SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
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Filed by a Party other than the Registrant /_/
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/_/ Preliminary Proxy Statement
/_/ Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2)
/X/ Definitive Proxy Statement
/_/ Definitive Additional Materials
/_/ Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Sovereign Bancorp, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than Registrant)
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the offsetting fee was paid previously. Identify the previous
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[ LOGO ]
March 19, 1997
Dear Shareholder:
Sovereign Bancorp's Annual Meeting of Shareholders will be held on
Thursday, April 17, 1997, at 10:00 a.m. in the Baron Room of The Sheraton
Berkshire Inn, Route 422 West, Papermill Road Exit, Wyomissing, Pennsylvania.
For your convenience, directions to The Sheraton Berkshire Inn are included on
the back cover of this Proxy Statement.
Sovereign's Board of Directors believes that it is important for
Sovereign's shareholders to participate personally in the process by which
Sovereign's directors are elected. The election of diligent, active, involved,
and responsible directors is the linchpin of corporate governance at Sovereign.
Sovereign's Board actively chooses, directs and compensates Sovereign's senior
management, establishes programs to oversee Sovereign's compliance with laws and
reviews corporate plans, policies and commitments with a view to representing
all of Sovereign's stakeholders, including its shareholders, customers, team
members and the communities Sovereign serves.
THE NOTICE AND PROXY STATEMENT, WHICH ARE CONTAINED IN THE FOLLOWING PAGES,
DESCRIBE THE BUSINESS TO BE CONDUCTED AT THE MEETING. PROPOSALS 1, 2, AND 3 TO
BE ACTED ON AT THE MEETING HAVE BEEN UNANIMOUSLY APPROVED AND RECOMMENDED BY
SOVEREIGN'S BOARD OF DIRECTORS. WE URGE YOU TO READ CAREFULLY THE DESCRIPTION OF
THE PROPOSALS AND TO VOTE FOR THEIR ADOPTION.
If you cannot attend the Meeting, your shares should still be represented
at the Meeting. We urge you to sign and date the enclosed proxy card and return
it in the enclosed envelope as soon as possible. Please indicate and return the
enclosed proxy card and the enclosed ticket if you intend to be present at the
Meeting.
We urge you to participate in the Meeting in person or by proxy. Thank you
very much for your continued interest in Sovereign.
Sincerely,
/s/ Richard E. Mohn
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Richard E. Mohn
Chairman of the Board
/s/ Jay S. Sidhu
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Jay S. Sidhu
President and Chief Executive Officer
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[ LOGO ]
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NOTICE
OF
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 17, 1997
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NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Meeting") of Sovereign Bancorp, Inc. ("Sovereign") will be held on April 17,
1997, at 10:00 a.m. (Eastern Time) at The Sheraton Berkshire Inn, Wyomissing,
Pennsylvania, for the following purposes:
(1) To elect three (3) Class I directors of Sovereign to serve for a
term of three years and until their successors shall have been elected and
qualified;
(2) To consider and act upon a proposal to amend Sovereign's Articles
of Incorporation to increase the number of authorized shares of common
stock from 100,000,000 shares to 200,000,000 shares;
(3) To ratify the appointment by Sovereign's Board of Directors of
Ernst & Young LLP as Sovereign's independent auditors for the fiscal year
ending December 31, 1997; and
(4) To transact such other business as may properly be presented at
the Meeting.
Shareholders of record at the close of business on March 3, 1997, are
entitled to notice of, and to vote at the Meeting.
WHETHER OR NOT YOU PLAN ON ATTENDING THE MEETING IN PERSON, PLEASE SIGN,
DATE, AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Lawrence M. Thompson, Jr.
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LAWRENCE M. THOMPSON, JR.
SECRETARY
Wyomissing, Pennsylvania
March 19, 1997
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SOVEREIGN BANCORP, INC.
1130 BERKSHIRE BOULEVARD
WYOMISSING, PENNSYLVANIA 19610
(610) 320-8400
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PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 17, 1997
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GENERAL INFORMATION
SOLICITATION OF PROXIES. This Proxy Statement is furnished in connection
with the solicitation of proxies by the Board of Directors of Sovereign Bancorp,
Inc. ("Sovereign"), parent company of Sovereign Bank and Sovereign Community
Bank, for use at Sovereign's annual meeting of shareholders to be held April 17,
1997, or any adjournment thereof (the "Meeting"). The Proxy Statement and the
accompanying proxy are first being mailed to shareholders of Sovereign on or
about March 19, 1997. The expense of soliciting proxies will be borne by
Sovereign. It is expected that the solicitation of proxies will be made
primarily by mail. Sovereign's directors, officers and team members may also
solicit proxies personally, by telephone and by telegraph. In addition,
Sovereign has retained Georgeson & Company Inc. to assist with the solicitation
of proxies at an estimated cost of $8,000 plus reasonable out-of-pocket
expenses.
VOTING AND REVOCATION OF PROXIES. The execution and return of the enclosed
proxy will not affect a shareholder's right to attend the Meeting and vote in
person. Any shareholder giving a proxy may revoke it at any time before it is
exercised by submitting written notice of its revocation or a subsequently
executed proxy bearing a later date to the Secretary of Sovereign, or by
attending the Meeting and electing to vote in person. Shareholders of record at
the close of business on March 3, 1997 (the "Record Date"), are entitled to
notice of, and to vote at, the Meeting. On the Record Date, there were
57,961,683 shares of Sovereign common stock outstanding (unadjusted for the
6-for-5 stock split effected on March 14, 1997), each of which will be entitled
to one vote at the Meeting.
If the enclosed proxy is appropriately marked, signed and returned in time
to be voted at the Meeting, the shares represented by the proxy will be voted in
accordance with the instructions marked thereon. Signed proxies not marked to
the contrary will be voted "FOR" the election, as directors, of the Board of
Directors' nominees; "FOR" the proposal to amend Sovereign's Articles of
Incorporation to increase the number of authorized shares of common stock from
100,000,000 to 200,000,000 shares; and "FOR" the ratification of Ernst & Young
LLP as Sovereign's independent auditors for 1997. Signed proxies will be voted
"FOR" or "AGAINST" any other matter that properly comes before the Meeting or
any adjournment thereof, in the discretion of the persons named as proxyholders.
QUORUM. The presence, in person or by proxy, of shareholders entitled to
cast at least a majority of the votes that all shareholders are entitled to cast
shall constitute a quorum at the Meeting. Abstentions and broker nonvotes with
respect to one or more proposals voted upon at the Meeting will be included for
purposes of determining the presence of a quorum at the Meeting.
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INFORMATION CONCERNING THE BOARD OF DIRECTORS,
SOVEREIGN'S GOVERNANCE PROCEDURES
AND COMMITTEES OF THE BOARD OF DIRECTORS
Sovereign's Articles of Incorporation provide that the number of Sovereign
directors shall consist of not less than six nor more than twenty members, as
fixed by the Board of Directors from time to time. The Articles also provide
that the Board shall be divided into three classes, which under applicable law,
must be, in terms of the number of directors in each class, as nearly equal as
possible. The Board presently consists of eight members.
Consistent with what it perceives to be good principles of corporate
governance, Sovereign's historic practice has been to require that the
preponderance of its Board consist of outside, non-employee directors, presently
six, and to delegate important policy making and oversight functions to
committees which also consist predominantly of outside directors. A description
of the committees which possess significant corporate governance
responsibilities is set forth below.
o Sovereign's Audit Committee consists of five directors, all of whom are
outside directors. Sovereign's Audit Committee serves as the principal
liaison among the Board of Directors, Sovereign's independent certified
public accountants and Sovereign's internal audit function. It is
responsible, among other things, for reporting to Sovereign's Board on
the results of the annual audit. The Committee reviews and evaluates the
scope of the audit, accounting policies and reporting practices, internal
auditing, internal controls, security procedures and other matters
considered appropriate. The Committee also reviews the performance of
Sovereign's independent certified public accountants in connection with
their audit of Sovereign's financial statements. Importantly, from a
corporate governance perspective, it also regularly evaluates their
independence from Sovereign and Sovereign's management. Depending on the
nature of matters under review, the outside auditors, and such officers
and other team members, as necessary, attend all or part of the meetings
of the Committee. Sovereign's Audit Committee met twice during 1996.
o Sovereign's Nominating Committee consists of five directors, all of whom
are outside directors. Sovereign's by-laws provide for both shareholder
and Board nomination of director candidates. The Committee has the
important task of taking the first step toward assuring good corporate
governance by identifying, reviewing and recommending, to the full Board,
potential nominees for submission to Sovereign's shareholders for
election as directors of Sovereign or for election to fill vacancies on
the Board. The Committee strives to identify, review and recommend only
those nominees who appear to possess (i) the highest personal and
professional ethics, integrity and values; (ii) sufficient education and
breadth of experience to understand, evaluate and suggest solutions to
the many problems facing financial institutions in an increasingly
competitive environment; (iii) a reasoned and balanced commitment to
Sovereign's social responsibilities; (iv) an interest in and the
availability of time to be involved in Sovereign's affairs over a
sustained period; (v) the reputation and stature required to represent
Sovereign in the communities Sovereign serves, as well as before
Sovereign's shareholders and other stakeholders; (vi) a willingness to
objectively appraise management performance in the interest of Sovereign
and its stakeholders; (vii) an open mind on all policy issues
affecting the overall interests of Sovereign and its stakeholders, and
(viii) involvement only in other activities or interests which do not
create a conflict, or the appearance of a conflict, with the director's
responsibilities to Sovereign and its stakeholders. The Committee's
review of candidates is performed without regard to gender, race or
religious affiliation. One of the objectives of this review is to have a
Board which consists of members with a mix of diverse backgrounds,
skills, experiences and personalities which will foster, not only good
decision making, but also the chemistry to create an environment
encouraging active, constructive, and informed participation among Board
members. The Committee met once during 1996.
o Sovereign's Corporate Governance and Ethics Committee, which Sovereign
believes to be one of the few such Board committees in the United States,
consists of five directors, all but one of whom are outside directors.
The Chairman of the Committee also serves as Chairman of Sovereign Bank's
Ethics Committee. The Committee monitors, oversees and reviews
compliance, by Sovereign's directors, officers and team members with
Sovereign's Code of Conduct. Sovereign's Code of Conduct regulates
potential conflicts of interest and transactions between Sovereign and
its affiliates, the possible misuse or
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abuse of confidential information by Sovereign affiliates, and trading in
Sovereign stock by Sovereign affiliates. The Committee function,
therefore, is to assure, to the extent practicable, that Sovereign's
directors, management, other affiliates and team members act in
accordance with the highest standards of professional and ethical
conduct. When exercising its authority, the Committee is required to
consider Sovereign's mission, vision and values, including the impact of
its actions on Sovereign's stakeholders, including Sovereign's
shareholders, customers and team members, and the communities Sovereign
serves. The Committee also is required to periodically review Sovereign's
Code of Conduct and to make recommendations to the Board with respect to
modification. During 1996 Sovereign expanded the scope of the
responsibility of this Committee to specifically include other corporate
governance matters. The Committee met once during 1996.
o Sovereign's Compensation Committee consists of five directors, all of
whom are outside directors. This Committee is responsible for the
important task of studying and making recommendations to the Board on
compensating and providing incentive to executive management, principally
Sovereign's Chief Executive Officer. Among other responsibilities, the
Committee makes appraisals of the performance of the Chief Executive
Officer. In addition, the Committee reviews Sovereign's executive
compensation structure in an effort to ensure that executive compensation
(i) is competitive and (ii) is closely linked to Sovereign's financial
performance. The Committee also attempts to ensure, through programs
which are substantially weighted in favor of the use of Sovereign stock
as a compensation medium, that the interests of executive management are
aligned, to the extent practicable, with the interests of Sovereign's
shareholders. This Committee met once during 1996.
o Sovereign's Community Reinvestment and Public Responsibility Committee
consists of five directors, three of whom are outside directors and two
of whom are employee directors. The Committee reviews Sovereign's
programs, which strive to meet Sovereign's social responsibilities to the
communities which it serves by, among other things, providing credit to
all segments of such communities, including low to moderate income
individuals. The Committee reviews Sovereign's pursuit of opportunities
which contribute to the growth and vitality of these communities while
conforming to safe and sound lending practices and to the many laws and
regulations which are applicable to financial institutions. The Committee
reviews and recommends to the Board Sovereign's annual Community
Reinvestment Act Plan, including a review of Sovereign Bank's credit
programs and results, in an effort to assure that they are socially
useful, economically sound and nondiscriminatory. The Committee met once
during 1996.
Sovereign also maintains a number of other important committees, including
Sovereign's Merger and Acquisition Committee, Sovereign's Pension Committee,
Sovereign's Risk Management Committee, and Sovereign's Executive Committee.
Sovereign's Merger and Acquisition Committee, which met once during 1996,
consists of four directors, three of whom are outside directors. The Committee
reviews and recommends to Sovereign's Board of Directors candidates for
acquisition by Sovereign. Sovereign's Pension Committee, which met twice during
1996, consists of five directors, four of whom are outside directors. This
Committee administers Sovereign's Pension Plan, Employee Stock Ownership Plan,
Stock Purchase Plan, 401(k) Retirement Savings Plan and Sovereign's Long Term
Deferred Compensation Plan. This Committee also approves Sovereign's investment
policy and guidelines, reviews investment performance, and appoints and retains
trustees and investment managers for Sovereign's retirement plans. Sovereign's
Risk Management Committee assesses the major risks which impact on Sovereign's
earnings, asset quality, operations, as well as interest rate risk. The
Committee consists of six directors, five of whom are outside directors. The
Risk Management Committee met twice during 1996. The Board of Directors also has
an Executive Committee, which has the ability to exercise all of the powers of
the Board in the management and direction of the business and affairs of
Sovereign between Board meetings, except those, which by statute, are reserved
to the Board of Directors. This Committee, which met once during 1996, consists
of six directors, five of whom are outside directors.
Also consistent with the principles of what it perceives to be good
corporate governance, Sovereign's Board, working with management, has
established a series of practices and procedures to ensure a flow of information
about Sovereign's business to its directors in an effort to maximize continued
active interest, involvement and participation by Board members, as well as
diligent and effective Board decision making.
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New Sovereign directors receive manuals which include information on
Sovereign's vision, mission, values and style, as well as copies of Sovereign's
by-laws, policies, procedures and guidelines. They are also provided with an
opportunity to meet with Sovereign's management and visit Sovereign's
facilities.
Pre-meeting materials are routinely distributed to Board members in advance
of meetings. These materials include in-depth reports on each of Sovereign's
critical success factors, including reports on asset quality, cost containment,
interest rate and other risks. These materials also include reports for each of
Sovereign's divisions, consisting not only of financial data, but also
production, sales and marketing data and information on market and industry
trends, as well. These materials also include background and write-ups on items
coming before the Board. In an effort to be informed, directors also
periodically visit sites of new branches and acquisitions, as well as other
Sovereign locations germane to the decision making process.
Senior and executive officers routinely attend at least a portion of every
Board meeting and they, and other members of management, frequently brief and
seek advice from the Board, not only on items coming before the Board, but also
on new products, marketing strategies and human resource initiatives. The Board
periodically invites professionals and representatives of securities firms to
make presentations to the Board in order to make the Board more aware, among
other things, of investor perceptions of Sovereign. The Board also holds
periodic meetings with Sovereign's senior regulators in order for these
regulators to make the Board more aware of the changing regulatory environment,
and industry trends, as well as to discuss their assessment of Sovereign. Board
members take these and other opportunities to actively discuss Sovereign
specific and industry specific information and trends with these officers and
other visitors.
Sovereign's Board meets once or twice each year, over a two-day period,
with Sovereign's executive management team to review Sovereign's business plans,
discuss corporate strategy and evaluate Sovereign's strengths, weaknesses,
opportunities and threats, as well as to review Sovereign's progress against
Sovereign's vision, mission, values and critical success factors.
Sovereign's Board also extensively studies Sovereign's strategic
alternatives including sale, continuing its current strategy, or engaging in a
merger of equals at least once a year. Sovereign has pursued this policy for the
past three years and expects to continue it in the future, particularly in light
of rapidly changing competitive conditions. Investment banking firms are usually
asked to provide material for and/or to make presentations to or otherwise
assist the Board at these sessions.
In addition, Sovereign's Board has identified the following areas of Board
and Board Committee involvement and responsibility as its principal areas of
focus in its effort to achieve good corporate governance and to represent
Sovereign's stakeholders effectively:
1. Ongoing active and participatory review of Sovereign's strategic plan
and its long range goals and of Sovereign's performance against such
plan and goals, and the evaluation of the desirability, as appropriate,
of modifications to such plans and goals;
2. Monitoring of Sovereign's activities which may pose significant risks to
Sovereign and of Sovereign's programs to respond to and contain such
risks;
3. Ongoing review and monitoring of Sovereign's progress in achieving its
critical success factors;
4. Periodic, independent and objective review of the performance and
development of the Chief Executive Officer and other members of
executive management and their compensation relative to such
performance, as well as succession planning;
5. Ongoing review of Sovereign's adherence to its corporate "Mission,"
"Vision" and "Values," which include Sovereign's articulation of its
responsibilities to its stakeholders, including its shareholders,
customers, team members, and the communities Sovereign serves;
6. Regular, periodic study, with outside assistance, of Sovereign's
strategic alternatives, including sales;
7. Ongoing review of, and compliance with, Sovereign's policies and
procedures, particularly its Code of Conduct, and other policies
designed to assure compliance by Sovereign with law and regulation;
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8. The selection process for nominees for election to Sovereign's Board and
the overall quality, interest, diligence, participation and contribution
of its members; and
9. The availability, dissemination and explanation of the information which
the Board and management believe is needed for the Board to perform its
duties diligently and effectively in the interest of Sovereign's
stakeholders.
The Board met 14 times during 1996. Each director attended at least 75% of
the total number of meetings of the Board and its Committees on which the
director served.
In addition to consisting principally of outside directors, Sovereign's
Board occasionally excludes management directors from meetings. It also
otherwise acts in an independent manner and considers itself to be interested,
diligent, actively involved in Sovereign's affairs and otherwise dedicated to
principles of good corporate governance.
ELECTION OF DIRECTORS
Sovereign's Board of Directors consists of eight members and is divided
into three classes: Class II directors, whose term expires in 1998; Class III
directors, whose term expires in 1999; and Class I directors, whose present term
expires in 1997 at the Meeting and, if and when elected at the Meeting, whose
term will expire in 2000.
The Board of Directors has unanimously nominated Fred D. Hafer, Patrick J.
Petrone, and Cameron C. Troilo for election as Class I directors of Sovereign.
Mr. Hafer was appointed a Class I director by the Board of Directors in January
1997 to fill a vacancy created as a result of an increase by the Board in the
size of Class I. Mr. Troilo was nominated as a Class I director to succeed
Theodore Zialek, who will retire from the Board of Directors at the conclusion
of his term at the Meeting. Each of the nominees has consented to being named in
this Proxy Statement and to serve if elected. If any of the nominees become
unable to accept nomination or election, the persons named in the proxy may vote
for a substitute nominee selected by the Board of Directors. Sovereign's
management, however, has no present reason to believe that any nominee listed
below will be unable to serve as a director, if elected.
The three nominees who receive the highest number of votes cast at the
Meeting will be elected Class I directors. Shares represented by properly
executed proxies in the accompanying form will be voted for the Class I nominees
named below unless otherwise specified in the proxy by the shareholder. Any
shareholder who wishes to withhold authority from the proxyholders to vote for
the election of directors or to withhold authority to vote for any individual
nominee may do so by marking his or her proxy to that effect. Shareholders
cannot cumulate their votes for the election of directors. No proxy may be voted
for a greater number of persons than the number of nominees named.
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The following table sets forth certain information concerning the nominees
for election as Class I directors of Sovereign, the continuing Class II and
Class III directors of Sovereign, each named present or former executive officer
of Sovereign set forth in the summary compensation table on page 12, and all
Sovereign directors and executive officers as a group, including their ownership
of shares of common stock of Sovereign as of March 3, 1997. Unless otherwise
indicated in a footnote, each such Sovereign director and each such named
executive officer holds sole voting and investment power over the shares listed
as beneficially owned. Unless otherwise indicated in a footnote, shares
indicated as being subject to options are shares issuable pursuant to options
outstanding and vested under the Sovereign's stock option plans.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
DIRECTOR BENEFICIAL OF COMMON
NAME AGE SINCE OWNERSHIP(1) STOCK
---- --- -------- ------------ ---------
<S> <C> <C> <C> <C>
NOMINEES AS CLASS I DIRECTORS
TO SERVE UNTIL 2000
Fred D. Hafer........................................... 56 1997 300(2) --
Patrick J. Petrone...................................... 67 1987 164,013(3) .3%
Cameron C. Troilo....................................... 58 -- 364,180(4) .6
CONTINUING AS CLASS II DIRECTORS
TO SERVE UNTIL 1998(5)
Rhoda S. Oberholtzer.................................... 66 1979 24,833(6) --
Daniel K. Rothermel..................................... 58 1976 34,550(7) --
CONTINUING CLASS III DIRECTORS
TO SERVE UNTIL 1999
Richard E. Mohn......................................... 66 1981 371,842(8) .6
Jay S. Sidhu............................................ 45 1987 1,606,555(9) 2.7
G. Arthur Weaver........................................ 64 1971 74,820(10) .1
EXECUTIVE OFFICERS
Karl D. Gerhart......................................... 44 N/A 317,906(11) .5
Lawrence M. Thompson, Jr................................ 44 N/A 207,982(12) .4
All Sovereign Directors and executive officers as a
group (10 persons).................................... N/A 3,231,105(13) 5.5%
</TABLE>
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(1) The table reflects data supplied by each director and executive officer.
The table does not reflect the 6-for-5 stock split effected March 14, 1997.
The table reflects shares of Sovereign stock owned by the trustee of
Sovereign's Employee Stock Ownership Plan ("Sovereign ESOP") which have
been allocated to the accounts of the executive officers identified in the
table and as a group.
(2) Mr. Hafer holds shared voting and investment power over all of such shares.
(3) Mr. Petrone holds shared voting and investment power over 52,479 shares.
Time in service includes years Mr. Petrone served as director of
Sovereign's and Sovereign Bank's predecessor institutions.
(4) Shares and percent include 42,905 shares subject to options. Mr. Troilo has
not previously served on the Board of Directors of Sovereign, but has
served on the Board of Directors of Sovereign Bank since 1989.
(5) Howard D. Mackey, presently a Class II director, will retire effective
March 31, 1997, prior to the Meeting.
(6) Shares and percent include 348 shares held by Mrs. Oberholtzer's spouse.
(footnotes continued on following page)
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(7) Shares and percent include 876 shares held by Mr. Rothermel's spouse with
respect to which Mr. Rothermel disclaims beneficial ownership.
(8) Shares and percent include 103,454 shares held by Mr. Mohn's spouse and
38,419 shares subject to options.
(9) Mr. Sidhu holds shared voting and investment power over 533,183 shares.
Shares and percent include 692,883 shares subject to options, 119,615
shares held by Mr. Sidhu's spouse and children and 18,714 shares held by
Sovereign's 401(k) Retirement Savings Plan which are allocated to
Mr. Sidhu's account. Shares and percent include 11,633 shares purchased and
held by the Sovereign ESOP which are allocated to Mr. Sidhu's account and
over which he exercises voting power.
(10) Mr. Weaver holds shared voting and investment power over 47,229 shares.
(11) Mr. Gerhart holds shared voting and investment power over 231,600 shares.
Mr. Gerhart's shares and percent include 45,427 shares subject to options
and 42,765 shares held by Sovereign's 401(k) Retirement Savings Plan which
are allocated to Mr. Gerhart's account. Shares and percent also include
8,550 shares purchased and held by the Sovereign ESOP which are allocated
to Mr. Gerhart's account and over which he exercises voting power.
(12) Mr. Thompson holds shared voting and investment power over 60,488 shares.
Mr. Thompson's shares and percent include 129,107 shares subject to options
and 3,685 shares held by Sovereign's 401(k) Retirement Savings Plan which
are allocated to Mr. Thompson's account. Shares and percent also include
8,335 shares purchased and held by the Sovereign ESOP that are allocated to
Mr. Thompson's account and over which he exercises voting power.
(13) In the aggregate, these persons hold shared voting and investment power
over 763,807 shares. Shares and percent include 867,417 shares subject to
options and 65,164 shares held by Sovereign's 401(k) Retirement Savings
Plan which are allocated to the executive officers' accounts. Shares and
percent also include 28,518 shares purchased and held by the Sovereign ESOP
that are allocated to participant accounts and over which they exercise
voting power.
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The principal occupation and business experience during the last five years
of, and other information with respect to, each nominee for election as a
director of Sovereign and of each continuing director of Sovereign is as
follows:
photo of FRED D. HAFER. Mr. Hafer was appointed President and Chief
Fred D. Operating Officer of GPU, Inc. (public utility company) in 1996.
Hafer Prior thereto, he served as President and Chief Operating Officer
of Metropolitan Edison Co. ("Met-Ed") and Pennsylvania Electric
Co. from 1994. Prior thereto, he served as President and Chief
Operating Officer of Met-Ed from 1986. Mr. Hafer has served as a
director of GPU, Inc. since 1996.
photo of RICHARD E. MOHN. Mr. Mohn became Chairman of the Board of
Richard E. Sovereign Bank in November, 1989, and Chairman of Sovereign in
Mohn April, 1995. He is Chairman of Cloister Spring Water Company,
Lancaster, Pennsylvania, a bottler and distributor of spring
water. Mr. Mohn serves as a member of Sovereign's Executive,
Compensation, Community Reinvestment and Public Responsibility
Committees, its Corporate Governance and Ethics, Merger and
Acquisition, Pension and Risk Management Committees and also
serves as Chairman and as a member of Sovereign's Nominating
Committee.
photo of RHODA S. OBERHOLTZER. Mrs. Oberholtzer is retired. Prior to her
Rhoda S. retirement she was Floral Manufacturing Manager of Stauffer's of
Oberholtzer Kissel Hill, Lititz, Pennsylvania. Mrs. Oberholtzer serves on
Sovereign's Audit, Community Reinvestment and Public
Responsibility Committees, and its Corporate Governance and
Ethics and Risk Management Committees and also serves as
Chairperson and as a member of Sovereign's Pension Committee.
photo of PATRICK J. PETRONE. Mr. Petrone retired as President of the
Patrick J. Charter Federal Savings Bank Division of Sovereign Bank and as
Petrone Vice Chairman of Sovereign Bank in October 1996. Prior to the
merger of Charter Federal Savings Bank into Sovereign Bank in
1994, he served as President and Chief Executive Officer of
Charter and of Charter Federal. Mr. Petrone previously served as
President and Chief Executive Officer of Charter since 1990 and
President and Chief Executive Officer of Charter Federal since
1989. Mr. Petrone serves on Sovereign's Executive, Corporate
Governance and Ethics, Merger and Acquisition, and Risk
Management Committees, and also serves as Chairman and as a
member of Sovereign's Community Reinvestment and Public
Responsibility Committee.
8
<PAGE>
photo of DANIEL K. ROTHERMEL. Mr. Rothermel became President and Chief
Daniel K. Executive Officer of Cumru Associates, Inc., a private holding
Rothermel company in 1989. He retired, in 1989, as Vice President, General
Counsel and Secretary of Carpenter Technology Corporation, a
publicly held specialty steel manufacturer, a position he held
for more than ten years. Mr. Rothermel is a member of Sovereign's
Audit, Compensation, Merger and Acquisition, Nominating and
Pension Committees, and also serves as Chairman and as a member
of Sovereign's Executive and Corporate Governance and Ethics
Committees.
photo of JAY S. SIDHU. Mr. Sidhu became President and Chief Executive
Jay S. Officer of Sovereign in November 1989, and was named President
Sidhu and Chief Executive Officer of Sovereign Bank in March 1989.
Mr. Sidhu previously served as Treasurer and Chief Financial
Officer of Sovereign since the organization of Sovereign in 1987.
Mr. Sidhu serves as a member of Sovereign's Executive, Community
Reinvestment and Public Responsibility Committees, its Corporate
Governance and Ethics, Pension, and Risk Management Committees,
and also serves as Chairman and a member of Sovereign's Merger
and Acquisition Committee.
photo of CAMERON C. TROILO. Mr. Troilo is the owner and President of
Cameron C. Cameron C. Troilo, Inc., a holding company for entities engaged
Troilo in the construction, building material supply, and real estate
management businesses. Mr. Troilo previously served as Vice
Chairman of Yardley Savings & Loan Association, which was
acquired by Sovereign Bank in 1989. He presently serves on the
Executive Committee, Asset Liability Committee, Directors Loan
Committee, and is Chairman of the CRA Committee of Sovereign
Bank.
photo of G. ARTHUR WEAVER. Mr. Weaver is a real estate and insurance
G. Arthur executive with the George A. Weaver Company, New Holland,
Weaver Pennsylvania. Mr. Weaver serves on Sovereign's Executive, Audit,
Corporate Governance and Ethics, Nominating and Risk Management
Committees, and also serves as Chairman and a member of
Sovereign's Compensation Committee.
Compensation Paid to Directors
Sovereign believes that the amount, form and methods used to determine
compensation are an important ingredient in (i) attracting and maintaining
directors who are independent, interested, diligent and actively involved in
Sovereign's affairs, and (ii) more substantially aligning the interests of
Sovereign's directors with the interests of Sovereign's stakeholders.
In 1996, shareholders approved the Non-Employee Director Compensation Plan
as a means of compensating non-employee directors of Sovereign and Sovereign
Bank for all services rendered as directors. The Plan requires
9
<PAGE>
that, on a quarterly basis, all persons serving as directors of Sovereign and/or
Sovereign Bank receive a fixed number of shares of Sovereign common stock, plus
cash equal to the difference between the value of Sovereign common stock
received and the individual's quarterly compensation. Sovereign's Chairman must
receive the total amount of his compensation in Sovereign common stock. For
1996, directors of Sovereign who also served as directors of Sovereign Bank
received 675 shares of Sovereign common stock quarterly plus cash sufficient to
provide total quarterly compensation of $9,500 and directors of Sovereign who
did not also serve as directors of Sovereign Bank received 500 shares of
Sovereign common stock quarterly plus cash sufficient to provide total quarterly
compensation of $7,000. Sovereign's Chairman received Sovereign common stock
with a value sufficient to provide quarterly compensation of $25,000.
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
Sovereign Bancorp, Inc.'s Executive Compensation Program is administered by
the Compensation Committee of the Board of Directors. The Compensation Committee
is composed entirely of non-employee Directors. The Executive Compensation
Program is structured and administered to support Sovereign's mission, which is
to be a highly focused, quality driven, market led and results oriented company,
seeking continually to outperform the market in terms of consistency, growth in
earnings, quality of earnings and return on equity. The program is also
structured to link executive compensation to Sovereign's performance and,
through programs which are substantially weighted in favor of the use of
Sovereign stock as a compensation medium, to more closely align the interests of
executive management with those of Sovereign's shareholders.
The Compensation Committee evaluates and recommends, to the Board of
Directors, compensation and awards for the Chief Executive Officer. The Chief
Executive Officer, Jay S. Sidhu, evaluates and approves compensation and awards
for the other executive officers. Such compensation and awards are based upon
Sovereign's performance and each individual's performance in meeting personal
and team objectives.
COMPENSATION PHILOSOPHY
The Executive Compensation Program of Sovereign has been designed to:
o Align the interests of executives with the long-term interests of
shareholders through award opportunities which result in ownership of
common stock;
o Motivate key team members to achieve a superior level of quality
performance and financial results by rewarding them for their
achievement; and
o Support a pay-for-performance policy that supplements overall company
compensation amounts based on company-wide results, team oriented results
and individual performance.
COMPONENTS OF COMPENSATION
At present, the Executive Compensation Program is comprised of salary,
annual cash incentive opportunities, long-term incentive opportunities in the
form of options to acquire Sovereign stock and employee benefits, which are also
significantly stock based. As an executive's level of responsibility increases,
a greater portion of his or her potential total compensation opportunity is
based on performance incentives and less on salary and employee benefits,
causing greater variability in the individual's absolute compensation from
year-to-year. Base salary levels for the executive officers of Sovereign are set
below average compared to other companies within its peer group, which consists
of other thrifts and thrift holding companies in the $5 billion to $15 billion
asset range. The peer group used in determining compensation is different from
and broader than the peer group (the three (3) largest Pennsylvania bank holding
companies) used in the performance graph (see "Performance Graph") because,
although Sovereign is the fourth (4th) largest financial institution
headquartered in Pennsylvania, it is smaller in asset size than all of the
companies in the performance graph peer group. Executives can have the
opportunity for total cash compensation to exceed the average salary for peer
group companies upon Sovereign's achievement of predetermined financial goals
and objectives set by the Compensation Committee and the Board of Directors. The
intent is to have incentive compensation tied to performance results.
10
<PAGE>
The Chief Executive Officer's base salary increased in January 1997 from
$245,000 to $295,000. The Compensation Committee based the Chief Executive
Officer's base salary in 1995 and 1996 on a variety of factors, including the
salaries of the chief executive officers of comparable companies in the
financial services industry to which it compares its financial results. The
salary increase granted to the Chief Executive Officer in 1997 was not based on
any mathematical formula and did not directly relate to any quantitative
factors. The increase was determined in the Compensation Committee's sole
discretion after its consideration of competitive data, the Board of Directors'
assessment of his performance during 1995 and 1996 and recognition of
Sovereign's performance, which for 1995 and 1996 was generally above its peer
group in terms of return on equity, net income and growth in assets through
mergers and acquisitions. The other named executive officers were granted salary
increases each year based on individual performance, contributions to Sovereign
and level of responsibility.
SHORT-TERM INCENTIVE COMPENSATION
Incentive compensation awards in 1997 were based on a review of Sovereign's
1996 performance. This review included an assessment of Sovereign's results of
operations for 1996 and of how Sovereign met and exceeded financial goals, set
in early 1996, for return on equity, earnings and capital levels for 1996. The
goals reflected the Board of Directors' determination of the appropriate goals
for a growth oriented company. No bonuses would have been paid to executive
management if Sovereign's return on beginning equity at January 1, 1996 was less
than 15% for the year ended December 31, 1996. Pursuant to a formula recommended
by the Compensation Committee and approved by the Board early in 1996, if
Sovereign's return on beginning equity was 15% or better for 1996, Mr. Sidhu was
entitled to a bonus for 1996 based on a sliding scale of various percentages of
Sovereign's profits beginning at 0.65% for a 15% return on beginning equity to
0.9% for a 16.5% or better return on beginning equity. Mr. Sidhu was also
entitled to receive special bonuses for 1996 if Sovereign's profits exceeded
$65.5 million and if Sovereign closed or announced an acquisition of $400
million or greater by December 31, 1996.
The Compensation Committee determined the amount of bonus paid to Mr. Sidhu
and Mr. Sidhu determined the bonuses paid to the other named executives. In a
continuing effort to align the interests of executive management with the
interests of shareholders by making a higher percentage of compensation stock
based, Mr. Sidhu's bonus increases by 5% if he agrees to use his bonus to
increase his stake in Sovereign by purchasing shares of Sovereign common stock
with the bonus. The bonuses of certain executive officers, from time-to-time,
are likewise increased if they agree to purchase stock. Because Sovereign's
return on beginning equity and profits exceeded Sovereign's targets. Mr. Sidhu
was awarded incentive compensation of $567,000 for 1996. This amount may be
increased by 5% if Mr. Sidhu agrees to buy Sovereign common stock with the
proceeds of his bonus.
LONG-TERM INCENTIVE COMPENSATION
Sovereign's shareholders approved the 1996 Stock Option Plan at the 1996
Annual Meeting of Shareholders. The 1996 Plan, like its predecessor plans, is a
long-term plan designed not only to provide incentive to management, but also to
align a significant portion of the Executive Compensation Program with
shareholder interests. The 1996 Stock Option Plan permits Sovereign to grant
certain officers a right to purchase shares of stock over a ten (10) year
period, at the fair market value per share at the date the option is granted. In
granting incentive stock options to Mr. Sidhu and the other executive officers,
the Compensation Committee took into account Sovereign's financial performance,
Sovereign's long-term strategic goal of increasing shareholder value, the
executive's level of responsibility and his continuing contributions to
Sovereign. In 1996, shareholders also approved the Non-Employee Director
Compensation Plan, which is designed to more closely align the interests of
directors with those of shareholders by requiring that a preponderant portion of
a non-employee director's annual compensation for Board membership be paid in
shares of Sovereign common stock.
The following tables, and the accompanying narrative and footnotes, reflect
the decisions covered by the above discussion. This report has been furnished by
the Compensation Committee whose members are:
G. Arthur Weaver, Chairman
Richard E. Mohn
Daniel K. Rothermel
Theodore Ziaylek, Jr.
11
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to Sovereign for the
fiscal years ended December 31, 1996, 1995 and 1994, of those persons who during
1996, (i) served as Sovereign's chief executive officer or (ii) were executive
officers (other than the chief executive officer) whose total annual salary and
bonus exceeded $100,000 (collectively with the chief executive officer, the
"Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- -------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND SALARY BONUS OPTIONS/SARS(2) COMPENSATION(3)(4)
PRINCIPAL POSITION YEAR ($) ($)(1) (#) ($)
------------------ --------- ---------- ---------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Jay S. Sidhu 1996 $ 245,000 $ 567,000 26,250 $ 4,500
President and 1995 195,000 460,479 0 4,725
Chief Executive Officer 1994 195,000 422,158 0 4,710
Karl D. Gerhart 1996 125,000 82,784 10,500 4,500
Chief Financial 1995 114,038 85,555 0 4,065
Officer and Treasurer 1994 103,846 40,000 0 3,115
Lawrence M. Thompson, Jr. 1996 125,000 82,784 10,500 2,548
Chief Administrative 1995 114,038 85,555 0 3,859
Officer and Secretary 1994 103,462 40,000 0 3,104
</TABLE>
- ------------------
(1) Mr. Sidhu's bonus for 1996 may be increased by 5% if Mr. Sidhu agrees to
purchase Sovereign common stock with the proceeds of such bonus.
(2) Does not reflect the 6-for-5 stock split effected March 14, 1997. Does not
reflect options to acquire 10,500, and 10,500 shares of Sovereign common
stock awarded to Messrs. Gerhart and Thompson, respectively, in January
1997.
(3) Does not include the value of 11,633, 8,550, and 8,335 shares of Sovereign
Common Stock allocated to the accounts of Messrs. Sidhu, Gerhart and
Thompson, respectively, under the terms of Sovereign's Employee Stock
Ownership Plan as of December 31, 1996.
(4) Amounts appearing in this column are Sovereign's contributions on behalf of
each named person to the Sovereign Bancorp, Inc. 401(k) Retirement Savings
Plan, and, in the case of Messrs. Sidhu and Thompson, include Sovereign's
contributions to the Sovereign Bancorp, Inc. Nonqualified Deferred
Compensation Plan.
12
<PAGE>
The following table sets forth information concerning grants of stock
options during the fiscal year ended December 31, 1996 to the named executive
officers.
OPTION GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION
OPTIONS EMPLOYEES OR BASE FOR OPTION TERM
GRANTED(2) IN FISCAL PRICE(3) EXPIRATION ----------------------
NAME (#) YEAR ($/SH) DATE 5%(%)(4) 10%($)(4)
---- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jay S. Sidhu.............................. 26,250 39.29% $ 9.40 1/24/06 $ 154,875 $ 393,488
Karl D. Gerhart........................... 10,500 15.71 9.40 1/24/06 61,950 157,395
Lawrence M. Thompson, Jr.................. 10,500 15.71 9.40 1/24/06 61,950 157,395
</TABLE>
- ------------------
(1) Table does not reflect the 6-for-5 stock split effected on March 14, 1997.
(2) All amounts represent incentive stock options. Terms of outstanding options
are for a period of ten years and one month from the date the option is
granted. An option may only be exercised after the holder has been an
employee of Sovereign or one of its subsidiaries for one full year from the
date the option is granted or three months from the date the employee's
employment is terminated. Options are not exercisable following an
optionee's voluntary termination of employment other than by reason of
retirement or disability.
(3) Under the terms of the plan, the exercise price per share must equal the
fair market value on the date the option is granted. The exercise price may
be paid in cash, in shares of Sovereign common stock valued at fair market
value on the date of exercise or pursuant to a cashless exercise procedure
under which the optionee provides irrevocable instructions to a brokerage
firm to sell the purchased shares and to remit to Sovereign, out of the sale
proceeds, an amount equal to the exercise price plus all applicable
withholding taxes.
(4) The dollar amounts set forth under these columns are the result of
calculations made at the 5% and 10% appreciation rates set forth in
Securities and Exchange Commission regulations and are not intended to
indicate future price appreciation, if any, of Sovereign common stock.
The following table sets forth information concerning exercised and
unexercised options to purchase Sovereign common stock granted to the named
executive officers.
AGGREGATED OPTIONS EXERCISED IN LAST YEAR AND DECEMBER 31, 1996 OPTION VALUE(1)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
SHARES 1996 (#) 1996 ($)
ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---- ------------- -------------- ----------------- -------------------------
<S> <C> <C> <C> <C>
Jay S. Sidhu........................ 57,204 $ 516,981 430,929/261,954 $ 4,656,365/$1,787,836
Karl D. Gerhart..................... 0 0 10,500/34,927 39,113/238,377
Lawrence M. Thompson, Jr............ 0 0 94,180/34,927 974,327/238,377
</TABLE>
- ------------------
(1) Table does not reflect the 6-for-5 stock split effected on March 14, 1997.
13
<PAGE>
PENSION PLAN
Sovereign maintains a defined benefit retirement plan ("Pension Plan") for
all employees who have attained age 21 and have completed one year of
eligibility service. The following table sets forth the estimated annual
benefits payable upon retirement to participants at normal retirement age, in
the average annual salary and years of service classifications specified.
SOVEREIGN BANCORP, INC. PENSION PLAN
ILLUSTRATION OF BENEFITS AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
FIVE YEAR BENEFITS PAYABLE PER YEARS OF SERVICE(1)(2)
AVERAGE -----------------------------------------------------
REMUNERATION(3) 15 20 25 30 35
- --------------- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 60,000 $ 11,583 $ 15,445 $ 19,306 $ 23,167 $ 27,028
80,000 17,283 23,045 28,806 34,567 40,328
100,000 22,983 30,645 38,306 45,967 53,628
120,000 28,683 38,245 47,806 57,367 66,928
140,000 34,383 45,845 57,306 68,767 80,228
160,000 37,233(4) 49,645(4) 62,056(4) 74,467(4) 86,878(4)
180,000 37,233(4) 49,645(4) 62,056(4) 74,467(4) 86,878(4)
200,000 37,233(4) 49,645(4) 62,056(4) 74,467(4) 86,878(4)
220,000 37,233(4) 49,645(4) 62,056(4) 74,467(4) 86,878(4)
240,000 37,233(4) 49,645(4) 62,056(4) 74,467(4) 86,878(4)
</TABLE>
- ------------------
(1) The following are the years of credited service under Sovereign's Pension
Plan for the persons named in the cash compensation table: Mr. Sidhu -- 10
years; Mr. Thompson -- 11 years; Mr. Gerhart -- 20 years.
(2) Benefits are computed in single life annuity amounts on the basis of an
assumed year of birth of 1950 and without any deduction for Social Security
or other offset amounts.
(3) Represents the highest average remuneration received over a consecutive
five-year period during the last ten years, excluding deferred compensation
other than 401(k) Retirement Savings Plan contributions, subject in the
cases of Messrs. Sidhu, Gerhart and Thompson to a compensation limit of
$150,000 in 1996.
(4) The 1996 maximum annual benefit permitted when the Internal Revenue Code's
annual compensation limit of $150,000 and maximum annual benefit limit are
applied to the Pension Plan's benefit formula.
14
<PAGE>
CERTAIN TRANSACTIONS
EMPLOYMENT AGREEMENTS
Sovereign and Sovereign Bank entered into an employment agreement, dated
March 1, 1997, with Jay S. Sidhu, which superseded, in its entirety, Mr. Sidhu's
then existing employment agreement. Mr. Sidhu's agreement has an initial term of
five years and, unless terminated as set forth therein, is automatically
extended annually to provide a new term of five years except that, at certain
times, notice of nonextension may be given, in which case the agreement will
expire at the end of its then current term. No such notice has been given.
The agreement provides a base salary which, if increased by action of the
Board of Directors, becomes the new base salary provided thereafter by the
agreement. In addition, the agreement provides, among other things, a right to
participate in any bonus plan approved by the Board of Directors and insurance,
vacation, pension and other fringe benefits for Mr. Sidhu.
If Mr. Sidhu's employment is terminated without "Cause," or if Mr. Sidhu
voluntarily terminates employment for "Good Reason" (as defined in the
agreement), Mr. Sidhu becomes entitled to severance benefits under the
agreement. "Good Reason" includes the assignment of duties and responsibilities
inconsistent with Mr. Sidhu's status as President and Chief Executive Officer, a
reduction in salary or benefits or a reassignment which requires Mr. Sidhu to
move his principal residence more than 100 miles from Sovereign's principal
executive office. If any such termination occurs, Mr. Sidhu will be paid an
amount equal to five times the sum of (i) his highest annual base salary under
the agreement, and (ii) the average of his annual bonuses with respect to the
three calendar years immediately preceding his termination. Such amount will be
payable in sixty equal monthly installments. In addition, in the event of such
termination, Mr. Sidhu will be entitled to continuation of certain insurance and
other specified benefits for sixty months or until he secures substantially
similar benefits through other employment, whichever shall first occur. Further,
Mr. Sidhu will be entitled to additional retirement benefits to which he would
have been entitled had his employment continued through the then remaining term
of the agreement. If the payments and benefits under the agreement, when
aggregated with other amounts received from Sovereign and Sovereign Bank, are
such that Mr. Sidhu becomes subject to excise tax on excess parachute payments
under Section 4999 and 280G of the Internal Revenue Code, he will receive
additional payments equal to such excise tax and any incremental income taxes he
may be required to pay by reason of the receipt of additional amounts under the
agreement. Sovereign estimates that, if Mr. Sidhu had terminated employment as
of March 1, 1997 under circumstances entitling him to the above-described
severance benefits, he would have been entitled to receive $3.9 million,
exclusive of the non-cash benefits, additional retirement benefits, and any
potential excise tax-related payments.
If Mr. Sidhu's employment terminates by reason of his disability, he will
be entitled to continuation of 80% of the annual base salary and bonus described
above, less amounts payable under any disability plan of Sovereign, until the
earliest of (i) his return to employment, (ii) his attainment of age 65, or
(iii) his death. Provision is also made generally for the continuation of
insurance and other specified benefits for such period, as well as additional
credits for retirement benefit purposes.
The agreement contains provisions restricting Mr. Sidhu's right to compete
with Sovereign and Sovereign Bank during the period he is receiving severance or
disability benefits thereunder, except under certain circumstances.
Sovereign has also entered into employment agreements with Karl D. Gerhart
and Lawrence M. Thompson, Jr., each dated September 15, 1992, which superseded
in their entirety the executives' then existing employment agreements. Each
agreement, has an initial term of two years and, unless terminated as set forth
therein, is automatically extended at certain dates to provide a new term of two
years except that at certain times notice of nonextension may be given, in which
case the agreement will expire at the end of its then current term. Each
agreement provides a base salary which, if increased by action of the Board of
Directors, becomes the new base salary provided thereafter by the agreement. In
addition, each agreement provides, among other things, a right to participate in
any bonus plan approved by the Board of Directors and insurance, vacation,
pension and other fringe benefits for the executive.
15
<PAGE>
If Mr. Gerhart's or Mr. Thompson's employment is terminated without "Cause"
(as defined in the agreements), whether or not a "Change in Control" (as defined
in the agreements) of Sovereign has occurred, or if Mr. Gerhart or Mr. Thompson
voluntarily terminates employment for "Good Reason" (as defined in the
agreements) following a "Change in Control," the executive becomes entitled to
severance benefits under the agreement. The benefits are continuation of salary,
bonus (equal to the average bonus for the three prior years), and insurance and
other fringe benefits for two years. If, in the absence of a "Change in
Control," Mr. Gerhart's or Mr. Thompson's employment is terminated without
"Cause," cash benefits payable under the agreement are reduced by an amount
equal to 25% of any compensation received from another employer. Sovereign Bank
estimates that, if Messrs. Gerhart and Thompson had terminated employment as of
January 1, 1997 under circumstances entitling them to the above-described
severance benefits, they would have been entitled to receive $391,100 and
$392,600, respectively, exclusive of the non-cash benefits and without regard to
any potential reduction in payments by reason of post-termination employment.
Each agreement contains a provision restricting the executive's right to compete
after a voluntary termination of employment without "Good Reason" or any
termination for "Cause"; in all other circumstances, after termination of
employment, there is no covenant not to compete.
INDEMNIFICATION
The by-laws of Sovereign provide for (1) indemnification of directors,
officers, employees and agents of Sovereign and its subsidiaries and (2) the
elimination of a director's liability for monetary damages, each to the fullest
extent permitted by Pennsylvania law. Pennsylvania law provides that a
Pennsylvania corporation may indemnify directors, officers, employees and agents
of the corporation against liabilities they may incur in such capacities for any
action taken or any failure to act, whether or not the corporation would have
the power to indemnify the person under any provision of law, unless such action
or failure to act is determined by a court to have constituted recklessness or
willful misconduct. Pennsylvania law also permits the adoption of a by-law
amendment, approved by shareholders, providing for the elimination of a
director's liability for monetary damages for any action taken or any failure to
take any action unless (1) the director has breached or failed to perform the
duties of his office and (2) the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness.
Directors and officers of Sovereign are also insured against certain
liabilities for their actions, as such, by an insurance policy obtained by
Sovereign. The premium for 1996 was $255,099.
On December 21, 1993, Sovereign Bank entered into an Indemnification
Agreement (the "Indemnification Agreement") with Mr. Sidhu. The Indemnification
Agreement provides that Sovereign Bank will indemnify Mr. Sidhu to the fullest
extent permitted by applicable law and regulation for all expenses, judgments,
fines and penalties incurred in connection with, and amounts paid in settlement
of, any claim relating to, among other things, the fact that Mr. Sidhu is or was
a director or officer of Sovereign or Sovereign Bank (an "Indemnifiable Claim").
Sovereign Bank will also advance expenses upon Mr. Sidhu's request in connection
with any Indemnifiable Claim.
Sovereign Bank's indemnification obligations are subject to the condition
that a Reviewing Party (as defined in the Indemnification Agreement) shall not
have determined that Mr. Sidhu would not be permitted to be indemnified under
applicable law. To the extent that it is subsequently determined that Mr. Sidhu
is not entitled to indemnification, he shall reimburse Sovereign Bank for any
amounts previously paid.
Upon a Change in Control (as defined in the Indemnification Agreement) of
Sovereign or Sovereign Bank, all determinations regarding Sovereign Bank's
indemnification obligations under the Agreement shall be made by Independent
Legal Counsel (as defined in the Indemnification Agreement). Upon a Potential
Change in Control (as defined in the Indemnification Agreement) of Sovereign or
Sovereign Bank, Sovereign Bank shall, upon written request by Mr. Sidhu, create
and fund a trust for the benefit of Mr. Sidhu in order to ensure satisfaction of
Sovereign Bank's indemnification obligations under the Indemnification
Agreement.
16
<PAGE>
INDEBTEDNESS OF MANAGEMENT
Prior to August 1989, Sovereign Bank offered consumer and residential
mortgage loans to directors of Sovereign and its subsidiaries, full-time
employees with six months continuous service at Sovereign Bank, and part-time
employees with one year of continuous service at Sovereign Bank, at preferential
terms with respect to interest rates and loan fees. Specifically, interest rates
offered to such persons were up to 1% lower than rates offered to nonaffiliated
persons for similar transactions, and certain loan origination fees were waived.
As a result of the enactment in August 1989 of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, which made certain provisions of
the Federal Reserve Act applicable to Sovereign and Sovereign Bank, any credit
extended by Sovereign Bank to executive officers and directors of Sovereign Bank
and Sovereign, and to the extent otherwise permitted, principal shareholders of
Sovereign or any related interest of the foregoing, must (i) be on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions by Sovereign Bank with non-affiliated
parties, and (ii) not involve more than the normal risk of repayment or present
other unfavorable features.
At December 31, 1996, there were no directors or executive officers of
Sovereign whose aggregate indebtedness to Sovereign Bank exceeded $60,000, and
whose loan was granted on preferential terms applicable to directors, officers
and employees of Sovereign Bank and Sovereign at the time the loan was made.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Sovereign's officers and directors, and any persons
owning ten percent or more of Sovereign's common stock, to file in their
personal capacities initial statements of beneficial ownership, statements of
changes in beneficial ownership and annual statements of beneficial ownership
with the Securities and Exchange Commission (the "SEC"). Persons filing such
beneficial ownership statements are required by SEC regulation to furnish
Sovereign with copies of all such statements filed with the SEC. The rules of
the SEC regarding the filing of such statements require that "late filings" of
such statements be disclosed in Sovereign's proxy statement. Based solely on
Sovereign's review of any copies of such statements received by it, and on
written representations from Sovereign's existing directors and officers that no
annual statements of beneficial ownership were required to be filed by such
persons, Sovereign believes that all such statements were timely filed in 1996,
except for one report for one transaction involving an exercise of stock options
and sale of underlying common stock by Patrick J. Petrone was inadvertently
filed one month late.
OTHER
Cameron C. Troilo, a nominee for election as a Class I director at the
Meeting, is a party to a lease agreement with Sovereign Bank for its branch and
commercial lending office located in Newtown, Bucks County, Pennsylvania. The
monthly rental amount is $5,712, which was confirmed as fair market value by a
market rate analysis undertaken by Sovereign.
17
<PAGE>
PERFORMANCE GRAPH
Set forth below is a graph and table comparing the yearly percentage change
in the cumulative total shareholder return on Sovereign's common stock against
(1) the cumulative total return on the S&P 500 Index, (2) the cumulative total
return on the NASDAQ Combination Bank Index, and (3) the cumulative total return
on the largest three Pennsylvania bank holding companies (CoreStates Financial
Corp, Mellon Bank Corp. and PNC Bank Corp.) for the five-year period commencing
January 1, 1992, and ending December 31, 1996.
Cumulative total return on Sovereign's common stock, the S&P 500 Index, the
NASDAQ Combination Bank Index and the common stock of the largest three
Pennsylvania bank holding companies equals the total increase in value since
January 1, 1992, assuming reinvestment of all dividends. The graph and table
were prepared assuming that $100 was invested on January 1, 1992, in Sovereign's
common stock, the S&P 500, the NASDAQ Combination Bank Index and the common
stock of the largest three Pennsylvania bank holding companies.
SOVERIEGN BANCORP, INC.
Performance Graph
[GRAPHIC]
In the printed version there appears a line graph depicting the following plot
points:
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
S&P 500............................................ $ 100 $ 103.97 $ 111.30 $ 109.59 $ 146.97 $ 176.75
NASDAQ Combination Bank Index...................... 100 152.02 196.67 198.84 287.95 363.26
Sovereign.......................................... 100 197.66 350.84 231.25 319.85 438.23
Top 3 Banks in PA(1)............................... 100 139.73 136.80 123.69 204.68 273.95
</TABLE>
- ------------------
(1) Includes CoreStates Financial Corp, Mellon Bank Corp. and PNC Bank Corp.
18
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding persons known by
Sovereign to own more than 5% of the outstanding shares of Sovereign's common
stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIARY PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP COMMON STOCK
------------------- ------------------ ------------
<S> <C> <C>
Sovereign ESOP................................................... 4,140,622 7.1%
c/o York Bank & Trust Company
P.O. Box 869
21 East Market Street
York, Pennsylvania 17401
</TABLE>
- ------------------
(1) As of March 3, 1997, 4,140,622 shares of Common Stock (approximately 7.1% of
outstanding shares of Common Stock) were held of record by a nominee for
York Bank & Trust Company, trustee for the Sovereign ESOP. Under the terms
of the Sovereign ESOP, shares held by the Sovereign ESOP are allocated to
individual employee accounts as the debt incurred to purchase the shares is
repaid. Once allocated to an individual employee account, shares are voted
in the manner directed by the employee. Prior to allocation, the trustee is
required to vote the shares in its discretion. As of March 3, 1997, 735,860
shares were allocated to the accounts of Sovereign employees and 3,404,762
shares were unallocated.
PROPOSAL TO AMEND SOVEREIGN'S ARTICLES OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FROM 100,000,000 SHARES TO 200,000,000 SHARES
The Board of Directors has approved an amendment to Article Fifth of the
Articles of Incorporation which, if adopted, would increase the number of
authorized shares of Sovereign common stock from 100,000,000 to 200,000,000
shares. The Board of Directors recommends that shareholders approve this
amendment.
At March 3, 1997, there were 57,961,683 shares of Sovereign common stock
issued and outstanding (unadjusted for the 6-for-5 stock split effected March
14, 1997). Of the remaining 42,038,317 shares of authorized common stock on such
date, in excess of 25,000,000 shares may be issued in connection with
Sovereign's pending acquisition of Bankers Corp. (the exact number dependent on
the value of Sovereign common stock at the closing) and approximately 15,000,000
shares are reserved for issuance under Sovereign's dividend reinvestment and
various employee benefit plans and for conversions of Sovereign's outstanding
cumulative convertible preferred stock, leaving less than 2,000,000 shares of
common stock available for issuance.
Matter No. 2 is being proposed because the Board of Directors believes that
it is advisable to have a greater number of authorized but unissued shares of
common stock available for various corporate programs and purposes. Sovereign
may from time to time consider acquisitions, stock dividends or stock splits,
and public or private financings to provide Sovereign with capital, which may
involve the issuance of additional shares of common stock or securities
convertible into common stock. Also, additional shares of common stock may be
necessary to meet anticipated future obligations under Sovereign's dividend
reinvestment and stock purchase plan and under Sovereign's employee benefit
plans. The Board of Directors believes that having authority to issue additional
shares of common stock will avoid the possible delay and significant expense of
calling and holding a special meeting of shareholders to increase authorized
capital.
Sovereign has no present plan, agreement or understanding involving the
issuance of its common stock except for shares required or permitted to be
issued under employee benefit plans, upon exercise of outstanding stock options,
upon conversion of Sovereign's outstanding cumulative convertible preferred
stock, under Sovereign's shareholder rights plan, and in connection with
Sovereign's pending acquisition of Bankers Corp. It is possible, however, that
additional merger and acquisition opportunities involving the issuance of shares
of common stock will develop. It is also possible that an increase in the market
price for common stock, and conditions in the capital markets generally, may
make a stock dividend, a stock split or a public offering of Sovereign's stock
desirable. Sovereign believes that an increase in the number of authorized
shares of Sovereign's common stock will enhance its ability to respond promptly
to any such opportunities.
19
<PAGE>
If Matter No. 2 is approved, the Board of Directors will not solicit
shareholder approval to issue additional authorized shares of common stock,
except to the extent that such approval may be required by law, and such shares
may be issued for such consideration, cash or otherwise, at such times and in
such amounts as the Board of Directors may determine. Under the rules of the
National Association of Securities Dealers, Inc. applicable to Sovereign,
shareholder approval must be obtained prior to the issuance of shares for
certain purposes, including the issuance of greater than 20% of Sovereign's then
outstanding shares in connection with an acquisition by Sovereign.
Although the Board of Directors presently intends to employ the additional
shares of Common Stock solely for the purposes set forth above, such shares
could be used by the Board of Directors to dilute the stock ownership of persons
seeking to obtain control of Sovereign, thereby possibly discouraging or
deterring a nonnegotiated attempt to obtain control of Sovereign and making
removal of incumbent management more difficult. The proposal, however, is not a
result of, nor does the Board of Directors have knowledge of, any effort to
accumulate Sovereign capital stock or to obtain control of Sovereign by means of
a merger, tender offer, solicitation in opposition to the Board of Directors or
otherwise.
Article Fifth of Sovereign's Articles of Incorporation also authorizes the
issuance of 7,500,000 shares of preferred stock, which the Board of Directors
has the power to issue as a class or in series and to determine the voting
power, if any, dividend rates, conversion or redemption prices, designations,
rights, preferences and limitations of the shares in the class or in each
series. The proposed amendment to Article Fifth of Sovereign's Articles of
Incorporation will not increase or otherwise affect Sovereign's authorized
preferred stock. As of March 3, 1997, there were 2,000,000 shares of Sovereign's
cumulative convertible preferred stock outstanding and no shares of any other
series of preferred stock outstanding.
The amendment of the Articles of Incorporation to increase the number of
authorized shares of common stock from 100,000,000 to 200,000,000 will consist
of a revision of Article Fifth of the Articles of Incorporation to provide as
follows:
"FIFTH. The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is 207,500,000 shares, divided
into two classes consisting of 200,000,000 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")."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS AMENDMENT. The
affirmative vote of a majority of all votes cast at the Meeting is required to
approve this amendment. Abstentions and broker non-votes will not constitute or
be counted as "votes" cast for purposes of the Meeting. All proxies will be
voted "FOR" approval of the amendment unless a shareholder specifies to the
contrary on such shareholder's proxy card.
PROPOSAL TO RATIFY APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of Sovereign has appointed Ernst & Young LLP,
certified public accountants, as Sovereign's independent auditors for the fiscal
year ending December 31, 1997. No determination has been made as to what action
Sovereign's Board of Directors would take if shareholders do not ratify the
appointment.
Ernst & Young LLP has conducted the audit of the financial statements of
Sovereign and its subsidiaries for the year ended December 31, 1996.
Representatives of Ernst & Young LLP are expected to be present at the Meeting,
will be given an opportunity to make a statement if they desire to do so, and
will be available to answer appropriate questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPOINTMENT OF ERNST &
YOUNG LLP AS SOVEREIGN'S INDEPENDENT AUDITORS FOR THE 1997 FISCAL YEAR. The
affirmative vote of a majority of all votes cast at the Meeting is required to
ratify the appointment. Abstentions and broker non-votes will not constitute or
be counted as "votes" cast for purposes of the Meeting. All proxies will be
voted "FOR" ratification of the appointment unless a shareholder specifies to
the contrary on such shareholder's proxy card.
20
<PAGE>
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Sovereign's 1998 Annual Meeting of Shareholders will be held on or about
April 16, 1998.
In accordance with the By-Laws of Sovereign, a shareholder who desires to
propose a matter for consideration at an annual meeting of shareholders must
provide notice thereof in writing, delivered or mailed by first-class United
States mail, postage prepaid, to the Secretary of Sovereign, not less than 90
days nor more than 120 days prior to such annual meeting.
Any shareholder who desires to submit a proposal to be considered for
inclusion in Sovereign's proxy materials relating to its 1998 Annual Meeting of
Shareholders must submit such proposal in writing, addressed to Sovereign
Bancorp, Inc. at 1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610 (Attn:
Secretary), on or before November 17, 1997.
DIRECTOR NOMINATIONS BY SHAREHOLDER
In accordance with the by-laws of Sovereign, any shareholder entitled to
vote for the election of directors may propose candidates for election to the
Board by providing notice thereof in writing and delivered or mailed to
Sovereign not less than 90 days prior to the date of the 1998 Annual Meeting of
Shareholders.
Any shareholder who desires to submit a candidate to be considered for
nomination to the Board of Directors for inclusion in Sovereign's proxy
materials relating to its 1998 Annual Meeting of Shareholders must submit the
same information as that required to be stated by Sovereign in its Proxy
Statement with respect to nominees of the Board of Directors. The shareholder
nomination should be submitted in writing, addressed to Sovereign Bancorp, Inc.
at 1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610 (Attn: Secretary),
on or before January 16, 1998.
ANNUAL REPORT ON FORM 10-K
Sovereign's Annual Report on Form 10-K for the year ended December 31,
1996, including a list of the exhibits thereto, is enclosed herewith.
BY ORDER OF THE BOARD OF DIRECTORS
LAWRENCE M. THOMPSON, JR.
SECRETARY
PLEASE REMEMBER TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR IMPORTANT VOTE WILL BE COUNTED AT
THE ANNUAL MEETING.
21
<PAGE>
DIRECTIONS TO THE SHERATON BERKSHIRE
(ROUTE 422 WEST & PAPER MILL ROAD EXIT), 1741 PAPER MILL ROAD
WYOMISSING (READING), PA 19610-1207
FROM:
MANHATTAN, NY -- Take Lincoln Tunnel to NJ Tpk S to exit 14. Take I-78W to 222S.
Continue 35 miles on 222S to exit marked 222S, 176S, 422W Lancaster Exit here,
continue 2 miles thru 1st traffic light (do not follow signs to 422E or 222S
which exits just before the traffic light). After light, exit onto Paper Mill
Road, Sheraton is straight ahead.
ASBURY PARK/TRENTON, NJ -- Take I-95W to NJ Turnpike S to PA Turnpike W to Exit
22 Morgantown. Follow signs to I-176. Take I-176N to 422W to Paper Mill Road
exit. Exit onto Paper Mill Road, Sheraton is straight ahead.
PHILADELPHIA, PA -- Take I-76W to PA Tpk W to Exit 22 Morgantown. Follow signs
to I-176N 9 miles to 422W to the Paper Mill Road Exit. Exit onto Paper Mill
Road, Sheraton is straight ahead.
PITTSBURGH/HARRISBURG, PA -- Take PA Tpk E to Exit 21 Denver. Follow signs to
222N to 422W to Paper Mill Road Exit. Exit onto Paper Mill Road, Sheraton is
straight ahead.
SCRANTON/WILKES-BARRE, PA -- Take I-81S to 61S to 222S. Exit here, continue 2
miles thru 1st traffic light (do not follow signs to 422E or 222S which exits
just before the traffic light). After light, exit onto Paper Mill Road, Sheraton
is straight ahead.
DOVER, DE -- Take 13N to Wilmington to 141N to I-95N to 202N to 100N to PA Tpk W
to Exit 22 Morgantown. Follow signs I-176N, 9 miles to 422W to Paper Mill Road
Exit. Exit onto Paper Mill Road, Sheraton is straight ahead.
<PAGE>
SOVEREIGN BANCORP, INC.
I/We hereby appoint Karl D. Gerhart and Patricia A. Zong, or any one of
them acting in the absence of the other, as proxyholders, each with the power to
appoint his or her substitute, and hereby authorize them to represent and to
vote, as designated on the reverse side, all the shares of common stock of
Sovereign Bancorp, Inc. held of record by me/us on March 3, 1997, at the Annual
Meeting of Shareholders to be held on April 17, 1997, or any adjournment
thereof.
This proxy when properly executed will be voted in the manner directed on
the reverse side. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE
ELECTION OF DIRECTORS, FOR THE PROPOSAL TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF SOVEREIGN COMMON STOCK, AND FOR THE RATIFICATION OF INDEPENDENT
AUDITORS. This proxy will be voted, in the discretion of the proxyholders,
upon such other business as may properly come before the Annual Meeting of
Shareholders or any adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Please vote and sign on the other side.
<PAGE>
<TABLE>
<S> <C> <C> <C>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
"FOR" THE FOLLOWING MATTERS & PROPOSALS MATTER NO. 2
MATTER NO. 1 Fred D. Hafer; Patrick J. Petrone; Proposal to increase authorized
ELECTION OF CLASS I DIRECTORS Cameron C. Troilo shares of Common Stock
WITHHOLD
FOR all nominees AUTHORITY (INSTRUCTION: TO WITHHOLD AUTHORITY TO
listed the right to vote for all VOTE FOR ANY INDIVIDUAL NOMINEE STRIKE A
(except as marked nominees listed LINE THROUGH THE NAME IN THE LIST ABOVE)
to the contrary) to the right MATTER NO. 3
RATIFICATION OF INDEPENDENT AUDITORS
Please mark / /
your votes as
indicated in
this example
FOR AGAINST ABSTAIN
/ / / / / /
FOR AGAINST ABSTAIN
/ / / / / /
Please check this box if
you plan to attend the / /
1997 Annual Meeting.
The undersigned hereby acknowledges receipt of the Proxy Statement
dated March 17, 1997 and hereby revokes any proxy or proxies heretofore
given to vote share at said meeting or any adjournment thereof.
Dated: , 1997
------------------------
- ------------------------------------
Signature
- ------------------------------------
- ------------------------------------
Signature if held jointly. Please
sign exactly as name appears hereon.
</TABLE>
(PLEASE DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED ADDRESSED ENVELOPE)
