13
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SOVEREIGN................. 14
Section 3.1 Organization and Standing................. 14
Section 3.2 Authority................................. 14
Section 3.3 No Violation.............................. 14
Section 3.4 Financial Statements...................... 15
Section 3.5 Absence of Changes........................ 15
Section 3.6 Liquidity................................. 15
Section 3.7 No Finder................................. 15
ARTICLE IV
COVENANTS OF COLONIAL....................................... 16
Section 4.01 Conduct of Business....................... 16
Section 4.02 Best Efforts.............................. 19
Section 4.03 Access and Confidentiality................ 19
Section 4.04 Subsequent Financial Statements and
Regulatory Reports........................ 20
Section 4.05 Update of Schedule I and Notice........... 20
Section 4.06 Consents.................................. 20
Section 4.07 Deleted................................... 20
Section 4.08 Regulatory Applications................... 20
Section 4.09 Shareholder Approval...................... 21
Section 4.10 Fairness of Opinion....................... 21
Section 4.11 Reserves and Accruals..................... 21
Section 4.12 Financial Statement Review................ 21
Section 4.13 No Other Bids............................. 21
Section 4.14 Park Avenue Real Estate................... 22
Section 4.15 Miscellaneous............................. 23
Section 4.16 Colonial D&O Insurance.................... 23
ARTICLE V
COVENANTS OF SOVEREIGN...................................... 24
Section 5.01 Best Efforts.............................. 24
Section 5.02 Interim Banks............................. 24
Section 5.03 Regulatory Notices and Applications....... 24
Section 5.04 Management Following the Merger........... 24
Section 5.05 Employees and Employee Benefits........... 25
ARTICLE VI
CONDITIONS PRECEDENT........................................ 26
Section 6.01 Conditions to Colonial's Obligations
under this Agreement...................... 26
Section 6.02 Conditions to Sovereign's Obligations
under this Agreement...................... 27
ARTICLE VII
TERMINATION................................................. 29
Section 7.01 Termination............................... 29
Section 7.02 Effect of Termination..................... 31
ARTICLE VIII
MISCELLANEOUS............................................... 32
Section 8.01 Expenses.................................. 32
Section 8.02 Non-Survival of Representations and
Warranties................................ 32
Section 8.03 Amendment, Extension and Waiver........... 32
Section 8.04 Public Announcements...................... 33
Section 8.05 Entire Agreement.......................... 33
Section 8.06 No Assignment............................. 33
Section 8.07 Notices................................... 33
Section 8.08 Captions.................................. 34
Section 8.09 Counterparts.............................. 34
Section 8.10 Severability.............................. 35
Section 8.11 Governing Law............................. 35
Exhibits.................................................... 35
<PAGE>
AGREEMENT AND PLAN OF MERGER
MADE this 23rd day of March 1995, by and between
SOVEREIGN BANCORP, INC., a Pennsylvania business corporation
having its administrative headquarters at 1130 Berkshire
Boulevard, P.O. Box 37, Reading, Pennsylvania 19603 ("Sovereign")
and COLONIAL STATE BANK, a New Jersey commercial bank having its
administrative headquarters at 521 Park Avenue, Freehold, New
Jersey 07728 ("Colonial").
Background:
Sovereign is a savings and loan holding company.
Colonial is a New Jersey commercial bank. Sovereign wishes to
acquire all of the outstanding $5.00 par value common stock of
Colonial (the "Colonial Common Stock") and Colonial wishes to
affiliate itself with and to become a subsidiary of Sovereign.
Subject to the terms and conditions of this Agreement, the
acquisition by Sovereign of all of the outstanding Colonial
Common Stock will be accomplished by means of a reverse
triangular merger under which: (i) Sovereign will organize as a
wholly-owned subsidiary Sovereign Interim Bank, a non-operating
phantom federal savings bank ("Interim Bank"), (ii) Interim Bank
will be merged with and into Colonial (the "Merger"),
(iii) Colonial will survive the Merger as a wholly-owned
subsidiary of Sovereign, (iv) each outstanding share of Colonial
Common Stock will in consideration of the Merger be converted
into the right to receive $11.60 in cash from Sovereign, (v)
Sovereign will organize as a wholly-owned subsidiary Sovereign
Interim Bank II, a non-operating phantom Pennsylvania-chartered
savings bank ("Second Interim Bank"), (vi) Second Interim Bank
will convert from a Pennsylvania-chartered savings bank to a
federal savings bank (the "Charter Conversion"),
(vii) immediately following the Merger, Colonial will be merged
with and into Second Interim Bank (the "Second Merger"), and
(viii) Second Interim Bank will change its name to a name which
includes the term "Sovereign" and will survive the merger as a
federal savings bank and wholly-owned subsidiary of Sovereign.
Prior to or contemporaneously with the execution and
delivery of this Agreement and as a condition and inducement to
Sovereign's execution of this Agreement: (i) all of the
directors and certain of the officers and shareholders of
Colonial executed in favor of Sovereign a Letter Agreement dated
the date of this Agreement in the form attached hereto as
Exhibit E pursuant to which each such person has agreed, among
other things, to vote for and otherwise support the consummation
of the transactions contemplated in this Agreement, and (ii)
Colonial granted to Sovereign an option to acquire up to 19.9% of
Colonial's common stock pursuant to the terms of a Stock Option
Agreement between Sovereign and Colonial dated the date of this
Agreement (the "Sovereign Option Agreement").
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual
covenants hereinafter set forth and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
PLAN OF MERGER, CLOSING AND EFFECTIVE DATE
Section 1.1 Plan of Merger. Subject to the terms
and conditions of this Agreement, Interim Bank shall merge with
and into Colonial in accordance with the Plan of Merger attached
hereto as Exhibit A and Colonial shall survive such merger (the
"Merger").
Section 1.2 Closing. Provided that all conditions
precedent set forth in Article VI above shall have been satisfied
or waived, the parties shall hold a closing (the "Closing")
following the receipt of all required regulatory approvals and
the expiration of all applicable waiting periods on a date and at
a place to be agreed upon by the parties, at which time the
parties shall execute and deliver all such documents and
instruments as may be necessary or appropriate to effectuate the
purposes of this Agreement.
Section 1.3 Effective Date. The Merger shall be
effective on the date on which all filings with government
agencies as may be required under all applicable laws and
regulations for the Merger to become effective are made and
accepted by such agencies or, if later, on the date specified in
such filings (the "Effective Date").
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COLONIAL
Colonial represents and warrants to Sovereign, as of
the date of this Agreement and as of the date of the Closing, as
follows:
Section 2.1 Organization and Standing. Colonial is a
New Jersey commercial bank duly organized, validly existing and
in good standing under the laws of the State of New Jersey.
Colonial is an insured bank under the provisions of the Federal
Deposit Insurance Act and is not a member of the Federal Reserve
System. Colonial has full power and lawful authority to own and
hold its properties and to carry on its present business.
Section 2.2 Authority. Colonial has full corporate
power and authority to execute and deliver this Agreement and,
subject to the receipt of shareholder and required regulatory
approvals (and compliance with any conditions contained therein),
to consummate the transactions contemplated herein. The
execution and delivery of this Agreement and the consummation of
the transactions contemplated herein have been authorized and
unanimously approved by the Board of Directors of Colonial and,
subject to the approval of this Agreement by its shareholders, no
other corporate action on its part is necessary to authorize this
Agreement or the consummation of the transactions contemplated
herein. This Agreement has been duly executed and delivered by
and, assuming due authorization, execution and delivery by
Sovereign, constitutes a valid and binding obligation of
Colonial, enforceable against Colonial in accordance with its
terms, subject to applicable bankruptcy, insolvency,
conservatorship, receivership and similar laws affecting
creditors' rights generally and subject to the application of
equitable principles.
Section 2.3 No Violation. Subject to the receipt of
shareholder and required regulatory approvals (and compliance
with any conditions contained therein), the execution, delivery
and performance of this Agreement and the consummation of the
transactions contemplated herein will not: (i) violate or
conflict with any provision of the Certificate of Incorporation
or bylaws of Colonial; (ii) violate any statute, rule,
regulation, ordinance, judgment, order or decree applicable to
Colonial or by which Colonial or any of its properties is bound;
or (iii) violate, conflict with, or constitute a default (or be
an event which, with or without due notice or lapse of time, or
both, would constitute such a default) under, or cause or permit
the acceleration or termination of, any contract, note, bond,
mortgage, indenture, license, lease or other instrument,
agreement or commitment to which Colonial is a party or by which
Colonial or any of its properties are bound, except in the case
of clause (iii) for such violations, defaults, conflicts,
accelerations, and terminations as would not, individually or in
the aggregate, materially adversely affect the assets,
liabilities, business, financial condition or results of
operations of Colonial, or its ability to perform its obligations
under this Agreement.
Section 2.4 Subsidiaries. Colonial owns no
subsidiaries, either directly or indirectly, other than CSB
Building Corporation (the "Colonial Subsidiary"), which was
organized on February 21, 1995 for purposes of acquiring title to
the real estate located at 521 Park Avenue, Freehold, New Jersey
pursuant to the transaction described in Section 4.14 below. The
Colonial Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the State of New
Jersey and has the corporate power and authority to carry on its
business and operations as now being conducted (and as proposed
to be conducted in connection with the transaction referred to in
Section 4.14 below) and to operate the properties and assets now
owned (or to be acquired pursuant to the transaction referred to
in Section 4.14 below) by it. Colonial owns all of the
outstanding shares of capital stock of the Colonial Subsidiary,
free and clear of all liens, security interests, restrictions,
options, claims, charges, pledges and/or encumbrances of any kind
whatsoever. There are no outstanding agreements, subscriptions,
obligations, options or rights of any kind relating to the
issuance of or entitling others to acquire shares of capital
stock of the Colonial Subsidiary and there are no outstanding
securities or other instruments of any kind convertible into
shares of capital stock of the Colonial Subsidiary.
Section 2.5 Capitalization.
(a) General. The authorized capital of Colonial
consists exclusively of 2,550,000 shares of common stock of $5.00
par value per share (the "Colonial Common Stock"), of which
538,911 shares are validly issued and outstanding and are fully
paid and non-assessable, none of which are held as treasury
shares. There are no outstanding agreements, subscriptions,
obligations, options or rights of any kind relating to the
issuance of or entitling others to acquire shares of Colonial
Common Stock and there are no outstanding securities or other
instruments of any kind convertible into shares of Colonial
Common Stock.
(b) Number of Shareholders and Ownership by
Management. As of December 31, 1994, Colonial had
276 shareholders of record. The Colonial Common Stock is not
required to be registered with the Securities and Exchange
Commission (the "SEC") under the provisions of Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and Colonial is not required to file periodic reports with the
SEC pursuant to Section 15(d) of the Exchange Act. Except as
disclosed in Schedule I, to the knowledge of Colonial, no person
or "group" (as that term is defined in Section 13(d)(3) of the
Exchange Act) is the beneficial owner of 5% or more of the
outstanding shares of Colonial Common Stock. Schedule I sets
forth the name and number of shares of Colonial Common Stock
beneficially owned by each such person and each such group as of
the date of this Agreement. Schedule I also sets forth the name
of each director and officer of Colonial and the number of shares
of Colonial Common Stock owned beneficially by him as of the date
of this Agreement.
Section 2.6 Certificate of Incorporation, Bylaws and
Minute Books. The copies of the Certificate of Incorporation, as
amended, and of the bylaws, as amended, of Colonial which have
been delivered to Sovereign are true, complete and accurate in
all respects. The minute books of Colonial which have been or
will be made available to Sovereign for inspection are true,
complete and accurate in all respects.
Section 2.7 Financial Statements.
(a) Colonial Regulatory Reports. For purposes of
this Agreement, the term "Colonial Regulatory Reports" shall mean
the call reports, consolidated reports of condition and income,
and accompanying schedules filed, or to be filed, by Colonial
with the Federal Deposit Insurance Corporation (the "FDIC")
and/or with the NJDOB for each calendar quarter, beginning with
the quarter ended March 31, 1992 through the date of the Closing.
Colonial has previously delivered (and in the case of
subsequently prepared reports, will deliver) to Sovereign the
Colonial Regulatory Reports. The Colonial Regulatory Reports
have been (and in the case of subsequently prepared reports, will
be) prepared in accordance with applicable regulatory accounting
principles and practices applied on a consistent basis throughout
the periods covered by such statements and fairly present (and in
the case of subsequently prepared reports, will fairly present)
the financial condition, results of operations and changes in
shareholder's equity of Colonial at their respective dates and
for the respective periods then ended in accordance with
applicable regulatory accounting principles applied on a
consistent basis.
(b) Financial Statements. For purposes of this
Agreement, the term "Colonial Financial Statements" shall mean
the financial statements of Colonial at and for the years ended
December 31, 1992, 1993 and 1994 as certified by KPMG Peat
Marwick. Colonial has previously delivered to Sovereign the
Colonial Financial Statements. The Colonial Financial Statements
have been prepared in accordance with generally accepted
accounting principles consistently applied during the periods
involved and fairly present the financial condition, results of
operations, cash flows and changes in shareholders' equity of
Colonial at their respective dates and for the respective periods
then ended in accordance with generally accepted accounting
principles consistently applied.
(c) Absence of Undisclosed Liabilities. As of
the date of each balance sheet included in the Colonial
Regulatory Reports or in the Colonial Financial Statements,
Colonial did not have (and in the case of subsequently prepared
Colonial Regulatory Reports, will not have) any liabilities
(whether accrued, absolute, contingent or otherwise) which are
required to be reflected, noted or reserved against therein under
generally accepted accounting principles or which are in any case
or in the aggregate material, except as reflected, noted or
adequately reserved against therein. Except with respect to the
real estate transaction referred to in Section 4.14 below, since
December 31, 1994, Colonial has not incurred and will not incur
any such liability, other than liabilities of the same nature as
those set forth in the balance sheet included in the Colonial
Financial Statement, at and for the year ended December 31, 1994,
all of which have been reasonably incurred in the ordinary course
of business consistent with past practice.
(dStatements of Financial Accounting Standard Nos. 114 and 118,
effective January 1, 1995, and the adoption of such Statements
will not have a material adverse impact upon the financial
condition or results of operations of Colonial.
Section 2.8 Absence of Changes. Since December 31,
1994, Colonial has conducted its business in the regular and
ordinary course (except with respect to the real estate
transaction referred to in Section 4.14 below) and has not
undergone any change in condition (financial or otherwise),
assets, liabilities, business or operations, other than changes
in the ordinary course of business consistent with past practice
which have not been, either in any case or in the aggregate,
materially adverse, except that the operation of its business was
affected by the terms and conditions of, and the restrictions
imposed by, the Memorandum of Understanding referred to in
Section 2.16 below during the period March 2, 1993 through
November 21, 1994.
Section 2.9 Dividends, Distributions and Stock
Purchases. Since December 31, 1994, Colonial has not:
(i) declared, set aside, made or paid any dividend or other
distribution in respect of Colonial Common Stock, or
(ii) purchased, issued or sold any shares of Colonial Common
Stock.
Section 2.10 Taxes. Colonial has duly filed, and will
duly file, all federal, state, county, municipal and foreign tax
returns, reports, information returns and declarations which are
required to be filed by it (which returns, reports and
declarations are (and, in the case of subsequently filed returns,
will be complete, accurate and correct in all material respects
and free of any material omission, deficiency, error,
misstatement or misrepresentation) and has duly paid (and, in the
case of returns, reports and declarations to be filed by it after
the date of this Agreement, will duly pay) all taxes, penalties
and interest which have become due pursuant thereto or which
became due pursuant to assessments. Colonial has not received
any notice of deficiency or assessment of additional taxes and no
tax audits are in process. Colonial has not granted any waiver
of any statute of limitation with respect to any extension of a
period for the assessment of any federal, state, county,
municipal or foreign income tax. The accruals and reserves for
taxes reflected in the balance sheet included in the Colonial
Financial Statements and in the Colonial Regulatory Reports at
and for the 12 months ended December 31, 1994 are adequate to
cover all taxes (including interest and penalties, if any,
thereon) payable or accrued as a result of its operations for all
periods prior thereto.
Section 2.11 Title To and Condition of Assets.
Colonial is the legal, equitable, beneficial and record owner of
and has good and marketable title to all real and personal
properties and assets, both tangible and intangible, reflected
(and in the case of subsequently prepared financial statements,
to be reflected) in the balance sheets set forth in the Colonial
Financial Statements and in the Colonial Regulatory Reports, or
acquired subsequent to December 31, 1994 (other than property and
assets disposed of for fair value in the ordinary course of
business), free and clear of all liens, security interests,
restrictions, options, claims, charges, pledges and/or
encumbrances of any kind whatsoever other than: (i) as reflected
in such balance sheets; (ii) liens of current taxes not yet due;
and (iii) such imperfections of title, encumbrances and
easements, if any, as are not substantial in character, amount or
extent and do not materially detract from the value, or
materially interfere with the present use, of the properties and
assets subject thereto. Without limitation of the foregoing,
Colonial has (or the Colonial Subsidiary organized in connection
with the transaction referred to in Section 4.14 below, will
have) good and marketable title to the real property located at
521 Park Avenue, Freehold, New Jersey, which property is
insurable at ordinary rates by any nationally recognized title
company (including Fidelity Land Title Insurance Company and
Chicago Title Insurance Company, which are represented by
Alliance Title Agency), free and clear of all liens,
restrictions, options, claims, charges, pledges and encumbrances,
other than as described in clauses (i) through (iii) of the
preceding sentence or as described in Schedule I. The structures
and other improvements to real estate, furniture, fixtures and
equipment reflected in the balance sheets included in the
Colonial Financial Statements and in the Colonial Regulatory
Reports or acquired subsequent to December 31, 1994, are in good
operating condition and repair, are fit for the purposes for
which they are used, and conform in all material respects with
all applicable laws, ordinances and regulations, including
without limitation, all building, zoning and other similar laws.
Colonial owns, has a valid leasehold interest in or otherwise has
the right to use all real and personal properties and assets
necessary to the conduct of its business as now conducted.
Section 2.12 Loan Portfolio; Portfolio Management.
All evidences of indebtedness reflected as assets in the balance
sheets included in the Colonial Financial Statements and/or the
Colonial Regulatory Reports are and in the case of any such
assets reflected in subsequently prepared Colonial Regulatory
Reports, will be, (except with respect to those assets which have
been or will be disposed of for fair value in the ordinary course
of business) binding obligations of the respective obligors named
therein, except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of
creditors' rights generally, and except that the availability of
equitable remedies, including specific performance, is subject to
the discretion of the court before which any proceeding may be
brought, and the payment of no amount thereof is subject to any
defenses which have been threatened or asserted against Colonial.
All such indebtedness which is secured by an interest in real
property is secured by a valid and perfected mortgage lien having
the priority specified in the latest title report included with
the loan documents theretofore made available to Sovereign.
Colonial warrants that all loans originated by it were at the
time entered into and have been at all times since in compliance
in all material respects with all applicable laws and
regulations. All loans purchased by Colonial: (i) were, at the
time entered into in compliance in all material respects with all
applicable laws and regulations, and (ii) at all times since such
loans were purchased have been in compliance in all material
respects with all applicable laws and regulations. Colonial
administers its loan and investment portfolios in all material
respects in accordance with all applicable laws and regulations.
The records of Colonial regarding all loans outstanding on its
books are accurate in all material respects and the risk
classification system has been established in accordance with the
requirements of the FDIC. Schedule I discloses all loans which,
as of December 31, 1994, have been classified by Colonial or by
any regulatory examiner as "Other Loans Specifically Mentioned,"
"Substandard," "Doubtful," or "Loss."
Section 2.13 Investment Securities. All securities
reflected as assets in the balance sheets included in the
Colonial Financial Statements and/or the Colonial Regulatory
Reports are (and in the case of securities reflected in
subsequently prepared financial statements and reports, will be)
owned legally, beneficially, equitably and of record by Colonial
free and clear of all mortgages, liens, security interests,
pledges, encumbrances and other restrictions, whether contractual
or statutory, which would impair the ability of Colonial freely
to dispose of any such security at any time. With respect to all
repurchase agreements to which Colonial is, or will be, a party,
Colonial has, or will have, a valid, perfected first lien or
security interest in the government securities or other
collateral securing the repurchase agreement, and the value of
the collateral securing each such repurchase agreement equals or
exceeds, or will equal or exceed, the amount of the debt secured
by such collateral under such repurchase agreement.
Section 2.14 Contracts and Required Consents.
(a) Contracts. Colonial has identified on
Schedule I: (i) all written or oral contracts (other than
contracts with customers reasonably entered into by Colonial in
the ordinary course of business consistent with past practice)
which involve the payment or the receipt of consideration in
excess of $10,000 per year, including, without limitation, all
employment contracts, agreements, leases, licenses, and other
commitments to which Colonial is a party or by which Colonial or
any of its properties are bound, and (ii) all employment,
consulting, retirement, severance, bonus, deferred compensation
or similar agreements, whether written or oral, entered into by
Colonial with any past or present officer, director, employee or
shareholder of Colonial. Except as disclosed in Schedule I, all
such contracts, agreements, leases, licenses and other
commitments are valid and in full force and effect and all
parties thereto have in all material respects performed all
obligations required to be performed by them to date and are not
in default in any material respect.
(b) Consents. Schedule I identifies all such
contracts, agreements, leases, licenses and other commitments
which require the consent, approval or waiver of any third party
to avoid a violation, the occurrence of an event of default or
the exercise of a right of termination by reason of the execution
and delivery of this Agreement or the consummation of the
transactions contemplated herein.
Section 2.15 Litigation. There is no litigation,
investigation or proceeding pending, or to the knowledge of
Colonial, threatened involving Colonial or its properties which,
if determined adversely to Colonial, would materially adversely
affect the condition (financial or otherwise), assets,
liabilities, business or operations of Colonial or which
challenge the validity or propriety of the transactions
contemplated under this Agreement. There are no outstanding
orders, writs, injunctions or decrees of any court, governmental
agency or arbitration tribunal against Colonial which materially
adversely affect the condition (financial or otherwise), assets,
liabilities, business or operations of Colonial, its right to
conduct its business as presently conducted or its ability to
perform its obligations under this Agreement. Colonial is not
aware of any fact or condition presently existing which might
give rise to any litigation, investigation or proceeding which,
if determined adversely to Colonial, would materially adversely
affect the condition (financial or otherwise), assets,
liabilities, business or operations of Colonial.
Section 2.16 Compliance with Laws; Governmental
Authorizations.
(a) General Compliance. Colonial is in
compliance in all material respects with all statutes, laws,
ordinances, rules, regulations, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses and other
governmental authorizations or approvals applicable to it or to
any of its properties. All permits, concessions, grants,
franchises, licenses and other governmental authorizations and
approvals necessary for the lawful conduct of Colonial's business
have been duly obtained and are in full force and effect and
there are no proceedings pending or, to the knowledge of
Colonial, threatened which may result in the revocation,
cancellation, suspension or materially adverse modification of
any of them.
(b) Regulatory Compliance. Except: (i) as
directly related to the Memorandum of Understanding referred to
in the next sentence, (ii) for matters relating to the failure by
Colonial to comply in certain respects with the requirements of
the Community Reinvestment Act and with certain regulations
relating to consumer compliance (the complete facts and
circumstances of such non-compliance having in each case been
fully disclosed by Colonial to Sovereign), and (iii) for matters
relating to the fact that Colonial's investment in bank premises
exceeded applicable regulatory limits, Colonial has not received
any notification or communication from any regulatory authority:
(A) asserting that Colonial is not in substantial compliance with
any of the statutes, regulations or ordinances which such
regulatory authority enforces; (B) threatening to revoke any
license, franchise, permit or governmental authorization which is
material to Colonial; (C) requiring or threatening to require
Colonial, or indicating that Colonial may be required, to enter
into a cease and desist order, agreement or memorandum of
understanding or any other agreement restricting or limiting, or
purporting to restrict or limit, in any manner the operations of
Colonial, including without limitation, any restriction on the
payment of dividends; or (D) directing, restricting or limiting,
or purporting to direct, restrict or limit, in any manner the
operations of Colonial, including without limitation any
restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described in this
sentence herein referred to as a "Regulatory Agreement").
Colonial has never consented to or entered into any Regulatory
Agreement, except for a Memorandum of Understanding dated
March 2, 1993 (the "MOU") entered into by Colonial with the FDIC
and the New Jersey Department of Banking (the "NJDOB"). Colonial
has delivered to Sovereign a true, complete and accurate copy of
the MOU, including all amendments thereto. The MOU was
terminated on November 21, 1994 and Colonial has not since that
time received any notification or communication from any
regulatory authority of the kind contemplated under clauses (A)
through (D) of the first sentence of this Section.
Section 2.17 Regulatory Reports of Examination.
Colonial will make available to Sovereign for inspection true,
complete and accurate copies of: (i) all reports of examination
prepared by the FDIC and/or by the NJDOB from the date of its
organization through the date of the Closing, (ii) all
correspondence relating to the foregoing reports of examination
and to the MOU, and (iii) all agreements, memoranda of
understanding and other arrangements and understandings between
Colonial and the FDIC and/or the NJDOB entered into as a result
of matters raised in such reports of examination and
correspondence.
Section 2.18 Insurance. All policies of insurance,
including all policies of title insurance and fidelity bonds,
held by or on behalf of Colonial are listed on Schedule I. All
such policies of insurance are in full force and effect and no
notices of cancellation have been received in connection
therewith.
Section 2.19 Fidelity Bonds. Colonial has
continuously since the date of its organization maintained in
full force and effect a fidelity bond insuring it against acts of
dishonesty by each of its employees in such amounts as are
disclosed on Schedule I. No claim has been made under any such
bond and Colonial is not aware of any fact or condition presently
existing which might form the basis of a claim under any such
bond. Colonial has no reason to believe that its present
fidelity bond will not be renewed by its carrier on substantially
the same terms as those now in effect.
Section 2.20 Labor Relations. Colonial is not a party
to or bound by any collective bargaining agreement. Colonial
enjoys good working relationships with its employees and there
are no labor disputes pending or to the knowledge of Colonial,
threatened which might materially adversely affect the condition
(financial or otherwise), assets, liabilities, business or
operations of Colonial.
Section 2.21 Employee Benefit Plans.
(a) Plans and Plan Documents. All employee
benefit plans, contracts or arrangements to which Colonial is a
party or by which it is bound which Colonial maintains for the
benefit of employees or former employees (including retired
employees), including, without limitation, all pension,
retirement, deferred compensation, incentive, bonus, profit
sharing, stock purchase, stock option, life insurance, death or
survivor's benefit, health insurance, sickness, disability,
medical, surgical, hospital, severance, layoff and vacation
plans, contracts or arrangements are identified in Schedule I.
Colonial has delivered to Sovereign true, complete and accurate
copies of all plans identified on Schedule I. Colonial has no
pension plan or other employee benefit plan which constitutes a
"qualified plan" under IRC Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "IRC").
(b) Compliance. All "employee benefit plans," as
defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), comply in all
material respects with ERISA. As of December 31, 1994 Colonial
had no material liability under any such plan which is not
reflected, reserved against or accrued in the unaudited financial
statements of Colonial at and for the year ended December 31,
1994 previously delivered to Sovereign (or disclosed in the notes
thereto), including any liability under SFAS No. 106. No
prohibited transaction (which shall mean any transaction
prohibited by ERISA Section 406 and not exempt under ERISA
Section 408) has occurred with respect to any employee benefit
plan maintained by Colonial which would result in the imposition,
directly or indirectly, of a material excise tax under IRC
Section 4975. Colonial provides continuation coverage under
group health plans for separating employees in accordance with
the provisions of IRC Section 4980B(f). Such group health plans
are in compliance with Section 1862(b)(1) of the Social Security
Act. There have been no breaches of fiduciary duty by any
fiduciary under and with respect to any employee benefit plan to
which Colonial is a party or by which it is bound and no claim is
pending or threatened with respect to any such plan, other than
claims for benefits made in the ordinary course.
Section 2.22 Related Party Transactions. Except as
disclosed in Schedule I: (i) no present or former officer or
director of Colonial, (ii) no spouse of any present or former
officer or director of Colonial, (iii) no shareholder owning five
percent or more of the outstanding Colonial Common Stock, (iv) no
child, parent, or sibling of any of the foregoing Persons, and
(v) no Person with respect to which any of the foregoing Persons
is an officer, director, partner, trustee or direct or indirect
beneficial owner of 10 percent or more of its equity interest, is
a party to (or has an interest in any property which is the
subject of) any contract, business arrangement or relationship of
any kind whatsoever with Colonial. For purposes of this
Agreement: (a) the term "Person" shall mean any individual,
corporation, partnership, association, joint venture, limited
liability company, trust or other organization or entity, and
(b) the term "Colonial Affiliate" shall mean the Persons
identified in clauses (i) through (v) of the preceding sentence.
All extensions of credit to Colonial Affiliates conform with all
applicable laws and regulations and no such extension of credit
is in default or has been in default, restructured, modified or
extended during the three year period preceding the date of this
Agreement, except for: (i) a loan to Directors Limited
identified in Schedule I, and (ii) a loan to Robert J. Belon in
the principal amount of approximately $106,000, the details of
which have been fully disclosed to Sovereign.
Section 2.23 No Finder. Except with respect to its
engagement of Ryan, Beck & Co., Colonial has not paid or become
obligated to pay any fee or commission of any kind whatsoever to
any investment banker, broker, finder or other intermediary for,
on account of or in connection with the transactions contemplated
in this Agreement. A true, complete and accurate copy of the
engagement letter entered into by Colonial with Ryan, Beck & Co.
(including all amendments thereto) has been delivered to
Sovereign.
Section 2.24 Significant Customers. All significant
customers of Colonial are identified in Schedule I. For purposes
of this Agreement, a "significant customer" shall mean any
customer which as of February 28, 1995 had in the aggregate:
(i) outstanding loans in the amount of $250,000 or more, or
(ii) deposits in the amount of $200,000 or more. There has been
no material change in the identity of the significant customers
of Colonial or in the composition of these loans and/or, to the
best of Colonial's knowledge, deposits since February 28, 1995.
Section 2.25 Environmental Matters. For purposes of
this Agreement, the term "Environmental Laws" shall mean any
federal, state, local or foreign law, statute, ordinance, rule,
regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with
any Regulatory Authority relating to: (i) the protection,
preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (ii) the use,
storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal
of any substance presently listed, defined, designated or
classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, whether by type or by quantity, including
any material containing any such substance as a component. To
the knowledge of Colonial, neither Colonial nor any property
owned or operated by Colonial (including other real estate owned)
or any property which serves as collateral for any loan held by
Colonial has been or is in violation of or liable under any
Environmental Law, except for such violations or liabilities
that, individually or in the aggregate, would not have a material
adverse effect on the assets, business, financial condition or
results of operation of Colonial. There are no actions, suits or
proceedings, or demands, claims, notices or investigations
(including without limitation notices, demand letters or requests
for information from any environmental agency) instituted or
pending, or, to the knowledge of Colonial, threatened relating to
the liability of any property owned or operated by Colonial
(including other real estate owned) or any property which serves
as collateral for any loan held by Colonial under any
Environmental Law.
Section 2.26 Allowance for Loan Losses. The allowance
for loan losses reflected in the Colonial Regulatory Reports and
shown on the balance sheets included in the Colonial Financial
Statements are (and in the case of allowances reflected in
subsequently prepared reports and financial statements, will be)
adequate, in accordance with the requirements of generally
accepted accounting principles and all applicable regulatory
criteria. No regulatory authority has requested Colonial to
increase the allowance for loan losses since January 1, 1995.
Section 2.27 Deleted.
Section 2.28 Complete and Accurate Disclosure.
Neither this Agreement nor any financial statement, schedule
(including, without limitation, Schedule I), certificate, or
other statement or document delivered (or to be delivered) by
Colonial to Sovereign in connection herewith contains (or will
contain) any untrue statement of a material fact or omits (or
will omit) to state a material fact necessary to make the
statements contained herein or therein (considered as a whole)
not misleading. As of the date of this Agreement, there are no
material facts known to Colonial which materially adversely
affect, or which may in the future materially adversely affect,
the assets, liabilities, business, financial condition, results
of operations or future prospects of Colonial which have not been
previously disclosed by Colonial to Sovereign in writing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SOVEREIGN
Sovereign represents and warrants to Colonial, as of
the date of this Agreement and as of the date of the Closing, as
follows:
Section 3.1 Organization and Standing. Sovereign is a
Pennsylvania corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Pennsylvania.
Sovereign is duly registered as a savings and loan holding
company under the Home Owners Loan Act of 1933, as amended.
Sovereign has full power and lawful authority to own and hold its
properties and to carry on its present business.
Section 3.2 Authority. Sovereign has full corporate
power and authority to execute and deliver this Agreement and,
subject to the receipt of all required regulatory approvals (and
compliance with any conditions contained therein), to consummate
the transactions contemplated herein. The execution and delivery
of this Agreement and the consummation of the transactions
contemplated herein have been authorized and approved by the
Board of Directors of Sovereign and no other corporate action on
its part is necessary to authorize this Agreement or the
consummation of the transactions contemplated herein. This
Agreement has been duly executed and delivered by and, assuming
due authorization, execution and delivery by Colonial,
constitutes a valid and binding obligation of Sovereign,
enforceable against Sovereign in accordance with its terms,
subject to applicable bankruptcy, insolvency, conservatorship,
receivership and similar laws affecting creditors' rights
generally and subject to the application of equitable principles.
Section 3.3 No Violation. Subject to the receipt of
all required regulatory approvals (and compliance with any
conditions contained therein), the execution, delivery and
performance of this Agreement and the consummation of the
transactions contemplated herein will not: (i) violate or
conflict with any provision of the Articles of Incorporation or
bylaws of Sovereign, (ii) violate, conflict with, or constitute a
default, however defined (or be an event which, with or without
due notice or lapse of time, or both, would constitute such a
default) under, or cause or permit the acceleration of any
contract, note, bond, mortgage, indenture, license, lease or
other instrument, agreement or commitment to which Sovereign is a
party or by which Sovereign or any of its properties are bound,
or (iii) violate any statute, rule, regulation, ordinance,
judgment, order or decree applicable to Sovereign or by which
Sovereign or any of its properties is bound; except, however, in
the case of clauses (ii) and (iii) for such violations, defaults,
conflicts, accelerations, and terminations as would not,
individually or in the aggregate, materially adversely affect the
financial condition of Sovereign or its ability to perform its
obligations under this Agreement.
Section 3.4 Financial Statements.
(a) Financial Statements. For purposes of this
Agreement, the term "Sovereign Financial Statements" shall mean:
(i) the financial statements of Sovereign at and for the year
ended December 31, 1994 as certified by Ernst & Young, and
(ii) the unaudited financial statements of Sovereign for each
calendar quarter following the date of this Agreement included in
the Quarterly Reports on Form 10-Q to be filed by Sovereign with
the SEC. Sovereign has previously delivered, or will deliver, to
Colonial the Sovereign Financial Statements. The Sovereign
Financial Statements have been (and in the case of subsequently
prepared financial statements, will be) prepared in accordance
with generally accepted accounting principles consistently
applied during the periods involved and fairly present (and in
the case of subsequently prepared financial statements will
fairly present) the financial condition, results of operations,
cash flows and changes in shareholder's equity of Sovereign at
their respective dates and for the respective periods then ended
in accordance with generally accepted accounting principles
consistently applied.
(b) Absence of Undisclosed Liabilities. As of
the date of each balance sheet included in the Sovereign
Financial Statements, Sovereign did not have (and in the case of
subsequently prepared financial statements, will not have) any
liabilities (whether accrued, absolute, contingent or otherwise)
which are required to be reflected, noted or reserved against
therein under generally accepted accounting principles or which
are in any case or in the aggregate material, except as
reflected, noted or adequately reserved against therein.
Section 3.5 Absence of Changes. Since December 31,
1994, Sovereign has conducted its business in the regular and
ordinary course and has not undergone any change in condition
(financial or otherwise), assets, liabilities, business or
operations, other than changes in the ordinary course of business
consistent with past practice which have not been, either in any
case or in the aggregate, materially adverse.
Section 3.6 Liquidity. Sovereign will on the date of
the Closing have adequate liquidity to perform its obligations
under Sections 7.2 and 7.3 of the Plan of Merger attached hereto
as Exhibit A.
Section 3.7 No Finder. Sovereign has not paid or
become obligated to pay any fee or commission of any kind
whatsoever to any investment banker, broker, finder or other
intermediary for, on account of or in connection with the
transactions contemplated in this Agreement.
ARTICLE IV
COVENANTS OF COLONIAL
From the date of this Agreement until the earlier of
the Effective Date or the termination of this Agreement in
accordance with the terms of Section 7.01 below, Colonial agrees
to do the following:
Section 4.01 Conduct of Business.
(a) Ordinary Course. From the date of this
Agreement to the date of the Closing, Colonial will conduct its
business and engage in transactions only in the ordinary course
and consistent with past practice, except as otherwise required
by this Agreement or with the written consent of Sovereign.
Colonial will use its reasonable best efforts to: (i) preserve
its business organization intact, (ii) maintain good
relationships with its employees, and (iii) preserve the goodwill
of its customers and others with whom business relationships
exist.
(b) Certain Negative Covenants. Without
limitation of the covenants set forth in Section 4.01(a) above,
from the date hereof to the date of the Closing, except as
otherwise consented to or approved by Sovereign in writing or as
permitted or required by this Agreement, Colonial will not:
(i) change any provision of its Articles of
Incorporation or bylaws;
(ii) change the number of authorized or
issued shares of its capital stock or issue or grant any
option, warrant, call commitment, subscription, right or
agreement of any kind relating to its authorized or issued
capital stock or any securities convertible into shares of
such stock, combine or reclassify any shares of capital
stock, or declare, set aside or pay any dividend or other
distribution in respect of capital stock, or redeem or
otherwise acquire any shares of capital stock;
(iii) grant any severance or termination pay
to, or enter into or amend any employment agreement with,
any employee, officer or director of Colonial, or increase
the rate of compensation of any officer, director or
employee of Colonial;
(iv) merge or consolidate Colonial with any
other entity; sell or lease all or any substantial portion
of the assets or business of Colonial; make any acquisition
of all or any substantial portion of the business or assets
of any other person, firm, association, corporation or
business organization other than in connection with the
collection of a loan or credit arrangement; enter into a
purchase and assumption transaction with respect to its
deposits and liabilities; revoke or surrender any
certificate of authority to maintain, or file an application
for the relocation of, any existing branch office, or file
an application for a certificate of authority to establish a
new branch office;
(v) sell or otherwise dispose of any asset,
other than in the ordinary course of business consistent
with past practice; subject any asset of Colonial to a lien,
pledge, security interest or other encumbrance, other than
in the ordinary course of its banking business consistent
with past practice; modify in any material respect the
manner in which Colonial has heretofore conducted its
business or enter into any new line of business; incur any
indebtedness for borrowed money (or guarantee any
indebtedness for borrowed money), except in the ordinary
course of its banking business consistent with past
practice;
(vi) take any action which would result in
any of the representations and warranties of Colonial set
forth in this Agreement becoming untrue after the date
hereof or any of the conditions set forth in Article V
hereof not being satisfied;
(vii) change any method, practice or
principle of accounting; or change any assumption
underlying, or any method of calculation of, depreciation of
any type of asset or establishment of any reserve, except at
the request of Sovereign pursuant to Section 4.14 below and
except as may be required by any change in generally
accepted accounting principles;
(viii) waive, release, grant or transfer any
rights of value or modify or change in any material respect
any existing agreement to which Colonial is a party, other
than in the ordinary course of business consistent with past
practice;
(ix) establish any new pension, retirement,
profit sharing, bonus, welfare benefit or similar plan or
arrangement or amend any such existing plan or arrangement,
except for such amendments as may be required by law;
(x) make any new loan or other credit
facility commitment (including, without limitation, lines of
credit and letters of credit) to: (A) any borrower or group
of affiliated borrowers in excess of $250,000 in the
aggregate, or (B) any Colonial Affiliate;
(xi) compromise, extend or restructure any
loan with an unpaid principal balance exceeding $250,000,
provided, however, that Sovereign agrees that it may
withhold its consent to any such compromise, extension or
restructuring only for reasons relating to credit
considerations specifically applicable to the loan involved;
(xii) sell, exchange or otherwise dispose of
any investment securities or loans held for sale in an
amount in excess of $100,000;
(xiii) purchase any security for its
investment portfolio not rated "A" or higher by both
Standard & Poor's Corporation or Moody's Investor Services,
Inc.;
(xiv) offer, issue any commitment for, or
approve any loan or other credit facility, except in the
ordinary course of business and at rates and on terms and
conditions which are consistent with past practice;
(xv) originate deposits, except in the
ordinary course of business and at rates and on other terms
and conditions which are consistent with past practice;
(xvi) make any loan or other credit facility
commitment (including without limitation, lines of credit
and letters of credit) to any Colonial Affiliate or
compromise, extend, renew (other than the renewal of a home
equity line of credit which is secured by a first mortgage
lien and which has a loan to value ratio of not more than
50%) or modify any such existing loan or commitment;
provided, however, that Sovereign shall not unreasonably
withhold its consent;
(xvii) enter into, renew, extend or modify
any other transaction with any Colonial Affiliate;
(xviii) enter into or assume any material
contract or commitment, except in the ordinary course of
business consistent with past practice;
(xix) take any action which would adversely
affect the ability of Sovereign or Colonial to obtain any
regulatory approval required in order to consummate the
transactions contemplated in this Agreement;
(xx) make any capital expenditure of $10,000
or more;
(xxi) enter into any contract or commitment
(other than in the ordinary course of extending credit to
customers as part of its banking business) involving an
unbudgeted expense of $10,000 or more or involving a
material financial commitment which extends beyond six
months from the date hereof;
(xxii) elect or appoint any person to its
Board of Directors who is not a director on the date of this
Agreement; or
(xxiii) agree to do any of the foregoing.
(c) Certain Affirmative Covenants. Without
limitation of the covenants set forth in Section 4.01(a) above,
from the date hereof to the date of the Closing, except as
otherwise consented to or approved by Sovereign in writing or as
permitted or required by this Agreement, Colonial will:
(i) maintain all furniture, fixtures,
equipment and improvements to real estate in good condition
and repair, except for ordinary wear and tear and damage by
unavoidable casualty;
(ii) maintain all insurance policies in
effect;
(iii) perform all of its obligations under
all material agreements, contracts and other commitments to
which it is a party or by which it or any of its assets are
bound;
\DMS maintain its books of accounts and
other records in the ordinary course consistent with past
practice; and
(v) comply with all statutes, laws,
ordinances, rules and regulations applicable to it and/or to
the conduct of its business.
Section 4.02 Best Efforts. Colonial shall cooperate
with Sovereign and shall use its reasonable best efforts to do or
cause to be done all things necessary or appropriate on its part
in order to consummate the transactions contemplated by this
Agreement.
Section 4.03 Access and Confidentiality.
(a) Access. From the date of this Agreement
through the date of the Closing, Colonial shall afford to
Sovereign and its authorized agents and representatives
reasonable access during normal business hours to its properties,
books and records and personnel and Colonial shall make available
to Sovereign and its authorized agents and representatives all
such financial and operating data and other information relating
to Colonial and its business, properties, assets, liabilities and
personnel as they may from time to time reasonably request.
(b) Confidentiality. In the event of the
termination of this Agreement, Sovereign shall return or destroy
(and deliver to Colonial an affidavit of destruction) all
documents and records obtained by it from Colonial and will
maintain the confidentiality of all information relating to
Colonial obtained by it pursuant to this Agreement, except to the
extent that such information becomes public through no fault of
Sovereign and except to the extent that disclosure of any such
information is legally required.
Section 4.0Regulatory Reports. Colonial shall promptly deliver to
Sovereign all Colonial Financial Statements and all Colonial Regulatory
Reports required to be prepared by it subsequent to the date of
this Agreement. In addition, Colonial agrees to deliver to
Sovereign all such other reports and other documents normally
prepared by Colonial which relate to its assets, liabilities or
otherwise to the conduct of its business as Sovereign may from
time to time reasonably request.
Section 4.05 Update of Schedule I and Notice.
(a) Update of Schedule I. Colonial shall update
Schedule I as promptly as possible after the occurrence of any
event or fact which, if such event or fact had occurred prior to
the date of this Agreement, would have been disclosed on
Schedule I. The delivery of any update to Schedule I by Colonial
shall not relieve Colonial from liability for any breach or
violation of this Agreement.
(b) Notice. Without limitation of the foregoing,
Colonial shall promptly notify Sovereign in writing of any
action, claim, investigation or other development which, if
pending or in existence on the date of this Agreement, would have
been required to be disclosed to Sovereign to assure the accuracy
of the representations and warranties set forth in this Agreement
or which otherwise materially affects the assets, liabilities,
business, financial condition or results of operation of Colonial
or its ability to perform its obligations under this Agreement.
Section 4.06 Consents. Colonial shall obtain in
writing all such consents, waivers and other documents
contemplated under Section 2.14(b) from third parties that may be
required in order to consummate the transactions contemplated in
this Agreement.
Section 4.07 Deleted.
Section 4.08 Regulatory Applications. Colonial shall,
with the cooperation and assistance of Sovereign, promptly
prepare and file with the NJDOB, with the FDIC and with all other
relevant regulatory authorities all notices and applications
necessary in order to secure (and use its best efforts to secure
as promptly as possible) all regulatory approvals and consents
required to be obtained or filed by it in order to consummate the
transactions contemplated in this Agreement. All such notices
and applications shall be subject to review by and the approval
of Sovereign prior to filing, which approval shall not be
unreasonably withheld or delayed.
Section 4.09 Shareholder Approval. Colonial agrees to
hold a special meeting of its shareholders (the "Special
Meeting") as soon as practicable in order to obtain shareholder
approval of the Merger. Colonial agrees to cause its Board of
Directors to recommend to the shareholders that the Merger be
approved. Colonial further agrees to prepare and distribute to
its shareholders a proxy statement (the "Proxy Statement") in
connection with the Special Meeting in accordance with all
applicable laws and regulations, which proxy statement shall not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements contained
therein, in light of the circumstances under which made, not
misleading.
Section 4.10 Fairness of Opinion. Colonial shall use
its reasonable best efforts to obtain a written opinion from Ryan
Beck & Co. (or, in the event that Ryan Beck & Co. is for any
reason unable or unwilling to deliver the required opinion, from
another reputable investment banking firm engaged on terms and
conditions reasonably satisfactory to Sovereign) as to the
fairness of the Merger to the shareholders of Colonial from a
financial point of view, which opinion shall be dated a date not
more than ten (10) business days and not less than five
(5) business days prior to the date of mailing of the Proxy
Statement and shall be included in the Proxy Statement.
Section 4.11 Reserves and Accruals. Immediately prior
to the Closing, Colonial shall establish such additional accruals
and reserves as Sovereign may request in order to conform
Colonial's accounting reserve practices and methods (including
credit loss practices and methods) to those of Sovereign and its
subsidiaries and otherwise to reflect the expenses and costs
incurred by Colonial in connection with the consummation of this
Agreement.
Section 4.12 Financial Statement Review. If requested
to do so by Sovereign, Colonial shall at Sovereign's expense
cause KPMG Peat Marwick to perform a review of Colonial's
unaudited financial statements as of the end of a calendar
quarter designated by Sovereign in accordance with Statement of
Auditing Standards No. 36 and to issue their report hereon as
soon as practicable thereafter.
Section 4.13 No Other Bids. Colonial shall not, nor
shall it permit any officer, director, or employee of Colonial,
or any investment banker, attorney, accountant or other
representative retained by Colonial to, directly or indirectly,
solicit, encourage, initiate or engage in discussions or
negotiations with, or respond to requests for information,
inquiries, or other communications from, any person other than
Sovereign concerning the fact of, or the terms and conditions of,
this Agreement, or concerning any acquisition of Colonial, or any
assets or business of Colonial (except that Colonial's officers
may respond to inquiries from regulatory authorities and holders
of Colonial Common Stock in the ordinary course of business).
Colonial shall notify Sovereign immediately if any such
discussions or negotiations are sought to be initiated with
Colonial by any person other than Sovereign or if by such
requests for information, inquiries, proposals or communications
are received from any person other than Sovereign.
Notwithstanding the foregoing, Colonial, after written notice to
Sovereign, may respond to unsolicited inquiries from third
parties and/or engage in discussions with third parties if, in
each case Colonial shall have received a written opinion, from
Independent Counsel, to be selected by Colonial and approved by
Sovereign, to the effect that consummation of the Merger
constitutes a clear breach or failure on the part of the Board of
Directors of Colonial to perform the duties of their office, and
that such breach constitutes actionable misconduct for which a
majority of such directors are liable under New Jersey law. For
purposes of this Agreement, the term "Independent Counsel" shall
mean a law firm which is experienced in matters involving the
fiduciary duties of directors and which has not within the
preceding five years been engaged to represent Colonial or any
director or officer of Colonial.
Section 4.14 Park Avenue Real Estate.
(a) Background. Sovereign acknowledges that
Colonial has sought regulatory approval from the NJDOB for a
transaction (the "Real Estate Transaction") under which it will
cause the Colonial Subsidiary to purchase: (i) from Colonial the
fee interest in the real estate located at 521 Park Avenue,
Freehold, New Jersey, and (ii) from Directors Limited, a joint
venture, the improvements thereon erected. Colonial has provided
to Sovereign a true, complete and accurate copy of the
regulatory application filed with the NJDOB in connection with
the Real Estate Transaction and all correspondence relating
thereto (the "Application"). The Application completely and
accurately describes the terms of the Real Estate Transaction and
includes true, complete and accurate copies of all agreements,
loan commitments, appraisals and other documents and instruments
(including all amendments thereto) relating to the Real Estate
Transaction.
(b) Consents and Approvals. Colonial shall not
consummate the Real Estate Transaction: (i) without the prior
written consent of Sovereign, (ii) without the written approval
of the NJDOB, and (iii) except in strict compliance with the
terms and conditions of the approval of the NJDOB. Sovereign
agrees that it will consent to the Real Estate Transaction,
provided that: (i) the Real Estate Transaction is approved by
the NJDOB and such approval contains no terms or conditions which
Sovereign reasonably determines in the exercise of its sole
discretion to be burdensome or otherwise unacceptable, and
(ii) the financial and other terms of the Real Estate Transaction
are not amended, waived or otherwise changed in any material
respect from those set forth in the Application, and (iii) the
agreements of sale, mortgage, mortgage note, title policy, lease
and other documents pursuant to which the Real Estate Transaction
is consummated are in form and substance usual, reasonable and
customary for a transaction of that kind.
(c) No Violation of Other Covenants. No action
taken by Colonial for purposes of consummating the Real Estate
Transaction in accordance with the terms of and as contemplated
by this Section 4.14 shall constitute a breach of any covenant
set forth in any other Section of this Article IV.
Section 4.15 Miscellaneous.
(a) Environmental Audit. Colonial agrees to
permit Sovereign, at Sovereign's expense and if Sovereign elects
to do so, to cause a Phase I and/or a Phase II environmental
audit to be performed at any real property owned or occupied by
Colonial (including other real estate owned) and at any property
which serves as collateral for any loan held by Colonial.
Sovereign agrees to deliver to Colonial a copy of any report it
may receive in connection with any such environmental audit.
(b) Board of Director Meetings. Colonial agrees
that a representative of Sovereign shall be permitted to attend:
(i) all meetings of the Board of Directors of Colonial, (ii) all
meetings of the executive committee of the Board of Directors of
Colonial, and (iii) all senior management level meetings of
Colonial involving policy matters or significant business
decisions; provided, however, that Sovereign acknowledges that
its representative will be asked to leave any meeting during any
discussion of matters relating to this Agreement. Colonial
agrees to provide Sovereign with at least 48 hour's advance
written or oral notice of any such meeting, except that in the
case of an emergency meeting, Colonial shall provide the same
notice to Sovereign as it provides to its own directors and/or
officers.
Section 4.16 Colonial D&O Insurance. Colonial has
advised Sovereign that it has the ability to purchase a six year
policy of director and officer liability "tail" coverage
insurance on terms and conditions previously disclosed to
Sovereign at an aggregate cost which does not exceed $65,000.
Colonial shall take all such steps as may be necessary or
appropriate to purchase such policy of "tail" coverage insurance
immediately before the Effective Date, provided that the cost of
such policy does not exceed $65,000.
ARTICLE V
COVENANTS OF SOVEREIGN
From the date of this Agreement until the earlier of
the Effective Date or the termination of this Agreement in
accordance with the terms of Section 7.01 below, Sovereign
covenants and agrees to do the following:
Section 5.01 Best Efforts. Sovereign shall cooperate
with Colonial and shall use its reasonable best efforts to do or
cause to be done all things necessary or appropriate on its part
in order to consummate the transactions contemplated in this
Agreement.
Section 5.02 Interim Banks. Sovereign shall promptly
take all steps necessary or appropriate in order to organize
Interim Bank and Interim Bank II and shall cause Interim Bank and
Interim Bank II to take all actions which are necessary or
appropriate in order to effectuate the purposes of this
Agreement, including, without limitation, the Merger, the Charter
Conversion and the Second Merger.
Section 5.03 Regulatory Notices and Applications.
Sovereign shall promptly prepare and file all required notices
and applications required to be filed by it and by Interim Bank
and Interim Bank II for regulatory approval of the transactions
contemplated by this Agreement (which notices and applications
Sovereign will endeavor to file not later than April 30, 1995)
and shall use its reasonable best efforts to obtain such
approvals as promptly as possible.
Section 5.04 Management Following the Merger.
(a) Board of Directors. The Board of Directors
of Colonial following the Merger shall consist of: (i) those
persons who are members of Colonial's Board of Directors
immediately prior to the Merger, each of whom shall serve after
the Merger at the pleasure of Sovereign and until his successor
is elected and has qualified, and (ii) such additional persons as
Sovereign in its discretion may cause to be elected or appointed
to the Board of Directors. Notwithstanding the foregoing,
Sovereign agrees that each of the persons identified below shall
serve as a member of the Board of Directors of Colonial following
the Effective Date for the period indicated below opposite his
name, unless he resigns, dies or is removed from office for
cause:
Period of Service After
Name of Director the Effective Date
Charles P. Kaempffer 3 Years
Eli Kramer 3 Years
David I. Weiner 3 Years
Robert J. Belon 2 Years
Anthony R. Coppola 2 Years
Robert L. Coutts 2 Years
H. Daniel Harris 1 Year
Robert M. Kaye 1 Year
Charles R. Miller 1 Year
Each person identified above shall be free to resign as a
director at any time.
(b) Laine Employment Contract and Amendment.
Colonial has provided to Sovereign a true, complete and accurate
copy of an Employment Contract dated November 16, 1993, including
all amendments thereto (the "Employment Contract"), entered into
by and between Colonial and Stephen S. Laine ("Laine") under the
terms of which Colonial engaged Laine to serve as its President
and Chief Executive Officer for a three year period expiring on
November 15, 1996, subject, among other things, to the right of
Colonial to terminate such employment at any time, with or
without cause. Colonial has in all material respects performed
all obligations required to be performed by it under the
Employment Contract and is not in default in any material respect
under the Employment Contract. Colonial has also provided to
Sovereign a true, complete and accurate copy of an Agreement
dated March 20, 1995, including all amendments thereto (the
"Agreement"), entered into by and between Colonial and Laine
which, among other things, becomes effective on the Effective
Date and, upon becoming effective, supersedes the Employment
Contract in its entirety. The execution and delivery of the
Agreement and the consummation of the transactions contemplated
therein have been authorized and unanimously approved by the
Board of Directors of Colonial. The Agreement has been duly
executed and delivered by Colonial and by Laine and constitutes a
valid and binding obligation of Laine, enforceable against Laine
in accordance with its terms.
Section 5.05 Employees and Employee Benefits. It is
Sovereign's present intention to retain substantially all of the
officers and employees of Colonial following the Merger, with
appropriate changes in title so as to be consistent with
Sovereign's management and employee structure. It is Sovereign's
present intention to provide to the employees of Colonial
following the Merger the standard employee benefits package which
Sovereign then makes available to its employees and to the
employees of its subsidiaries. Employees of Colonial following
the Merger shall be entitled to full credit for each year of
service with Colonial for purposes of the eligibility and vesting
provisions of Sovereign's employee benefit plans, but not for
purposes of benefit accrual. Sovereign agrees that Colonial's
existing severance policy (as reflected in the minutes of the
November 17, 1994 meeting of the Board of Directors of Colonial)
will be applicable to any Colonial employee whose employment is
terminated (or who resigns because he is required to work at a
location which is more than 20 miles from Freehold, New Jersey or
because his annual salary or hourly rate of pay is reduced)
within six months following the Merger, provided that such
employee is otherwise entitled to receive benefits under that
policy in accordance with its terms. Nothing herein shall be
construed to limit in any way or prohibit the right of Sovereign
following the Merger to cause Colonial to amend or terminate any
Colonial employee benefit plan, except that Sovereign agrees that
it will honor Colonial's existing severance policy as and to the
extent contemplated in the fourth sentence of this Section.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Conditions to Colonial's Obligations
under this Agreement. The obligations of Colonial hereunder
shall be subject to satisfaction at or prior to the Closing of
each of the following conditions, unless waived by Colonial
pursuant to Section 8.03 hereof:
(a) Corporate Proceedings. All actions required
to be taken by, or on the part of, Sovereign and Interim Bank to
authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
hereby, shall have been duly and validly taken and Colonial shall
have received certified copies of the resolutions evidencing such
authorizations;
(b) Covenants and Representations. The
obligations of Sovereign required by this Agreement to be
performed by Sovereign at or prior to the Closing shall have been
duly performed and complied with in all material respects and the
representations and warranties of Sovereign set forth in this
Agreement shall be true and correct in all material respects, as
of the date of this Agreement and as of the Closing, as though
made on and as of the Closing, except: (i) as to any
representation or warranty which specifically relates to an
earlier date, or (ii) where the facts which cause the failure of
any representation or warranty to be so true and correct would
not, either individually or in the aggregate, constitute a
material adverse change in the assets, liabilities, business,
financial condition or results of operations of Sovereign and its
subsidiaries taken as a whole;
(c) Approvals of Regulatory Authorities. The
approval or authorization of each federal and state regulatory
authority required in connection with the transactions
contemplated hereby, including without limitation the approval of
the OTS and the NJDOB, shall have been obtained, and all notice
and waiting periods required thereunder shall have expired or
been terminated;
(d) No Injunction. There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(e) No Material Adverse Change. Since
December 31, 1994, there shall not have occurred any material
adverse change in the consolidated assets, consolidated financial
condition or consolidated results of operations of Sovereign and
its subsidiaries taken as a whole;
(f) Officer's Certificate. Sovereign shall have
delivered to Colonial a certificate, dated the date of the
Closing and signed, without personal liability, by its president
or by a vice president, to the effect that the conditions set
forth in Subsections (a) through (e) of this Section 6.01 have
been satisfied, to the best knowledge of the officer executing
the same;
(g) Opinion of Sovereign's Counsel. Colonial
shall have received an opinion of Stevens & Lee, counsel to
Sovereign, dated the date of the Closing, in form and substance
reasonably satisfactory to Colonial and its counsel to the effect
set forth on Exhibit B attached hereto; and
(h) Approval of Colonial's Shareholders. This
Agreement (including the Plan of Merger) shall have been approved
by the shareholders of Colonial by such vote as is required under
New Jersey law and by Colonial's Articles of Incorporation and
bylaws.
Section 6.02 Conditions to Sovereign's Obligations
under this Agreement. The obligations of Sovereign hereunder
shall be subject to satisfaction at or prior to the Closing of
each of the following conditions, unless waived by Sovereign
pursuant to Section 8.01 hereof:
(a) Corporate Proceedings. All action required
to be taken by, or on the part of, Colonial to authorize the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, shall have
been duly and validly taken by Colonial and Sovereign shall have
received certified copies of the resolutions evidencing such
authorizations;
(b) Covenants; Representations. The obligations
of Colonial required by this Agreement to be performed by it at
or prior to the Closing shall have been duly performed and
complied with in all material respects and the representations
and warranties of Colonial set forth in this Agreement shall be
true and correct in all material respects, as of the date of this
Agreement and as of the Closing, as though made on and as of the
Closing, except: (i) as to any representation or warranty which
specifically relates to an earlier date, or (ii) where the facts
which cause the failure of any representation or warranty to be
so true and correct would not, either individually or in the
aggregate, constitute a material adverse change in the assets,
liabilities, business, financial condition or results of
operations of Colonial.
(c) Approvals of Regulatory Authorities. The
approval or authorization of each federal and state regulatory
authority required in connection with the transactions
contemplated hereby, including without limitation the approvals
of the OTS and the NJDOB, shall have been obtained without the
imposition of any term or condition that Sovereign determines in
good faith and in the exercise of its reasonable discretion to be
unacceptable, and all notice and waiting periods required
thereunder shall have expired or been terminated;
(d) No Litigation. There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby and there shall be no material
suit, action, or other proceeding threatened or pending before
any court or governmental agency seeking monetary damages or
other relief against Colonial in connection with this Agreement
or otherwise;
(e) No Material Adverse Change. Since
December 31, 1994, there shall not have occurred any material
adverse change in the assets, liabilities, business, financial
condition or results of operations of Colonial (For purposes of
this Subsection (e), no "material adverse change" shall be deemed
to have occurred solely by reason of any increase by Colonial in
its allowance for loan losses, to the extent that such increase
is effected at the request of Sovereign pursuant to Section 4.11
of this Agreement.);
(f) Approval of Colonial's Shareholders. This
Agreement (including the Plan of Merger) shall have been approved
by the shareholders of Colonial by such vote as is required under
New Jersey law and by Colonial's Articles of Incorporation and
bylaws;
(g) Officer's Certificate. Colonial shall have
delivered to Sovereign a certificate, dated the date of the
Closing and signed, without personal liability, by its chairman
of the board or president, to the effect that the conditions set
forth in Subsections (a) through (f) of this Section 6.02 have
been satisfied, to the best knowledge of the officer executing
the same;
(h) Interim Bank II, Charter Conversion and
Second Merger. Interim Bank II shall have been duly organized,
all regulatory approvals shall have been obtained, and all other
actions shall have been taken which are required in order to
effect the Charter Conversion and the Second Merger immediately
following the Merger.
(i) Tax Opinion. Sovereign shall have received
an opinion of Stevens & Lee, counsel to Sovereign, substantially
to the effect set forth on Exhibit C attached hereto;
(j) Opinion of Colonial's Counsel. Sovereign
shall have received an opinion of counsel to Colonial dated the
date of the Closing in form and substance reasonably satisfactory
to Sovereign and its counsel to the effect set forth on Exhibit D
attached hereto;
(k) Comfort Letter. If requested by Sovereign,
Sovereign shall have received, at Sovereign's expense, a
"comfort" letter from KPMG Peat Marwick dated shortly prior to
the Effective Date, covering such matters as are usual and
customary for transactions of the type contemplated by this
Agreement, which letter shall be reasonably satisfactory in form
and substance to Sovereign;
(l) Dissenters' Rights. The holders of fewer
than 26,945 shares of Colonial Common Stock shall have timely
served written notice of dissent upon Colonial.
ARTICLE VII
TERMINATION
Section 7.01 Termination. This Agreement may be
terminated on or at any time prior to the Closing, as follows:
(a) Mutual Consent. This Agreement may be
terminated at any time by the mutual written consent of the
parties hereto.
(b) Unilateral Action by Sovereign. This
Agreement may be terminated unilaterally by Sovereign upon
written notice given to Colonial:
(i) Material Breach. At any time if there
shall have been any material breach of this Agreement by
Colonial and such breach cannot be, or shall not have been,
remedied within 30 days after receipt by Colonial of notice
in writing specifying the nature of such breach and
requesting that it be remedied;
(ii) Environmental Matters. At any time
prior to the expiration of 60 days after the date of this
Agreement if Sovereign reasonably determines in its sole
discretion that the results of any environmental audit(s)
performed by it pursuant to Section 4.15(a) above reflect so
adversely upon the assets, liabilities, business, financial
condition or results of operations of Colonial that
Sovereign concludes that it would be inadvisable for
Sovereign to consummate this Agreement;
(iii) Adverse Determination. At any time if
Sovereign reasonably determines in its sole discretion that
any change or development in state or federal law or
regulatory policy so adversely affects the legal,
regulatory, business and/or financial assumptions underlying
the transactions contemplated by this Agreement that
Sovereign concludes that it would be inadvisable for
Sovereign to consummate this Agreement;
(iv) Regulatory Disapproval. At any time if
either party has been informed in writing by a regulatory
authority whose approval or consent is required that such
approval or consent is unlikely to be granted, unless the
failure of such occurrence shall be due to the failure of
Sovereign to perform or observe its agreements set forth
herein required to be performed or observed by it on or
before the Closing; or
(v) Failure to Close. At any time if the
Closing shall not have occurred prior to November 15, 1995,
unless the failure of such occurrence shall be due to the
failure of Sovereign to perform or observe its agreements
set forth in this Agreement required to be performed or
observed by it on or before the Closing.
(c) Unilateral Action by Colonial. This
Agreement may be terminated unilaterally by Colonial upon written
notice given to Sovereign:
(i) Material Breach. At any time if there
shall have been any material breach of this Agreement by
Sovereign and such breach cannot be, or shall not have been,
remedied within 30 days after receipt by Sovereign of notice
in writing specifying the nature of such breach and
requesting that it be remedied;
(ii) Regulatory Disapproval. At any time if
either party has been informed in writing by a regulatory
authority whose approval or consent is required that such
approval or consent is unlikely to be granted, unless the
failure of such occurrence shall be due to the failure of
Colonial to perform or observe its agreements set forth
herein required to be performed or observed by it on or
before the Closing; or
(iii) Failure to Close. At any time if the
Closing shall not have occurred prior to November 15, 1995,
unless the failure of such occurrence shall be due to the
failure of Colonial to perform or observe its agreements set
forth in this Agreement required to be performed or observed
by it on or before the Closing.
Section 7.02 Effect of Termination.
(a) General. If this Agreement is terminated
pursuant to Section 7.01 hereof, this Agreement shall forthwith
become void (other than Section 4.03(b), Section 7.02(b),
Section 7.02(c), and Section 8.01 hereof, each of which shall
remain in full force and effect), and there shall be no further
liability on the part of Sovereign or Colonial to the other,
except for any liability of Sovereign or Colonial under
Section 4.03(b), Section 7.02(b), Section 7.02(c) and
Section 8.01 hereof and except for any liability arising out of a
breach of any covenant or other agreement contained in this
Agreement.
(b) Colonial Fee. If, within 18 months following
the date of termination of this Agreement by Sovereign pursuant
to Section 7.01(b)(i) on account of an unremedied material breach
by Colonial, a Person other than Sovereign or a subsidiary of
Sovereign, enters into a letter of intent or agreement with
Colonial pursuant to which such Person would: (i) merge or
consolidate, or enter into any similar transaction, with
Colonial, (ii) acquire all or substantially all of the assets of
Colonial, or (iii) acquire beneficial ownership of securities
representing, or the right to acquire beneficial ownership or to
vote securities representing, 25% or more of the then outstanding
shares of Colonial Common Stock, and at such time, for any
reason, Sovereign is prohibited by a court or any government
authority from exercising the Sovereign Option or causing
Colonial to repurchase the Sovereign Option or Sovereign in its
sole discretion reasonably determines that it is otherwise unable
to exercise the Sovereign Option or cause Colonial to repurchase
the Sovereign Option, then Colonial shall immediately pay to
Sovereign a fee of $500,000, which fee shall constitute
reimbursement to Sovereign for its costs and expenses, including
legal fees and expenses, incurred in connection with this
Agreement and the transactions contemplated hereby. Nothing in
this Section 7.02(b) shall constitute a waiver or limitation, in
whole or in part, of any legal or equitable rights which
Sovereign may possess against Colonial relating to any breach by
Colonial of its obligations under this Agreement or under the
Sovereign Option Agreement or against any other Person relating
to this Agreement or to the Sovereign Option Agreement, or
relating to Sovereign's relationship with Colonial or for any act
or omission of any such Person, including any tortious
interference with this Agreement or with the Sovereign Option
Agreement or for otherwise wrongfully inducing or causing any
breach of any such agreement.
(c) Sovereign Fees.
(i) Breach by Sovereign. If this Agreement
is terminated by Colonial pursuant to Section 7.01(c)(i) on
account of an unremedied material breach by Sovereign, then
Sovereign shall immediately pay to Colonial a fee of
$500,000, which fee shall constitute reimbursement to
Colonial for its costs and expenses, including legal fees
and expenses, incurred in connection with this Agreement and
the transactions contemplated hereby. Nothing in this
Section 7.02(c)(i) shall constitute a waiver or limitation,
in whole or in part, of any legal or equitable rights which
Colonial may possess against Sovereign relating to any
breach by Sovereign of its obligations under this Agreement.
(ii) Adverse Determination by Sovereign. If
this Agreement is terminated by Sovereign pursuant to
Section 7.01(b)(iii), then Sovereign shall immediately pay
to Colonial a fee of $500,000. Upon payment of such fee,
Sovereign shall have no further obligations or liabilities
of any kind whatsoever to Colonial relating to this
Agreement or the transactions contemplated hereby, except
for any liability of Sovereign under Section 4.03(b) and
Section 8.01 hereof, and Colonial hereby covenants not to
sue Sovereign or any Person which is an affiliate of
Sovereign for any cause of action or claim of any kind
whatsoever relating to this Agreement or the transactions
contemplated hereby, whether such cause of action or claim
is at law or in equity and whether it involves an alleged
breach of contract, tort or otherwise.
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Expenses. Each party hereto shall bear
and pay all costs and expenses incurred by it in connection with
the transactions contemplated hereby, including fees and expenses
of its own financial consultants, accountants and counsel, except
as provided in Section 4.12 and except that Sovereign shall pay:
(i) one-half of the cost of printing and mailing the Proxy
Statement, up to $2,000, and (ii) the additional regulatory
application filing fees and legal and accounting fees, if any,
reasonably incurred by Colonial by reason of or relating to the
Charter Conversion and/or the Second Merger.
Section 8.02 Non-Survival of Representations and
Warranties. All representations, warranties and, except to the
extent specifically provided otherwise herein, agreements and
covenants shall terminate on the Effective Date.
Section 8.03 Amendment, Extension and Waiver. Subject
to applicable law, at any time prior to the Effective Date, the
parties may: (i) amend this Agreement, (ii) extend the time for
the performance of any of the obligations or other acts of either
party hereto, (iii) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered
pursuant hereto, or (iv) waive compliance with any of the
agreements or conditions contained herein. This Agreement may
not be amended except by an instrument in writing signed, by duly
authorized officers, on behalf of the parties hereto. Any
agreement on the part of a party hereto to any extension or
waiver shall be valid only if set forth in an instrument in
writing signed by a duly authorized officer on behalf of such
party, but such waiver or failure to insist on strict compliance
with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
Section 8.04 Public Announcements. The parties shall
agree upon the form and substance of any press release related to
this Agreement and the transactions contemplated hereby, and upon
the form and substance of other public disclosures related
thereto, including without limitation communications to Colonial
shareholders, Colonial internal announcements and customer
disclosures, but nothing contained herein shall prohibit either
party from making any disclosure which its counsel deems
necessary.
Section 8.05 Entire Agreement. This Agreement,
including the documents and other writings referred to herein or
delivered pursuant thereto, contains the entire agreement and
understanding of the parties with respect to its subject matter.
This Agreement supersedes all prior arrangements and
understandings between the parties, both written and oral with
respect to its subject matter. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors; provided, however, that nothing in this
Agreement, express or implied, is intended to confer upon any
party, other than the parties hereto and their respective
successors, any rights, remedies, obligations or liabilities of
any kind and no such person (including, without limitation, any
officer, director, employee or shareholder of Colonial) shall
have any right to initiate or maintain any suit or other action
for any breach or alleged breach of this Agreement or to enforce
any provision set forth herein.
Section 8.06 No Assignment. Neither party hereto may
assign any of its rights or obligations hereunder to any other
person, without the prior written consent of the other party
hereto.
Section 8.07 Notices. All notices or other
communications hereunder shall be in writing and shall be deemed
given if delivered personally, mailed by prepaid registered or
certified mail (return receipt requested), or sent by telecopy,
addressed as follows:
(a) If to Sovereign, to:
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
P.O. Box 37
Reading, Pennsylvania 19603
Attention: Richard A. Elko, Corporate
Controller and Development
Officer
Telecopy No.: (610) 320-8448
with a copy to:
Stevens & Lee
607 Washington Street
Reading, Pennsylvania 19601
Attention: Joseph M. Harenza, Esquire
and
Clinton W. Kemp, Esquire
Telecopy No.: (610) 376-5610
(b) If to Colonial to:
Colonial State Bank
521 Park Avenue
Freehold, New Jersey 07728
Attention: Eli Kramer,
Chairman of the Board
Telecopy No.: (908) 780-4948
with a copy to:
Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, New Jersey 07095
Attention: Norman Peer, Esquire
Telecopy No.: (908) 855-6117
Section 8.08 Captions. The captions contained in this
Agreement are for reference purposes only and are not part of
this Agreement.
Section 8.09 Counterparts. This Agreement may be
executed in any number of counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
Section 8.10 Severability. If any provision of this
Agreement or the application thereof to any person or
circumstance shall be invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such
provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent
permitted by law.
Section 8.11 Governing Law. This Agreement shall be
governed by and construed in accordance with the domestic
internal law (without reference to its law of conflicts of law)
of the Commonwealth of Pennsylvania, except to the extent that
matters relating to the Merger may be governed by the laws of the
United States of America or, in the absence of controlling
federal law, by the domestic internal law (without reference to
its law of conflicts of law) of the State of New Jersey.
IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed by their duly authorized officers as of
the day and year first above written.
SOVEREIGN BANCORP, INC.
(CORPORATE SEAL) By: /s/ Jay S. Sidhu
Jay S. Sidhu,
President
Attest:/s/ Lawrence M. Thompson, Jr.
Lawrence M. Thompson, Jr.,
Secretary
COLONIAL STATE BANK
(CORPORATE SEAL) By: /s/ Eli Kramer
Eli Kramer,
Chairman of the Board
Attest: /s/ Robert S. Vuono
Robert S. Vuono,
Secretary
Exhibits
Exhibit A - Plan of Merger
Exhibit B - Form of Opinion of Sovereign's Counsel
Exhibit C - Form of Tax Opinion
Exhibit D - Form of Opinion of Colonial's Counsel
Exhibit E - Form of Affiliate Letter Agreement
Schedule I
<PAGE>
EXHIBIT A
PLAN OF MERGER
SOVEREIGN INTERIM BANK
With and Into
COLONIAL STATE BANK
The following is the Plan of Merger adopted pursuant to
the terms of an Agreement and Plan of Merger (the "Agreement")
dated as of March 23, 1995 by and between Sovereign Bancorp, Inc.
and Colonial State Bank, under the terms of which, among other
things: (i) Sovereign Interim Bank will be merged with and into
Colonial State Bank, (ii) Colonial State Bank will survive the
merger as a wholly-owned subsidiary of Sovereign Bancorp, Inc.,
and (iii) each outstanding share of the $5.00 par value common
stock of Colonial State Bank (the "Colonial Common Stock"), other
than shares of such stock, if any, held by Sovereign Bancorp,
Inc. or by shareholders who duly elect to exercise and perfect
dissenters' rights, will be converted into the right to receive
$11.60 in cash from Sovereign Bancorp, Inc.
ARTICLE I
PARTIES AND LOCATION OF OFFICES
The parties to this Plan of Merger are Sovereign
Interim Bank and Colonial State Bank. The location of the
principal office and each branch office of Sovereign Interim Bank
and Colonial State Bank are as follows:
Sovereign Interim Bank Colonial State Bank
521 Park Avenue 521 Park Avenue
Freehold, New Jersey 07728 Freehold, New Jersey 07728
ARTICLE II
MERGER
Subject to the terms and conditions of the Agreement
and this Plan of Merger, and in accordance with the applicable
laws and regulations of the United States of America and the
State of New Jersey, Sovereign Interim Bank shall, on the
Effective Date (as defined in Article IX of this Plan of Merger)
merge with and into Colonial State Bank, whereupon the separate
existence of Sovereign Interim Bank shall cease and Colonial
State Bank shall be the surviving institution. The foregoing
merger is sometimes hereinafter referred to as the "Merger" and
Colonial State Bank is sometimes hereinafter referred to as the
"Surviving Bank".
ARTICLE III
NAME
The name of the Surviving Bank shall be Colonial State
Bank.
ARTICLE IV
CERTIFICATE OF INCORPORATION AND BYLAWS
As of the Effective Date, the Certificate of
Incorporation and the bylaws of the Surviving Bank shall be the
Certificate of Incorporation and bylaws of Colonial State Bank as
then in effect.
ARTICLE V
BOARD OF DIRECTORS AND OFFICERS
Section 5.1 Board of Directors. As of the Effective
Date, the directors of the Surviving Bank shall be: (i) certain
directors of Colonial State Bank duly elected and then in office,
and (ii) _____ additional persons, each of whom shall serve at
the pleasure of Sovereign Bancorp, Inc. and until such time as
his successor is elected and has qualified and each of whom is
identified below:
Robert J. Belon Robert M. Kaye
Anthony R. Coppola Eli Kramer
Robert L. Coutts Charles R. Miller
H. Daniel Harris David I. Weiner
Charles P. Kaempffer ____________________
____________________ ____________________
____________________ ____________________
____________________ ____________________
____________________ ____________________
Section 5.2 Officers. On and after the Effective
Date, the officers of the Surviving Institution shall be the
officers of Colonial State Bank duly elected and then in office
(each of whom is identified below), together with such other
officers as may be subsequently elected or appointed, each of
whom shall serve at the pleasure of Sovereign Bancorp, Inc. and
until such time as his successor is elected and has qualified:
Name of Officer Office Held
Stephen S. Laine President and Chief Executive Officer
Robert S. Vuono Executive Vice President, Secretary and
Treasurer
Frederick M. Wells Senior Vice President and Senior Loan
Officer
Michael J. Salerno Senior Vice President and Mortgage
Officer
ARTICLE VI
PRINCIPAL OFFICE AND BRANCH OFFICE
As of the Effective Date, the principal office and the
only branch office of the Surviving Bank shall be as follows:
521 Park Avenue
Freehold, New Jersey 07728
ARTICLE VII
CONVERSION OF SHARES
Section 7.1 Stock of Sovereign Interim Bank. Each
share of Sovereign Interim Bank common stock issued and
outstanding immediately before the Effective Date shall, on the
Effective Date, be converted into and become, without any action
on the part of the holder thereof, such number of shares of the
$5.00 par value common stock of Colonial State Bank as shall be
equal to: (i) 538,911, divided by (ii) the number of shares of
Sovereign Interim Bank common stock issued and outstanding
immediately before the Effective Date. Immediately following the
Merger, the authorized capital stock of Colonial State Bank shall
consist of 2,550,000 shares of $5.00 par value common stock, of
which 538,911 shares shall be issued and outstanding.
Immediately following the Merger, the surplus of Colonial State
Bank shall be not less than $500,000.
Section 7.2 Stock of Colonial State Bank.
(a) General. Subject to the provisions of
Section 7.2(b) below relating to dissenting shares, each share of
Colonial Common Stock issued and outstanding immediately before
the Effective Date (other than shares, if any, then owned by
Sovereign Bancorp, Inc. and shares, if any, held in the treasury
of Colonial State Bank) shall, on the Effective Date, be
converted into and become without any action on the part of the
holder thereof, the right to receive $11.60 in cash from
Sovereign Bancorp, Inc. Each share of Colonial Common Stock, if
any, owned by Sovereign Bancorp, Inc. on the Effective Date and
each share of Colonial Common Stock, if any, held in the treasury
of Colonial on the Effective Date shall be cancelled and no cash
or other consideration shall be delivered in exchange therefor.
(b) Dissenting Shareholders of Colonial. Shares
of Colonial Common Stock with respect to which dissenters' rights
shall have been duly exercised and perfected: (i) shall not be
converted into the right to receive cash from Sovereign Bancorp,
Inc. pursuant to Section 7.2(a) above and the holders thereof
shall be entitled only to such rights as are granted by law to
dissenting shareholders, and (ii) shall be deemed to have been
retired and cancelled immediately prior to the Merger.
Section 7.0 Surrender and Exchange of Colonial Stock
Certificates.
(a) Letter of Instruction. On or promptly after
the Effective Date, Sovereign Bancorp, Inc. shall mail or cause
to be mailed to each former shareholder of Colonial State Bank at
his address as it appears on the records of Colonial State Bank a
letter of instruction specifying the procedures to be followed in
surrendering his Colonial Common Stock certificates.
(b) Surrender and Exchange Procedure. As
promptly as possible after receipt of the foregoing letter of
instruction, each former shareholder of Colonial State Bank shall
surrender to Sovereign Bancorp, Inc. his Colonial Common Stock
certificates and Sovereign Bancorp, Inc. shall upon such
surrender mail to him in exchange therefore a check payable to
the order of the registered holder of such shares in an amount
equal to: (i) the number of shares surrendered, multiplied by
(ii) $11.60. Following the Effective Date and until surrender,
each Colonial Common Stock certificate shall be deemed for all
purposes to evidence solely the right to receive cash in exchange
therefore pursuant to the Agreement and this Plan of Merger.
Notwithstanding the foregoing, neither Sovereign Bancorp, Inc.
nor any party to this Plan of Merger will be liable to any holder
of Colonial Common Stock for any amount paid in good faith to a
public official or agency pursuant to any applicable abandoned
property, escheat or similar law.
(c) Closing of Stock Transfer Books. The stock
transfer books of Colonial State Bank will be closed on and after
the Effective Date and no further transfers of shares of Colonial
Common Stock will thereafter be made or recognized.
ARTICLE VIII
EFFECT OF THE MERGER
Section 8.: Separate Existence. On the Effective
Date, the separate existence of Colonial State Bank shall cease
and all of the property (real, personal and mixed), rights,
powers, duties and obligations of Sovereign Interim Bank and
Colonial State Bank shall be taken and deemed to be transferred
to and vested in the Surviving Bank, without further act or deed,
as provided by applicable laws and regulations.
Section 8.2 Savings Accounts. After the Effective
Date, the Surviving Bank will continue to issue savings accounts
on the same basis as immediately prior to the Effective Date.
ARTICLE IX
EFFECTIVE DATE
The Merger shall be effective on the date on which all
filings with government agencies as may be required under all
applicable laws and regulations for the Merger to become
effective are made and accepted by such agencies or, if later, on
the date specified in such filings (the "Effective Date").
ARTICLE X
CONDITIONS PRECEDENT
The obligations of Sovereign Bancorp, Inc., Sovereign
Interim Bank and Colonial State Bank to effect the Merger shall
be subject to the satisfaction, unless duly waived by the party
entitled to the benefit thereof, of the conditions precedent set
forth in the Agreement.
ARTICLE XI
TERMINATION
This Plan of Merger shall terminate upon any
termination of the Agreement in accordance with its terms;
provided, however, that neither Sovereign Bancorp, Inc. nor any
party hereto shall by reason of such termination be relieved from
liability on account of a breach by it of any of the terms of
this Plan of Merger or of the Agreement.
ARTICLE XII
AMENDMENT
Subject to applicable law, this Plan of Merger may be
amended at any time prior to consummation of the Merger, but only
by means of an instrument in writing signed by duly authorized
officers on behalf of the parties hereto.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 Extensions; Waivers. Each party, by a
written instrument signed by a duly authorized officer, may
extend the time for the performance of any of the obligations or
other acts of the other party hereto and may waive compliance
with any of the covenants, or performance of any of the
obligations, of the other party contained in this Plan of Merger.
Section 13.2 Notices. Any notice or other
communication required or permitted under this Plan of Merger
shall be given, and shall be effective, in accordance with the
provisions of Section 8.07 of the Agreement.
Section 13.3 Captions. The headings of the several
Articles and Sections herein are inserted for convenience of
reference only and are not intended to be part of, or to affect
the meaning or interpretation of, this Plan of Merger.
Section 13.4 Counterparts. For the convenience of the
parties hereto, this Plan of Merger may be executed in several
counterparts, each of which shall be deemed the original, but all
of which together shall constitute one and the same instrument.
Section 13.5 Governing Law. This Plan of Merger shall
be governed by and construed in accordance with the domestic
internal law (without reference to its law of conflicts of law)
of the Commonwealth of Pennsylvania, except to the extent that
matters relating to the Merger may be governed by the laws of the
United States of America or, in the absence of controlling
federal law, by the domestic internal law (without reference to
its law of conflicts of law) of the State of New Jersey.
IN WITNESS WHEREOF, Sovereign Interim Bank and Colonial
State Bank have caused this Plan of Merger to be executed by
their duly authorized officers and their corporate seals to be
hereunto affixed as of this ________ day of ____________________,
1995.
SOVEREIGN INTERIM BANK, F.S.B.
By:________________________________
Jay S. Sidhu,
President
(CORPORATE SEAL)
Attest:____________________________
Lawrence M. Thompson, Jr.
Secretary
COLONIAL STATE BANK
By:________________________________
Eli Kramer,
Chairman of the Board
(CORPORATE SEAL)
Attest:____________________________
Robert S. Vuono,
Executive Vice President,
Treasurer and Secretary
<PAGE>
EXHIBIT B
FORM OF OPINION OF COUNSEL TO SOVEREIGN
Colonial shall have received from Stevens & Lee an
opinion, dated as of the Closing Date, substantially to the
effect that, subject to customary exceptions and qualifications:
(1) Sovereign and Interim Bank have full corporate
power to carry out the transactions contemplated in the
Agreement. The execution and delivery of the Agreement and the
completion of the transactions contemplated thereunder have been
duly and validly authorized by all necessary corporate action on
the part of Sovereign and Interim Bank, as the case may be, and
the Agreement constitutes a valid and legally binding obligation
of Sovereign, enforceable in accordance with its terms, except as
may be limited by bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship, and other laws
affecting creditors' rights generally and as may be limited by
the exercise of judicial discretion in applying principles of
equity. Subject to satisfaction of the conditions set forth in
the Agreement, neither the transactions contemplated in the
Agreement, nor compliance by Sovereign and Interim Bank with any
of the provisions thereof, will (i) conflict with or result in a
breach or default under (A) the Articles of Incorporation or
bylaws of Sovereign or the charter or bylaws of Interim Bank, or,
(B) based upon certificates of officers and without independent
verification, to the actual knowledge of such counsel, any note,
bond, mortgage, indenture, license, agreement or other material
instrument or obligation to which Sovereign or Interim Bank is a
party; or (ii) violate in any material respect any order, writ,
injunction or decree actually known to such counsel, or any
federal or Pennsylvania statute, rule or regulation applicable to
Sovereign or Interim Bank.
(2) Interim Bank is a validly existing, nonoperating,
federally-chartered savings bank organized and in good standing
under the laws of the United States of America.
(3) There is, to the actual knowledge of such counsel,
no legal, administrative, arbitration or governmental proceeding
or investigation pending or threatened to which Sovereign or any
of its subsidiaries is a party which states a claim to restrain
or prohibit the transactions contemplated by the Agreement.
(4) No consent, approval, authorization or order of
any federal or state court or federal or state governmental
agency or body is required for the completion by Sovereign or
Interim Bank of the transactions contemplated by the Agreement,
except for such consents, approvals, authorizations or orders as
have been obtained.
(5) Assuming the receipt by Colonial of all required
regulatory approvals upon the filing and effectiveness of the
Articles of Merger with the NJDOB in accordance with the
Agreement, the merger of Interim Bank and Colonial contemplated
by the Agreement will have been effected in compliance in all
material respects with all applicable federal laws, rules and
regulations.
<PAGE>
EXHIBIT C
FORM OF TAX OPINION OF STEVENS & LEE
Sovereign shall have received an opinion of Stevens &
Lee dated as of the date of Closing and subject to customary
exceptions and qualifications substantially to the effect that,
under the provisions of the IRC:
1. The formation of Interim and its merger with and
into Colonial ("Merger #1") will be disregarded.
The transaction will be treated as a sale by
Colonial's stockholders of all of the outstanding
Colonial Common Stock to Sovereign in exchange for
cash.
2. Sovereign's purchase of all of the outstanding
Colonial Common Stock will constitute a qualified
stock purchase within the meaning of IRC Section
338(d)(3).
3. No gain or loss will be recognized by Sovereign,
Interim, or Colonial as a result of Merger #1.
4. Gain or loss, as determined under IRC Section
1001, will be recognized by each Colonial
stockholder in an amount measured by the
difference between: (i) the sum of the amount of
cash received, and (ii) the adjusted basis (as
determined under IRC Section 1011) in the Colonial
Common Stock surrendered in exchange therefor.
5. Provided that IRC Section 341 is not applicable
and that the Colonial Common Stock is a capital
asset in the hands of a Colonial stockholder, any
gain or loss realized by such stockholder will be
capital gain or loss, subject to the provisions
and limitations of Chapter 1P of the IRC.
6. The basis in the hands of Sovereign of the
Colonial Common Stock acquired will, under IRC
Section 1012, be equal to the sum of: (i) the
cash paid to the Colonial stockholders, and
(ii) the amount of any expenses of the transaction
which are properly chargeable to a capital
account.
7. The merger of Colonial, as the surviving
institution following Merger #1, with and into
Second Interim Bank will qualify as a
reorganization under IRC Section 368(a)(1).
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL TO COLONIAL
Sovereign shall have received from counsel to Colonial,
an opinion, dated as of the Closing Date, substantially to the
effect that, subject to customary exceptions and qualifications:
(1) Colonial has full corporate power to carry out the
transactions contemplated in the Agreement. The execution and
delivery of the Agreement and the completion of the transactions
contemplated thereunder have been duly and validly authorized by
all necessary corporate action on the part of Colonial, and the
Agreement constitutes a valid and legally binding obligation of
Colonial, enforceable in accordance with its terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium,
receivership, conservatorship, and other laws affecting
creditors' rights generally and institutions the deposits of
which are insured by the FDIC, and as may be limited by the
exercise of judicial discretion in applying principles of equity.
Subject to satisfaction of the conditions set forth in the
Agreement, neither the transactions contemplated in the
Agreement, nor compliance by Colonial with any of the respective
provisions thereof, will: (i) conflict with or result in a
breach or default under (A) the Certificate of Incorporation or
bylaws of Colonial, or (B) based on certificates of officers and
without independent verification, to the actual knowledge of such
counsel, any note, bond, mortgage, indenture, license, agreement
or other instrument or obligation to which Colonial is a party;
or (ii) to the actual knowledge of such counsel, result in the
creation or imposition of any material lien, instrument or
encumbrance upon the property of Colonial, except such material
lien, instrument or obligation that has been disclosed to
Sovereign pursuant to the Agreement, or (iii) violate in any
material respect any order, writ, injunction, or decree actually
known to such counsel, or any statute, rule or regulation
applicable to Colonial.
(2) Colonial is a validly existing New Jersey-
chartered commercial bank organized and in good standing under
the laws of the State of New Jersey. The deposits of Colonial
are insured to the maximum extent provided by law by the Federal
Deposit Insurance Corporation.
(3) There is, to the actual knowledge of such counsel,
no legal, administrative, arbitration or governmental proceeding
or investigation pending or threatened to which Colonial is a
party which would, if determined adversely to Colonial, have a
material adverse effect on the business, properties, results of
operations, or condition, financial or otherwise, of Colonial or
which states a claim to restrain or prohibit the transactions
contemplated by the Agreement.
(4) No consent, approval, authorization, or order of
any federal or state court or federal or state governmental
agency or body, or of any third party, is required for the
consummation of the Merger by Colonial, except for such consents,
approvals, authorizations or orders as have been obtained.
(5) Assuming the receipt by Interim of all required
regulatory approvals, upon the filing and effectiveness of the
Articles of Merger with the NJDOB in accordance with the
Agreement, the merger of Interim Bank and Colonial contemplated
by the Agreement will have been effected in compliance in all
material respects with the Banking Act and all other applicable
New Jersey laws, rules and regulations.
<PAGE>
EXHIBIT E
March 23, 1995
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
Ladies and Gentlemen:
Sovereign Bancorp, Inc. ("Sovereign") and Colonial State
Bank ("Colonial") desire to enter into an agreement (the
"Agreement") pursuant to which and subject to the terms and
conditions set forth therein: (a) Colonial will merge with a to-
be-formed nonoperating phantom federal savings bank subsidiary of
Sovereign, with Colonial surviving the merger, and
(b) shareholders of Colonial will receive cash in exchange for
common stock of Colonial outstanding on the closing date (the
foregoing, collectively, referred to herein as the "Merger").
Sovereign has required, as a condition to its execution and
delivery to Colonial of the Agreement, that the undersigned,
being directors (or former directors) and/or executive officers
of Colonial, execute and deliver to Sovereign this Letter
Agreement.
Each of the undersigned, intending to be legally bound and
in order to induce Sovereign to execute and deliver to Colonial
the Agreement, for himself and not for any other person who signs
this Letter Agreement, hereby irrevocably:
(1) Agrees to be present (in person or by proxy) at
all meetings of shareholders of Colonial called to vote for
approval of the Merger so that all shares of common stock of
Colonial then owned by him will be counted for the purpose of
determining the presence of a quorum at such meetings and to vote
all such shares: (i) in favor of approval and adoption of the
Agreement and the transactions contemplated thereby (including
any amendments or modifications of the terms thereof approved by
Colonial's Board of Directors), and (ii) against approval or
adoption of any other merger, business combination,
recapitalization, partial liquidation or similar transaction
involving Colonial, provided, however, that these obligations
shall terminate concurrently with any termination of the
Agreement in accordance with its terms;
(2) Agrees not to vote or execute any written consent
to rescind or amend in any manner any prior vote or written
consent, as a shareholder of Colonial, to approve or adopt the
Agreement and the transactions contemplated thereby;
(3) Agrees to use his reasonable best efforts to cause
the Merger to be completed;
(4) Agrees not to sell, transfer or otherwise dispose
of any common stock of Colonial on or prior to the date of the
meeting of Colonial shareholders to vote on the Merger;
(5) Agrees not to solicit, initiate or, except as
permitted by Section 4.13 of the Agreement, engage in any
negotiations or discussions with any party other than Sovereign
with respect to any offer, sale, transfer or other disposition
of, any shares of common stock of Colonial now or hereafter owned
by him or her, or to support any such offer, sale, transfer, or
other disposition;
(6) Waives the right to assert dissenters' rights
under applicable law;
(7) Agrees to disclose and to permit Sovereign and
colonial to disclose that he has entered into this Letter
Agreement and that he supports the Merger and recommends that
shareholders of Colonial vote in favor of the Merger; and
(8) Represents that he has the capacity to enter into
this Letter Agreement and that it is a valid and binding
obligation enforceable against him in accordance with its terms.
________________________
This Letter Agreement may be executed in two or more
counterparts, each of which shall be deemed to constitute an
original, but all of which together shall constitute one and the
same Letter Agreement.
________________________
This Letter Agreement shall be effective upon execution by
one or more persons listed below, and its validity and
enforceability shall not be affected by the lack of its execution
by any person listed below.
________________________
This Letter Agreement shall terminate concurrently with any
termination of the Agreement in accordance with its terms.
________________________
The undersigned intend to be legally bound hereby.
Sincerely,
__________________________________
Robert J. Belon
__________________________________
Anthony R. Coppola
__________________________________
Robert L. Couts
__________________________________
H. Daniel Harris
__________________________________
Charles P. Kaempffer
__________________________________
Robert M. Kaye
__________________________________
Eli Kramer
__________________________________
Stephen S. Laine
__________________________________
Charles R. Miller
__________________________________
Allan J. Sockol
__________________________________
Robert S. Vuono
__________________________________
David I. Weiner
<PAGE>
AGREEMENT AND PLAN OF MERGER
PROPOSED TO BE ENTERED BY AND BETWEEN
SOVEREIGN BANCORP, INC. AND COLONIAL STATE BANK
SCHEDULE I
Section 2.5(b):
A.) Beneficial Owners of 5% or more of outstanding shares of
Colonial State Bank Common Stock:
Percentage of
Total Shares
Number of Shares Outstanding As of
Beneficial Owner Beneficially Owned 03/15/95
---------------- ------------------ -----------------
Anthony R. Coppola 87,954 (1) 16.32%
Robert M. Kaye 30,079 5.58%
Eli Kramer 32,730 (2) 6.07%
David I. Weiner 29,906 (3) 5.55%
Note: (1) Includes 2,547 shares owned by Mr. Coppola's wife and
315 shares owned by Mr. Coppola's children.
(2) Includes 32,630 shares owned by PEK Realty Associates
of which Mr. Kramer is a principal.
(3) Includes 13,500 shares owned by the Weiner Family
Trust.
B.) Director and Officer Beneficial Holdings:
Number of Shares
Director Beneficially Owned
-------- ------------------
Robert J. Belon 472
Anthony R. Coppola 87,954 (1)
Robert Lloyd Coutts 4,475 (2)
H. Daniel Harris 150
Charles P. Kaempffer 8,771
Robert M. Kaye 30,079
Eli Kramer 32,730 (3)
Stephen S. Laine 100
Charles R. Miller 5,122
David I. Weiner 29,906 (4)
Number of Shares
Officer Beneficially owned
------- ------------------
Stephen S. Laine (See Director Listing Above)
President & CEO
Kenneth A. Ney 100
Assistant Treasurer
Robert S. Vuono 562 (5)
Executive Vice President
Note: (1) Includes 2,547 shares owned by Mr. Coppola's wife and
315 shares owned by Mr. Coppola's children.
(2) Includes 1,237 shares owned by Mr. Coutts' wife.
(3) Includes 32,630 shares owned by PEK Realty Associates
of which Mr. Kramer is a principal.
(4) Includes 13,500 shares owned by the Weiner Family
Trust.
(5) Includes 300 shares owned jointly with his wife.
Section 2.11:
In connection with the real estate transaction referred to in
Section 4.14 of the Agreement, the Colonial subsidiary will grant
a mortgage to a bank in an amount not to exceed $850,000.
Section 2.12:
See Attached December 31, 1994 Watch List.
Section 2.14(a):
A. Contracts with payments in excess of $10,000 per year:
Contract With Purpose
------------- -------
AT&T Global Information Services Data Processing
AT&T Credit Lease of DP Equipment
Systematics, Inc. Item Processing
Directors Limited Lease of Main Office
KPMG Peat Marwick Audit of Financial
Statements
Contracts with receipts in excess of $10,000 per year:
Contract With Purpose
------------- -------
Director's Limited Land Lease
B. Employment Contract with President & CEO Stephen S. Laine
Severance Policy for Colonial State Bank staff.
C. All of the foregoing contracts are in full force and effect
and none are in default in any material respects.
Section 2. 14 (b):
None.
Section 2.18:
Insurance policies maintained by Colonial State Bank:
Kidnap & Ransom
Director's & Officers and IRA/Keough
Financial Institution Bond
Commercial Excess Policy
Special Multi-Peril Policy
Worker's Compensation
Key Man Insurance on President (See Employment Contract)
Section 2.19:
Coverage Type & Limit of Liability
Coverage Director Financial Excess
Period Carrier & Officer Institution Dishonesty
-------- ------- --------- ----------- ----------
8/29/88 to Progressive
8/29/89 Cas. Ins. Co. $1,000,000 $1,000,000 $1,000,000
8/29/89 to Progressive
8/29/90 Cas. Ins. Co. $1,000,000 $1,000,000 $1,000,000
8/29/90 to Progressive
8/29/91 Cas. Ins. Co. $1,000,000 $1,000,000 $1,000,000
8/29/91 to Reliance
8/29/92 Insurance Co. $ 500,000 $1,000,000 N/A
8/29/92 to Continental
9/13/93 Insurance Co. $1,000,000 $1,050,000 N/A
9/13/93 to Continental
9/27/94 Insurance Co. $1,000,000 $1,050,000 N/A
9/27/94 to
9/27/95 AETNA $1,000,000 $1,050,000 N/A
<PAGE>
Section 2.21(a):
COLONIAL STATE BANK
EMPLOYEE BENEFITS
JANUARY 31, 1995
Employee Benefits provided are as follows:
Group Life Insurance - Two times annual salary to $100,000
maximum coverage plus $25,000
Cost: 2X's salary: .465 per $1,000 (Sixteen
employees)
$25,000: $10.25 per month (Sixteen employees)
Medical/Hospitalization - Coverage for employee and
dependents.
Cost: Employees: $190.11 per month (Fourteen employees)
Dependents: 339.83 per month (Seven employees)
Prescription Drug Plan - Coverage for employee and
dependents.
Cost: Employees: $26.45 per month (Sixteen employees)
Dependents: 37.98 per month (Eight employees)
Dental Plan - Coverage for employee and dependents.
Cost: Employees: $30.06 per month (Sixteen employees)
Dependents: 53.68 per month (Eight employees)
Long Term Disability - Coverage for employee.
Cost: .600 Per $100 in monthly salary (49,910
@01/31/95)
Note: Employees contribute on a monthly basis for coverage
taken:
Single coverage - $10.00 monthly
Husband/Wife - $25.00 monthly
Family - $50.00 monthly
Employment contract of President Laine calls for additional
life insurance coverage in excess of standard coverage.
<PAGE>
Section 2.22:
Loans with Directors & officers (present and former):
Borrower Type Amount
-------- ---- ------
R. Belon (Director) Commercial Mtg. $106,868.73
A. Coppola (Director) Secured Loan 100,000.00
R. Kaye (Director) Secured Loan 250,000.00
E. & C. Kramer (Director) Auto Loan 15,440.99
Home Equity 61,192.67
C. Miller (Director) Commercial Mtg. 16,000.00
Home Equity 78,505.98
W.J.D. Ltd (D. Weiner-Director) Construct Mtg. 186,000.00
D. Hearn (Former Officer) Personal Loan 200.00
J. Peavley (officer) Personal Cr Line 1,480.32
Installment Loan 199.20
Installment Loan 7,652.57
D. Staples (Former Officer) Personal Cr Line 381.62
Contracts with Directors & Officers (present and former):
Lease arrangement with four present and one former Director for
the sale and subsequent leaseback of Colonial's only office -
Director's Limited, A Joint Venture. In addition, land lease by
Director's Limited of land owned by Colonial State.
Planned Residential communities services thirteen mortgages
purchased from PRC. Total outstanding balances as of February 1,
1995 - $646,015.83. Director Robert M. Kaye is owner of PRC.
Business Arrangements with Directors & Officers (Present and
former):
Colonial's Loan Policy includes Mid-Atlantic Appraisal, Inc. as
one of seven authorized appraisers for the Bank. Director Robert
J. Belon is owner of Mid-Atlantic.
<PAGE>
Section 2.24:
Customers with aggregate outstanding loans in the amount of
$250,000 or more as of February 28, 1995:
Customer Name Aggregate Outstanding Balance
------------- -----------------------------
Harlayne Roberts $405,270.65
Marilyn Loh Collado 317,241.18
Roy Carmen 460,807.36
William Schwartz 250,000.00
Eugene Cheslock 314,956.68
Howard Schoor 250,000.00
Donald Steel 456,751.62
Richard Eknoian 293,395.08
Sirb Construction 700,000.00 (350,000.00 Partic.)
George Fahoury 260,707.08
James Vaccaro 294,115.48
Samuel Carotenuto 457,813.68
John P. Tsakiris 276,649.32
Domenico Procopio 378,960.66
Martin Barger 328,734.66
Marvin Harris 271,492.95
Summerton Group 437,920.00
Frank Hawk 338,438.09
Jennie Nicol 350,000.00
Timothy Sullivan 333,450.01
Richard Sambol 250,000.00
Brian Boyle 460,807.09
Conover Holding Corp. 319,079.51
Joseph Lenczyk 333,450.01
Robert M. Kaye 250,000.00
Jewish Community Center 368,000.00
East of Eden 391,089.95
Rivers Edge Mall 296,000.00
Vizzoni Bros. Const. 268,287.78
Cong. Sons of Israel 250,562.50
Miller & McTigue 331,197.37
RC&C Sin Assoc. 275,000.00
S.R. Whelan Dev. 259,999.60
AMV GEN-3 Part. 385,808.50
Group Const. of Marlboro 300,000.00
V.S.K Inc. 353,246.45
Philip Kramer 250,000.00
<PAGE>
Section 2.24 (Continued):
Customers with aggregate deposit balances in the amount of
$200,000 or more as of February 28, 1995:
Customer Name Aggregate Deposit Balances
- ------------- --------------------------
Freehold Township $1,099,887.30 *
Freehold Township Escrow Accts 541,669.89
John Riehl 208,222.99
Freehold Chrysler Plymouth 275,339.72
Coltsbrook, Inc. 363,142.04
Beta Lambda Instruments 234,605.72
Planned Residential Communities 200,000.00
Reussille Law Firm Estate Accounts
and Partner Deposits 618,260.37
Charlene M. Schmitt 200,707.25 **
* Adjusted Balance
** Account Added
<PAGE>
<TABLE>
<CAPTION>
TOTAL DUE DATE
BORROWER CREDIT PMT/NOTE COLLATERAL VALUE TYPE
-------- ------ -------- ---------------- ----
<S> <C> <C> <C> <C>
MARTIN BARGER $ 175,000 current 2ND MTG I/L
MARTIN BARGER $ 156,679 11-24-94 UNSECURED COMML
ROBERT BELON $ 107,085 current LAND PARCEL COMML
LAVERNE FINE $ 35,194 10-1-94 1ST MTG R/E
LAVERNE FINE $ 28,365 current 1ST MTG R/E
FIRST UNITED INVEST. $ 100,000 current 1ST MTG COMML
GREENBROW ASSOC. $ 182,250 current UNSECURED COMML
CARL GROSS $ 72,000 current UNSECURED COMML
HERBERT GEORGE ASSOC. $ 57,600 current A/R COMML
ALSON HODDER $ 12,564 12-10-93 2ND MTG I/L
KIRSCH HOLDINGS $ 220,229 current ASSIGN MTG COMML
E. LEVINSON $ 28,349 current 1ST MTG R/E
MARLBORO FEED $ 11,455 7-28-94 A/R, INV COMML
JENNIE NICOL $ 89,000 1-13-94 UNSECURED COMML
OMNI TEMPS $ 85,000 current A/R COMML
GERALD RICHTER $ 100,156 current UNSECURED COMML
RIVERS EDGE $ 298,000 current 2NTG STRP MALL ## COMML
VERDON'S LANDSCAPING $ 17,121 10-1-94 EQUIPMENT
VIZZONI BROTHERS $ 9,030 9-24-94 UNSECURED COMML
VIZZONI BROTHERS $ 269,500 11-1-94 UNSECURED COMML
----------
$2,054,577
==========
</TABLE>
<TABLE>
<CAPTION>
SPECIAL ACTION TAKEN TO
BORROWER MENTION SUBSTND. DOUBTFUL N.I.A. IMPROVE BANK'S POS.
-------- ------- -------- -------- ------ -------------------
<S> <C> <C> <C> <C> <C>
MARTIN BARGER $ 175,000 Bal 173,943 due 1/1/95
MARTIN BARGER $ 156,679 N/D 11/24/94
ROBERT BELON $107,085 CURRENT
LAVERNE FINE $ 35,194 PRC servicing. CSB not
LAVERNE FINE $ 28,365 told this mtg. mat. 11/1/9
FIRST UNITED INVEST. $100,000 Int. N/D 12/17/94
GREENBROW ASSOC $ 182,250 CURRENT
CARL GROSS $ 72,000 N/D 12/15/94
HERBERT GEORGE ASSOC. $ 57,600 CURRENT
ALSON HODDER $ 12,564 Chpt. 13 BK 12/27/94
KIRSCH HOLDINGS $ 220,229
E. LEVINSON $ 28,349 CURRENT
MARLBORO FEED $ 11,455 Y N/D 7/28/94
JENNIE NICOL $89,000 Y Stock MV 247M bal. 350M
OMNI TEMPS $ 85,000 CURRENT
GERALD RICHTER $ 100,156 RENEWED TO 1/20/95
RIVERS EDGE $ 298,000 Paying $1M/mo + Int.
VERDON'S LANDSCAPING $ 17,121 N/D 10/1/94; following
VIZZONI BROTHERS $ 9,030
VIZZONI BROTHERS $269,500 1 pmt. promised
-------- ---------- -------
$628,215 $1,337,362 $89,000 TOTAL $2,054,57
======== ========== ======= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMERCIAL N.CLASS $16,767,049 1.25% $209,588
COMMERCIAL CLASS. OLEM $ 628,215 2.00% $ 18,564
SUBS $ 1,040,769 10.00% $ 74,077
DOUBT $ 89,000 50.00% $ 44,500
LOSS $ 0 100.00% $ 0
INSTALLMENT N.CLASS $ 6,073,771 1.00% $ 60,738
INSTALLMENT CLASS OLEM $ 0 2.00% $ 0
SUBS $ 187,564 5.00% $ 9,378
DOUBT $ 0 50.00% $ 0
LOSS $ 0 100.00% $ 0
REAL ESTATE N.CLASS $ 8,516,989 .50% $ 42,585
REAL ESTATE CLASS OLEM $ 0 2.00% $ 0
SUBS $ 81,908 5.00% $ 4,595
DOUBT $ 0 50.00% $ 0
LOSS $ 0 100.00% $ 0
UNUSED COMM. AND LC'S . . . . . $ 3,933,887 .50% $ 19,669
TOTAL PER FORMULA . . . . . . . . . . . . . . . . . . . $483,695
RESERVE PER G.L. . . . . . . . . . . . . . . . . . . . $494,496
OVERAGE/(DEFICIT) . . . . . . . . . . . . . . . . . . . $ 10,801
</TABLE>
EXHIBIT 27
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net Income (1) $56,408 $46,398 $35,614 $19,638 $11,982
Average Common Share outstanding (2) 55,364 49,751 49,101 36,903 30,949
Stock options considered to be common
stock equivalents, net of shares
assumed to be repurchased under the
treasury stock method (2) 1,204 1,643 1,805 1,596 1,092
Total stock/stock equivalents (2) 56,568 51,394 50,906 38,499 32,041
======= ======= ======= ======= =======
Net income per share before cumulative
effect of accounting change (2) $ 1.00 $ .90 $ .70 $ .51 $ .37
======= ======= ======= ======= ======
Net income per share after cumulative
effect of accounting change (2) $ 1.00 $ .90 $ .80 $ .51 $ .37
======= ======= ======= ======= ======
<FN>
(1) The 1993 results do not include a $4.8 million cumulative effect of a change in
accounting principle resulting from the adoption of Statement of Financial Accounting
Standards No. 109 in 1993.
(2) All per share date have been adjusted to reflect all stock dividends and stock splits.
</TABLE>
EXHIBIT 21
Subsidiaries of Sovereign Bancorp, Inc.
Subsidiary State or other
jurisdiction of
Incorporation
Sovereign Bank, a Federal Savings Bank United States of
America
d/b/a Charter Federal Savings Bank
Division
d/b/a Sovereign Bank of Delaware
Valley Division
d/b/a Sovereign Bank, Valley Federal
Division
d/b/a Sovereign Bank of New Jersey
Division
d/b/a Bank of Princeton FS Division
of Sovereign Bank
Colonial Bank for Savings, a United States of
Federal Savings Bank America
Sovereign Investment Corporation Delaware
First Lancaster Financial Corp. Pennsylvania
201 Associates, Inc. Delaware
Sovereign Annuity Corp., Inc. New Jersey
Sovereign Agency, Inc. New Jersey
CSB Building Corporation New Jersey
March 28, 1996
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-20186, Form S-8 No. 33-29038,
Form S-8 No. 33-39453, Form S-8 No. 33-44108, Form S-8
No. 33-89586 and Form S-8 No. 33-89592) of Sovereign Bancorp,
Inc. of our report dated January 17, 1996, with respect to the
consolidated financial statements of Sovereign Bancorp, Inc.
included in the Annual Report (Form 10-K) for the year ended
December 31, 1995.
Reading, Pennsylvania /s/ Ernst & Young LLP
March 25, 1996
EXHIBIT 23.2
Consent of Independent Certified Public Accountants
To the Board of Directors
Sovereign Bancorp, Inc.
We hereby consent to the incorporation by reference in
Registration Statement No. 33-20186 on Form S-8, Registration
Statement No. 33-29038 on Form S-8, Registration Statement No.
33-39453 on Form S-8, Registration Statement No. 33-44108 on
Form S-8, Registration Statement No. 33-89586 on Form S-8 and
Registration Statement No. 33-89592 on Form S-8 of Sovereign
Bancorp, Inc. and subsidiaries of our report dated November 24,
1994 with respect to the consolidated financial statements of
Charter FSB Bancorp, Inc. and subsidiary, which report appears in
the Annual Report on Form 10-K of Sovereign Bancorp, Inc. for the
year ended December 31, 1995.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Woodridge, New Jersey
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000811830
<NAME> SOVEREIGN BANCORP, INC.
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 147,771
<SECURITIES> 2,966,721
<RECEIVABLES> 4,744,876
<ALLOWANCES> (34,856)
<INVENTORY> 0
<CURRENT-ASSETS> 196,824
<PP&E> 100,732
<DEPRECIATION> (43,781)
<TOTAL-ASSETS> 8,078,287
<CURRENT-LIABILITIES> 7,651,262
<BONDS> 0
0
96,446
<COMMON> 220,103
<OTHER-SE> 110,476
<TOTAL-LIABILITY-AND-EQUITY> 8,078,287
<SALES> 0
<TOTAL-REVENUES> 518,860
<CGS> 0
<TOTAL-COSTS> 100,267
<OTHER-EXPENSES> 12,841
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> 318,805
<INCOME-PRETAX> 85,947
<INCOME-TAX> 29,539
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,408
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
EXHIBIT 99.1
Report of Independent Certified Public Accountants
To the Board of Directors
Charter FSB Bancorp, Inc.
We have audited the accompanying consolidated statements
(not presented) of financial condition of Charter FSB Bancorp,
Inc. and subsidiary as of September 30, 1994 and 1993, and the
related consolidated statements (not presented) of income,
stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We have conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements (not
presented) referred to above present fairly, in all material
respects, the financial position of Charter FSB Bancorp, Inc. and
subsidiary at September 30, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Woodbridge, NJ
November 23, 1994 /s/ BDO Seidman, LLP
