WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission File Number: 34-16533
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: (610) 320-8400
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)
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 |_|.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 11, 1997
- ------------------------------- ------------------------------
Common Stock (no par value) 65,957,499 shares
Preferred Stock (no par value) 1,998,700 shares
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations
for the three-month and six-month
periods ended June 30, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity for
the six-month period ended June 30, 1997 5
Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 1997
and 1996 6
Notes to Consolidated Financial Statements 7 - 19
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 20 - 34
PART II. OTHER INFORMATION
Item 6. Reports on Form 8-K 35
PART III. FINANCIAL DATA SCHEDULE 36 - 37
SIGNATURES 38
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
(Unaudited) (Note)
(in thousands, except
per share data)
<S> <C> <C>
ASSETS
Cash and amounts due from
depository institutions $ 133,910 $ 111,296
Interest-earning deposits 18,268 6,273
Loans held for resale (approximate fair
value of $13,293 and $33,162 at
June 30, 1997 and December 31, 1996,
respectively) 13,148 32,955
Investment and mortgage-backed securities
available-for-sale 718,052 494,997
Investment and mortgage-backed securities
held-to-maturity (approximate fair value
of $2,927,042 and $2,464,844 at June 30,
1997 and December 31, 1996, respectively) 2,943,867 2,487,615
Loans 6,829,705 6,649,537
Allowance for possible loan losses (48,948) (46,093)
Premises and equipment 58,010 63,763
Real estate owned 8,936 10,634
Accrued interest receivable 61,633 56,848
Goodwill and other intangible assets 108,041 113,606
Other assets 53,950 59,928
------------ ------------
TOTAL ASSETS $ 10,898,572 $ 10,041,359
============ ============
LIABILITIES
Deposits $ 5,856,717 $ 5,606,333
Borrowings:
Short-term 3,752,000 2,765,118
Long-term 593,152 1,097,076
Advance payments by borrowers
for taxes and insurance 37,998 25,949
Other liabilities 27,100 38,044
------------ ------------
TOTAL LIABILITIES 10,266,967 9,532,520
------------ ------------
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trust
holding solely subordinated debentures of Sovereign
Bancorp, Inc. ("Trust Preferred Securities") 97,568 --
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock; no par value; $50 liquidation
preference; 7,500,000 shares authorized;
2,000,000 shares issued at June 30, 1997
and December 31, 1996, respectively 96,441 96,446
Common stock; no par value;
100,000,000 shares authorized;
70,022,133 shares issued at June 30,
1997 and 69,492,593 shares issued at
December 31, 1996 301,749 299,357
Unallocated common stock held by the Employee
Stock Ownership Plan at cost;
4,067,047 shares at June 30, 1997
and December 31, 1996, respectively (33,091) (33,015)
Treasury stock at cost; 11,673 shares at June 30,
1997 and 229,168 shares at December 31, 1996 (147) (2,300)
Unrecognized gain on investment
and mortgage-backed securities
available-for-sale, net of tax 4,537 2,362
Retained earnings 164,548 145,989
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 534,037 508,839
------------ ------------
TOTAL LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY $ 10,898,572 $ 10,041,359
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Note: The balance sheet at December 31, 1996 is taken from the audited
supplemental financial statements at that date restated to reflect the merger
with First State Financial Services, Inc., but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
- 3 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three-Month Period Six-Month Period
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(in thousands, except
per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest on interest-earning deposits $ 716 $ 753 $ 1,365 $ 1,784
Interest and dividends on investment
and mortgage-backed securities
available-for-sale 10,021 7,438 18,498 16,541
Interest and dividends on investment
and mortgage-backed securities
held-to-maturity 50,367 46,373 94,341 86,548
Interest and fees on loans 124,652 107,231 246,612 208,691
--------- --------- --------- ---------
Total interest income 185,756 161,795 360,816 313,564
--------- --------- --------- ---------
Interest expense:
Interest on deposits 59,562 53,872 115,455 111,400
Interest on borrowings 61,545 47,182 118,847 84,586
--------- --------- --------- ---------
Total interest expense 121,107 101,054 234,302 195,986
--------- --------- --------- ---------
Net interest income 64,649 60,741 126,514 117,578
Provision for possible loan losses (1) 1,000 1,416 9,700 2,216
--------- --------- --------- ---------
Net interest income after provision for
possible loan losses 63,649 59,325 116,814 115,362
--------- --------- --------- ---------
Other income:
Other loan fees and service charges 1,631 4,480 3,180 7,368
Deposit fees 3,826 3,107 7,153 6,028
Gain on sale of loans
and investment and mortgage-
backed securities available-for-sale 1,110 46 1,093 1,181
Gain on sale of loans held for resale 1,680 569 2,745 1,116
Miscellaneous income 1,291 1,130 2,734 1,967
--------- --------- --------- ---------
Total other income 9,538 9,332 16,905 17,660
--------- --------- --------- ---------
General and administrative expenses:
Salaries and employee benefits 16,200 14,561 30,848 28,098
Occupancy and equipment expenses 4,596 6,278 11,170 12,321
Outside services 4,998 7,863 9,386 13,584
Deposit insurance premiums 879 2,748 1,707 5,529
Advertising 1,360 1,440 2,889 2,742
Other administrative expenses 5,490 5,167 10,868 9,014
--------- --------- --------- ---------
Total general and administrative expenses 33,523 38,057 66,868 71,288
--------- --------- --------- ---------
Other operating expenses:
One-time, merger-related charge -- -- 7,955 --
Amortization of goodwill and other intangibles 2,709 2,996 5,419 5,987
Trust Preferred Securities expense 2,269 -- 2,447 --
Real estate owned (gains)/losses, net (5) 94 87 664
--------- --------- --------- ---------
Total other operating expenses 4,973 3,090 15,908 6,651
--------- --------- --------- ---------
Income before income taxes 34,691 27,510 50,943 55,083
Income tax provision 13,185 10,407 20,230 20,794
--------- --------- --------- ---------
Net Income (2) $ 21,506 $ 17,103 $ 30,713 $ 34,289
========= ========= ========= =========
Net Income Applicable to Common Stock $ 19,944 $ 15,541 $ 27,588 $ 31,164
========= ========= ========= =========
Earnings per share (2) (3) $ .27 $ .23 $ .39 $ .45
========= ========= ========= =========
Dividends per share (3) $ 0.020 $ 0.020 $ 0.043 $ 0.037
========= ========= ========= =========
</TABLE>
- ----------
(1) Results for the six-month period ended June 30, 1997 include $7.9 million
of a one-time, pre-tax charge related to the acquisition of First State
Financial Services, Inc. ("First State") taken in the first quarter of
1997.
(2) Excluding the one-time, after-tax charge of $10.7 million related to the
acquisition of First State, net income and earnings per share for the
six-month period ended June 30, 1997 were $41.4 million and $.52 per share,
respectively.
(3) Per share amounts have been adjusted to reflect all stock dividends and
stock splits.
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Preferred Unallocated
Shares Shares Common Preferred Retained Treasury Common Stock
Outstanding Outstanding Stock Stock Earnings Stock Held by ESOP
----------- ----------- ----- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 65,196 2,000 $299,357 $96,446 $145,989 $(2,300) $(33,015)
Net income -- -- -- -- 30,713 -- --
Exercise of stock options 494 -- 2,199 -- -- -- --
Cash in lieu of fractional shares (2) -- (21) -- -- -- --
Sale of stock under Dividend
Reinvestment Plan and Employee
Stock Purchase Plan 100 -- 1,200 -- -- -- --
Dividends paid on common stock,
$.043 per share -- -- -- -- (2,812) -- (76)
Dividends paid on preferred stock,
$1.56 per share -- -- -- -- (3,125) -- --
Treasury stock repurchase (20) -- -- -- -- (250) --
Treasury stock sale 16 -- -- -- -- 191 --
Retirement of treasury shares -- -- (2,212) -- -- 2,212 --
Unrecognized gain on investment
and mortgage-backed securities
available-for-sale, net of tax -- -- -- -- -- -- --
Conversion of Preferred stock 1 -- 5 (5) -- -- --
Adjustment for First State's
different fiscal year end 158 -- 1,010 -- (6,217) -- --
Other -- -- 211 -- -- -- --
------ ----- -------- ------- -------- ------- --------
Balance, June 30, 1997 65,943 2,000 $301,749 $96,441 $164,548 $ (147) $(33,091)
====== ===== ======== ======= ======== ======= ========
<CAPTION>
Total
Unrecognized Stock-
Loss on Holders'
AFS Equity
------------ ------
<S> <C> <C>
Balance, December 31, 1996 $2,362 $508,839
Net income -- 30,713
Exercise of stock options -- 2,199
Cash in lieu of fractional shares -- (21)
Sale of stock under Dividend
Reinvestment Plan and Employee
Stock Purchase Plan -- 1,200
Dividends paid on common stock,
$.043 per share -- (2,888)
Dividends paid on preferred stock,
$1.56 per share -- (3,125)
Treasury stock repurchase -- (250)
Treasury stock sale -- 191
Retirement of treasury shares -- --
Unrecognized gain on investment
and mortgage-backed securities
available-for-sale, net of tax 1,947 1,947
Conversion of Preferred stock -- --
Adjustment for First State's
different fiscal year end 228 (4,979)
Other -- 211
------ --------
Balance, June 30, 1997 $4,537 $534,037
====== ========
</TABLE>
- 5 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30,
---------------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 30,713 $ 34,289
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for possible loan losses and deferred taxes 22,840 9,603
Depreciation 2,948 3,492
Amortization 8,446 (1,289)
Gain on sale of loans, investment and
mortgage-backed securities and real estate owned (1,007) (261)
Net change in:
Loans held for resale 19,807 110,194
Accrued interest receivable (4,785) (7,023)
Prepaid expenses and other assets (14,723) (19,771)
Other liabilities 86,624 1,575
--------- -----------
Net cash provided by operating activities 150,863 130,809
--------- -----------
Cash Flows from Investing Activities:
Proceeds from sales of investment
and mortgage-backed securities:
Available-for-sale 53,668 544,948
Proceeds from repayments and maturities of investment
and mortgage-backed securities:
Available-for-sale 44,542 66,199
Held-to-maturity 333,897 266,117
Purchases of investment and mortgage-backed securities:
Available-for-sale (292,156) (199,992)
Held-to-maturity (816,396) (773,774)
Proceeds from sales of loans 3,284 2,421
Purchase of loans (388,548) (609,974)
Net change in loans other than purchases and sales 199,846 (402,391)
Proceeds from sales of premises and equipment 7,895 1,669
Purchases of premises and equipment (5,199) (3,465)
Proceeds from sale of real estate owned 4,995 5,340
Other, net (4,996) 4,983
--------- -----------
Net cash used by investing activities (859,168) (1,097,919)
--------- -----------
Cash Flows from Financing Activities:
Net increase/(decrease) in deposits 250,954 (194,035)
Net (decrease)increase in short-term borrowings 462,767 774,247
Proceeds from long-term borrowings 19,838 385,000
Repayments of long-term borrowings -- (1)
Net increase in advance payments by
borrowers for taxes and insurance 12,049 11,457
Cash dividends paid to stockholders (6,013) (5,689)
Net proceeds from issuance of common stock 3,378 2,521
Advance to the Employee Stock Ownership Plan -- (5,000)
Purchase of treasury stock, net (59) --
--------- -----------
Net cash provided by financing activities 742,914 968,500
--------- -----------
Net change in cash and cash equivalents 34,609 1,390
Cash and cash equivalents at beginning of period 117,569 159,563
--------- -----------
Cash and cash equivalents at end of period $ 152,178 $ 160,953
========= ===========
Reconciliation of Cash and Cash Equivalents
to Consolidated Balance Sheets:
Cash and amounts due from depository institutions $ 133,910 $ 155,161
Interest-earning deposits 18,268 5,792
--------- -----------
Cash and cash equivalents at end of period $ 152,178 $ 160,953
========= ===========
</TABLE>
Supplemental Disclosures:
Income tax payments totaled $13.9 million for the six-month period ended June
30, 1997 and $20.3 million for the same period in 1996. Interest payments
totaled $231.7 million for the six-month period ended June 30, 1997 and $188.1
million for the same period in 1996. Noncash activity consisted of mortgage loan
securitization of $139.9 million for the six-month period ended June 30, 1997
and $256.7 million for the same period in 1996; reclassification of long-term
borrowings to short-term borrowings of $524.0 million for the six-month period
ended June 30, 1997 and $176.7 million for the same period in 1996; and
reclassification of mortgage loans to real estate owned of $8.2 million for the
six-month period ended June 30, 1997 and $4.1 million for the same period in
1996.
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
The accompanying financial statements of Sovereign Bancorp, Inc. and
Subsidiaries ("Sovereign") include the accounts of the parent company, Sovereign
Bancorp, Inc. and its wholly-owned subsidiary: Sovereign Bank ("Sovereign
Bank"). All material intercompany balances and transactions have been eliminated
in consolidation. These financial statements have been prepared in accordance
with the instructions for Form 10-Q and therefore do not include certain
information or footnotes necessary for the presentation of financial condition,
results of operations, stockholders' equity, and cash flows in conformity with
generally accepted accounting principles. However, in the opinion of management,
the consolidated financial statements reflect all adjustments (which consist of
normal recurring accruals) necessary for a fair presentation of the results for
the unaudited periods. The preparation of these 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.
The results of operations for the six-month period ended June 30, 1997 are
not necessarily indicative of the results which may be expected for the entire
year. The consolidated financial statements should be read in conjunction with
Form 10-K for the year ended December 31, 1996, and the audited supplemental
consolidated financial statements, restated for the merger of First State
Financial Services, Inc. filed on Form 8-K dated June 17, 1997.
- 7 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) EARNINGS PER SHARE
Primary and fully diluted earnings per share have been computed based on
the weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares include dilutive stock options for
both primary and fully diluted earnings per share. Fully diluted shares also
assume the conversion of convertible preferred shares. Primary shares
outstanding for the six-month periods ended June 30, 1997 and 1996 were 66.9
million and 65.0 million, respectively and fully diluted shares outstanding for
the same periods were 79.0 million and 76.9 million, respectively. Earnings per
share have been adjusted to reflect all stock dividends and stock splits. The
following table presents the computation of primary and fully diluted earnings
per share at the dates indicated: (dollars in thousands, except per share data)
Six-Month Period Ended June 30,
-------------------------------
Primary Fully Diluted
------- -------------
1997 1996 1997 1996
---- ---- ---- ----
Net income (1) $30,713 $34,289 $30,713 $34,289
Preferred dividends $ 3,125 $ 3,125 $ 3,125 $ 3,125
Net income applicable to
common stock $27,588 $31,164 $27,588 $31,164
Average common shares
outstanding at end of
period 65,566 63,430 77,540 75,403
Average stock options
considered to be common
stock equivalents, net of
shares assumed to be
repurchased under the
treasury stock method 1,351 1,527 1,460 1,527
------- ------- ------- -------
Average common and common
equivalent shares
outstanding at end of
period 66,917 64,957 79,000 76,930
======= ======= ======= =======
Earnings per share $ .41 $ .48 $ .39 $ .45
======= ======= ======= =======
(1) Results for the six-month period ended June 30, 1997 include a one-time,
after-tax charge of $10.7 million related to the acquisition of First
State. Excluding the one-time charge, primary and fully diluted earnings
per share for the six-month period ended June 30, 1997 would have been $.57
and $.52, respectively.
- 8 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, Earnings per Share,
which is required to be adopted on December 31, 1997. At that time, Sovereign
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Contrary to the current computation of
primary earnings per share, the dilutive effect of stock options will be
excluded from the calculation of basic earnings per share under the requirements
of SFAS No. 128. The impact of SFAS No. 128 on the calculation of primary and
fully diluted earnings per share for these quarters is not expected to be
material. For additional information with respect to SFAS No. 128, see Note 10
in the Notes to Consolidated Financial Statements.
- 9 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
The following table presents the composition and fair value of investments
available-for-sale at the dates indicated: (dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1997
-------------
Amortized Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
---- ------------ ------------ -----
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury and
government agency
securities $ -- $ -- $ -- $ --
Equity securities 367,598 7,368 19 374,947
Other securities -- -- -- --
Mortgage-backed Securities:
FHLMC 24,952 27 425 24,554
GNMA 62,395 -- 2 62,393
Collateralized mortgage
obligations 255,670 669 181 256,158
Other securities -- -- -- --
-------- -------- -------- --------
Total investment and
mortgage-backed securities
available-for-sale $710,615 $ 8,064 $ 627 $718,052
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Amortized Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
---- ------------ ------------ -----
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury and
government agency
securities $ 5,728 $ 43 $ 7 $ 5,764
Equity securities 286,773 3,525 -- 290,298
Other securities 7,720 -- 248 7,472
Mortgage-backed Securities:
FHLMC 25,288 -- 287 25,001
GNMA -- -- -- --
Collateralized mortgage
obligations 164,459 895 129 165,225
Other securities 1,259 -- 22 1,237
-------- -------- -------- --------
Total investment and
mortgage-backed securities
available-for-sale $491,227 $ 4,463 $ 693 $494,997
======== ======== ======== ========
</TABLE>
- 10 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
The following table presents the composition and fair value of investment
and mortgage-backed securities held-to-maturity at the dates indicated: (dollars
in thousands)
<TABLE>
<CAPTION>
June 30, 1997
-------------
Amortized Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
---- ------------ ------------ -----
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury and
government agency
securities $ 9,372 $ 35 $ 117 $ 9,290
Corporate securities 1,003 24 -- 1,027
Other securities 55,119 686 115 55,690
Mortgage-backed Securities:
FHLMC 232,340 892 3,427 229,805
FNMA 227,981 340 4,727 223,594
GNMA 263,808 3,890 287 267,411
RTC 21,873 -- 2,915 18,958
Private issues 228,533 143 2,456 226,220
Collateralized mortgage
obligations 1,903,838 4,987 13,778 1,895,047
Other securities -- -- -- --
---------- ---------- ---------- ----------
Total investment and
mortgage-backed securities
held-to-maturity $2,943,867 $ 10,997 $ 27,822 $2,927,042
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Amortized Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
---- ------------ ------------ -----
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury and
government agency
securities $ 13,426 $ 60 $ 171 $ 13,315
Corporate securities 1,006 32 -- 1,038
Other securities 65,086 86 242 64,930
Mortgage-backed Securities:
FHLMC 145,075 900 3,425 142,550
FNMA 193,607 374 5,102 188,879
GNMA 194,782 3,590 370 198,002
RTC -- -- -- --
Private issues 272,778 87 9,529 263,336
Collateralized mortgage
obligations 1,599,769 4,589 13,614 1,590,744
Other securities 2,086 -- 36 2,050
---------- ---------- ---------- ----------
Total investment and
mortgage-backed securities
held-to-maturity $2,487,615 $ 9,718 $ 32,489 $2,464,844
========== ========== ========== ==========
</TABLE>
- 11 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(5) COMPOSITION OF LOAN PORTFOLIO
The following table presents the composition of the loan portfolio by type
of loan and by fixed and adjustable rates at the dates indicated: (dollars in
thousands)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Residential real estate loans $5,348,574 78.31% $5,286,017 79.50%
Residential construction loans
(net of loans in process of
$35,534 and $45,088, respectively) 69,357 1.02 82,579 1.24
---------- ----- ---------- ------
Total Residential Loans 5,417,931 79.33 5,368,596 80.74
---------- ------ ---------- ------
Multi-family loans 59,411 .87 71,815 1.08
Commercial real estate loans 139,933 2.05 140,973 2.12
Commercial loans 124,909 1.83 125,706 1.89
---------- ------ ---------- ------
Total Commercial Loans 324,253 4.75 338,494 5.09
---------- ------ ---------- ------
Consumer loans (1) 1,087,521 15.92 942,447 14.17
---------- ------ ---------- ------
Total Loans $6,829,705 100.00% $6,649,537 100.00%
========== ====== ========== ======
Total Loans with: (2)
Fixed rates $1,817,669 26.61% $1,503,497 22.61%
Variable rates 5,012,036 73.39 5,146,040 77.39
---------- ------ ---------- ------
Total Loans $6,829,705 100.00% $6,649,537 100.00%
========== ====== ========== ======
</TABLE>
- ----------
(1) Consumer loan balances include home equity loans of $706.0 million at June
30, 1997 and $583.2 million at December 31, 1996.
(2) Loan totals do not reflect the impact of off-balance sheet interest rate
swaps used for interest rate risk management as discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Loan Portfolio."
- 12 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(6) DEPOSIT PORTFOLIO COMPOSITION
The following table presents the composition of deposits at the dates
indicated: (dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
Weighted Weighted
Average Average
Account Type Amount Percent Rate Amount Percent Rate
------------ ------ ------- -------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Demand deposit accounts $ 293,692 5.02% -- % $ 272,445 4.86% -- %
NOW accounts 476,597 8.14 1.26 469,810 8.38 1.40
Savings accounts 1,129,852 19.29 2.42 1,091,556 19.47 2.38
Money market accounts 657,124 11.22 4.16 661,987 11.81 3.96
Retail certificates 3,090,727 52.77 5.45 2,951,917 52.65 5.31
Jumbo certificates 208,725 3.56 5.65 158,618 2.83 5.56
---------- ------ ---- ---------- ------ ----
Total Deposits $5,856,717 100.00% 4.11% $5,606,333 100.00% 4.00%
========== ====== ==== ========== ====== ====
</TABLE>
(7) BORROWINGS
The following table presents information regarding borrowings at the dates
indicated: (dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Securities sold under
repurchase agreements $ 358,934 5.50% $ -- --%
FHLB advances 3,818,231 5.95 3,694,446 5.85
Other borrowings 167,987 7.46 167,748 7.46
---------- ---- ---------- ----
Total Borrowings $4,345,152 5.97% $3,862,194 5.92%
========== ==== ========== ====
</TABLE>
- 13 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(8) 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 (interest rate
corridors) 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: (dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1997
-------------
Weighted
Average
Notional Book Estimated Maturity
Amount Value Fair Value In Years
------ ----- ---------- --------
<S> <C> <C> <C> <C>
Amortizing interest rate swaps:
Pay variable-receive fixed (1) $1,207,669 $ -- $ (9,449) 3.5
Pay fixed-receive variable (2) 377,821 -- 751 1.9
Non-amortizing interest rate swaps:
Pay variable-receive fixed (3) 125,000 -- (1,765) 2.2
Pay fixed-receive variable (4) 1,380,000 -- 1,215 2.4
Interest rate caps/floors/
corridors (5) 1,200,000 11,349 10,726 4.4
---------- ---------- --------
$4,290,490 $ 11,349 $ 1,478
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Weighted
Average
Notional Book Estimated Maturity
Amount Value Fair Value In Years
------ ----- ---------- --------
<S> <C> <C> <C> <C>
Amortizing interest rate swaps:
Pay variable-receive fixed (1) $ 713,448 $ -- $(10,459) 3.6
Pay fixed-receive variable (2) 398,565 -- (464) 2.3
Non-amortizing interest rate swaps:
Pay variable-receive fixed (3) 50,000 -- (1,738) 3.7
Pay fixed-receive variable (4) 1,355,000 -- 9,152 2.2
Interest rate caps (5) 500,000 9,283 7,264 4.5
---------- ---------- --------
$3,017,013 $ 9,283 $ 3,755
========== ========== ========
</TABLE>
- 14 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(1) The weighted average pay rate was 5.82% and 5.50% and the weighted average
receive rate was 6.61% and 5.93% at June 30, 1997 and December 31, 1996,
respectively.
(2) The weighted average pay rate was 6.76% and 6.76% and the weighted average
receive rate was 6.58% and 6.18% at June 30, 1997 and December 31, 1996,
respectively.
(3) The weighted average pay rate was 6.38% and 6.91% and the weighted average
receive rate was 6.54% and 6.75% at June 30, 1997 and December 31, 1996,
respectively.
(4) The weighted average pay rate was 5.85% and 5.28% and the weighted average
receive rate was 5.83% and 5.53% at June 30, 1997 and December 31, 1996,
respectively. Of the June 30, 1997 notional amount, $250.0 million has an
effective date of March 18, 1998.
(5) The weighted average contract rate range was 5.25% - 9.00% at June 30,
1997.
The following table summarizes by notional amounts the activity of
Sovereign's interest rate exchange agreements: (dollars in thousands)
<TABLE>
<CAPTION>
Balance Balance
December 31, Maturities/ June 30,
1996 Additions Amortization Terminations 1997
----------- ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Amortizing interest
rate swaps $1,112,013 $ -- $ 26,523 $ -- $1,085,490
Non-amortizing interest
rate swaps 1,405,000 1,725,000 -- 1,125,000 2,005,000
Interest rate
caps/floors/corridors 500,000 700,000 -- -- 1,200,000
---------- ---------- ---------- ---------- ----------
$3,017,013 $2,425,000 $ 26,523 $1,125,000 $4,290,490
========== ========== ========== ========== ==========
</TABLE>
At June 30, 1997, Sovereign's balance sheet included a net deferred loss of
$2.7 million related to interest rate exchange agreements terminated in June
1996 which were originally accounted for as hedges. Of this net deferred loss,
$2.2 million will amortize into interest expense during the remainder of 1997
and $525,000 will amortize into interest expense in 1998.
Net interest income resulting from interest rate exchange agreements
includes $4.1 million of income and $5.9 million of expense for the six-month
period ended June 30, 1997.
- 15 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(9) ACQUISITIONS
On February 18, 1997, Sovereign acquired First State Financial Services,
Inc. ("First State"), a $603 million savings institution headquartered in West
Caldwell, New Jersey with 14 branch offices located throughout central and
northern New Jersey. In accordance with the merger agreement, First State
shareholders received 1.47 shares of Sovereign common stock in exchange for each
share of First State common stock. Sovereign issued 5.9 million new shares of
Sovereign common stock in connection with the transaction, which was tax-free to
First State and First State shareholders. This transaction was accounted for as
a pooling-of-interests and accordingly, the consolidated financial statements
have been restated to include the accounts of First State for all periods
presented.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below:
Years Ended December 31,
1996 1995
---- ----
Net interest income
Sovereign $216,710 $174,226
First State 25,185 22,584
-------- --------
Combined $241,895 $196,810
======== ========
Net income (loss):
Sovereign $ 51,463 $ 56,408
First State (5,649) 3,998
-------- --------
Combined $ 45,814 $ 60,406
======== ========
Prior to the combination, First State's fiscal year end was September 30,
and accordingly, Sovereign's consolidated results of operations for the
three-month and six-month periods ended June 30, 1997 include First State's
results of operations for the same periods. Sovereign's consolidated results of
operations for the three-month and six-month periods ended June 30, 1996 include
First State's results of operations for the three-month period ended December
31, 1995 and the six-month period ended March 31, 1996, respectively. A net
decrease to Sovereign's stockholders' equity of $5.0 million has been made to
reflect First State's activity for the three-month period ended December 31,
1996. That activity consisted of proceeds from the exercise of stock options of
$1.0 million, net loss of $6.4 million, dividends paid of $223,000 and net
change in unrecognized loss on available-for-sale securities of $228,000.
- 16 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
On February 5, 1997, Sovereign executed a Definitive Agreement to acquire
Bankers Corp., Inc. ("Banker's"), a $2.6 billion financial services holding
company headquartered in Perth Amboy, New Jersey. Bankers' sole banking
subsidiary, Bankers Savings, operates 15 branch offices located in Middlesex,
Monmouth, and Ocean counties, New Jersey. The transaction will add loans,
deposits, and shareholders' equity to Sovereign of $1.5 billion, $1.7 billion,
and $203.5 million, respectively. The terms of the Agreement call for Sovereign
to exchange $25.50 in Sovereign common stock (subject to adjustment under
certain conditions) for each outstanding common share of Bankers. Should the
average closing price of Sovereign common stock be greater than $13.75 per share
during the pricing period as defined in the definitive agreement, each share of
Bankers common stock will be converted into 1.854 shares of Sovereign common
stock. The transaction will be tax-free to Bankers and Bankers' shareholders,
and will be accounted for as a pooling-of-interests. Sovereign anticipates that
the transaction will close during the third quarter of 1997.
On July 2, 1997, Sovereign executed a Definitive Agreement to acquire Fleet
Financial Group Inc.'s ("Fleet") Automobile Finance Division ("Fleet Auto").
Fleet Auto is the result of Fleet's acquisition over the last two years of
Shawmut and NatWest. Fleet Auto consists of approximately $2.0 billion of
indirect auto loans, dealer floor plan loans and lessor loans and serves
customers throughout New Jersey, New York and several New England states. The
terms of the transaction call for Sovereign to buy Fleet's auto finance business
at a discount, which will be used in part to establish initial reserves for
possible loan losses of approximately $19.0 million. As part of the transaction,
Sovereign has agreed to offer employment to substantially all of the employees
of Fleet Auto. Sovereign anticipates that the transaction will be accounted for
as a purchase and will close during the third quarter of 1997.
(10) ACCOUNTING CHANGES
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
The overall objective of SFAS No. 130 is to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. SFAS No. 130 is effective for all periods
ending after December 15, 1997. Subsequent to the effective date, all
prior-period amounts are required to be restated to conform to the provisions of
SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. SFAS No. 131
is effective for all periods ending after December 15, 1997.
- 17 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Subsequent to the effective date, all prior-period amounts are required to
be restated to conform to the provisions of SFAS No. 131.
Sovereign is currently evaluating the impact of SFAS No. 130 and SFAS No.
131 on its consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. This
statement supersedes APB Opinion No. 15, "Earnings per Share" and FASB Statement
No. 85, "Yield Test for Determining whether a Convertible Security Is a Common
Stock Equivalent". The overall objective of SFAS No. 128 is to simplify the
calculation of earnings per share and achieve comparability with the recently
issued International Accounting Standard No. 33, "Earnings Per Share". SFAS No.
128 is effective for all periods ending after December 15, 1997. Subsequent to
the effective date, all prior-period earnings per share amounts are required to
be restated to conform to the provisions of SFAS No. 128.
Under SFAS No. 128, primary earnings per share will be replaced with basic
earnings per share. Basic earnings per share will be calculated by dividing
income available to common stockholders by the weighted average common shares
outstanding, excluding options, warrants, and convertible securities from the
calculation.
Under SFAS No. 128, fully diluted earnings per share will be renamed
diluted earnings per share. Income available to common stockholders will be
adjusted for the assumed conversion of all potentially dilutive securities. In
calculating diluted earnings per share, the dilutive effect of options and
warrants will continue to be calculated using the treasury stock method.
However, unlike the existing calculation of fully diluted earnings per share,
the treasury stock method will be applied using the average market price for the
period rather than the higher of the average market price or the ending market
price. The dilutive effect of convertible debt or preferred stock will continue
to be calculated using the if-converted method.
(11) RECENT DEVELOPMENTS
During March 1997, Sovereign issued $100 million of preferred capital
securities ("Trust Preferred Securities") through Sovereign Capital Trust I
("Trust"), a special-purpose statutory trust created expressly for the issuance
of these securities. Distributions on the Trust Preferred Securities will be
payable at an annual rate of 9% of the stated liquidation amount of $1,000 per
capital security, payable semi-annually. After issuance costs, proceeds of $97.6
million were invested in Junior Subordinated Debentures of Sovereign, at terms
identical to the Trust Preferred Securities offering. Cash distributions on the
Trust Preferred Securities are made to the extent interest on the debentures is
received by the Trust. In the event of certain changes or amendments to
regulatory requirements or federal tax rules, the Trust Preferred Securities are
redeemable in whole. Otherwise, the Trust Preferred Securities
- 18 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
are generally redeemable in whole or in part on or after April 1, 2007, at
a declining redemption price ranging from 103.875% to 100% of the liquidation
amount. On or after April 1, 2017, the Trust Preferred Securities may be
redeemed at 100% of the liquidation amount.
The Trust Preferred Securities offering is classified as and is similar to
minority interests and is presented as "Corporation-obligated mandatorily
redeemable capital securities of subsidiary trust holding solely subordinated
debentures of Sovereign Bancorp, Inc." The Trust Preferred offering qualifies
for Tier 1 capital treatment for Sovereign, and the loan payments from Sovereign
to the Trust are fully tax deductible. Sovereign intends to use the proceeds of
the transaction for general corporate purposes.
- 19 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
General
Net income for the three-month period ended June 30, 1997, was $21.5
million, an increase of 26% when compared to net income of $17.1 million for the
three-month period ended June 30, 1996. Earnings per share, for the three-month
period ended June 30, 1997 was $.27 per share, an increase of 17% when compared
to $.23 per share for the same period in 1996.
Net income for the six-month period ended June 30, 1997, excluding a
one-time, after-tax charge of $10.7 million in the first quarter related to the
acquisition of First State was $41.4 million or $.52 per share compared to $34.3
million or $.45 per share for the same period in 1996. Net income for the
six-month period ended June 30, 1997, which includes the impact of the one-time,
merger-related charge, was $30.7 million and earnings per share was $.39.
Earnings per share have been adjusted to reflect all stock dividends and stock
splits.
Return on average equity, return on average total assets, and average
equity to average total assets, excluding the one-time, merger related charge,
were 13.79%, .70% and 5.02%, respectively, for the six-month period ended June
30, 1997 compared to 14.01%, .76% and 5.42%, respectively, for the same period
in 1996.
Net Interest Income
Net interest income for the three-month and six-month periods ended June
30, 1997 was $64.6 million and $126.5 million compared to $60.7 million and
$117.6 million for the same periods in 1996. The increase is attributable to an
increase in average balances resulting from internal growth, partially offset by
a decline in Sovereign's net interest margin. Sovereign's net interest margin
(net interest income divided by average interest-earning assets) for the
three-month and six-month periods ended June 30, 1997 was 2.57% and 2.54%
compared to 2.79% and 2.80% for the same periods in 1996.
Interest on interest-earning deposits for the three-month and six-month
periods ended June 30, 1997 was $716,000 and $1.4 million compared to $753,000
and $1.8 million for the same periods in 1996. The average balance of
interest-earning deposits was 15.3 million with an average yield of 17.72% for
the six-month period ending June 30, 1997 compared to an average balance of
$17.0 million with an average yield of 20.39% for the same period in 1996. The
high yields on Sovereign's interest-earning deposits are the result of a
contractual arrangement whereby a third-party vendor performed check processing
and reconcilement functions for Sovereign's disbursement accounts. Under the
agreement, the vendor is required to pay Sovereign interest on disbursed funds
during the two to three day float period, effectively producing interest income
with no corresponding asset balance. This agreement will continue to favorably
- 20 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
impact the yield on Sovereign's interest-earning deposits in 1997 and
future years.
Interest on investment and mortgage-backed securities available-for-sale
was $10.0 million and $18.5 million for the three-month and six-month periods
ended June 30, 1997 compared to $7.4 million and $16.5 million for the same
periods in 1996. The average balance of investment and mortgage-backed
securities available-for-sale was $585.6 million with an average yield of 6.75%
for the six-month period ended June 30, 1997 compared to an average balance of
$496.3 million with an average yield of 7.04% for the same period in 1996.
Interest on investment and mortgage-backed securities held-to-maturity was
$50.4 million and $94.3 million for the three-month and six-month periods ended
June 30, 1997 compared to $46.4 million and $86.5 million for the same periods
in 1996. The average balance of investment and mortgage-backed securities
held-to-maturity was $2.66 billion with an average yield of 7.10% for the
six-month period ended June 30, 1997 compared to an average balance of $2.42
billion with an average yield of 7.13% for the same period in 1996.
Interest and fees on loans were $124.7 million and $246.6 million for the
three-month and six-month periods ended June 30, 1997 compared to $107.2 million
and $208.7 million for the same periods in 1996. The average balance of loans
was $6.65 billion with an average yield of 7.45% for the six-month period ended
June 30, 1997 compared to an average balance of $5.56 billion with an average
yield of 7.53% for the same period in 1996. The increases in the average balance
of loans and in the interest and fees on loans are primarily due to the full
year-to-date effect of Sovereign's record level of loan originations in 1996.
Interest on deposits was $59.6 million and $115.5 million for the
three-month and six-month periods ended June 30, 1997 compared to $53.9 million
and $111.4 million for the same periods in 1996. The average balance of deposits
was $5.71 billion with an average cost of 4.08% for the six-month period ended
June 30, 1997 compared to an average balance of $5.49 billion with an average
cost of 4.08% for the same period in 1996. The increase in the average balance
of deposits is primarily the result of Sovereign's emphasis on relationship
selling rather than relying strictly on rates.
Interest on borrowings was $61.5 million and $118.8 million for the
three-month and six-month periods ended June 30, 1997 compared to $47.2 million
and $84.6 million for the same periods in 1996. The average balance of
borrowings was $3.97 billion with an average cost of 5.99% for the six-month
period ended June 30, 1997 compared to an average balance of $2.86 billion with
an average cost of 5.94% for the same period in 1996. The increase in the
average balance of borrowings is the result of balance sheet growth being funded
principally by borrowings.
- 21 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Provision for Possible Loan Losses
The provision for possible loan losses was $1.0 million and $9.7 million
for the three-month and six-month periods ended June 30, 1997, which includes
$7.9 million of reserves attributable to a change in strategic direction related
to the workout of certain non-performing assets acquired from First State. This
compares to provision for possible loan losses of $1.4 million and $2.2 million
for the same periods in 1996.
In 1996, Sovereign diversified its lending efforts and began to offer small
business loans and an expanded line of consumer products, such as automobile
loans and credit cards. As a result of the increased risk inherent in these
products and as Sovereign continues to place emphasis on small business and
consumer lending in 1997 and future years, management will continually evaluate
its loan portfolio and record additional loan loss reserves as is necessary. For
additional information with respect to Sovereign's asset quality, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Loan Portfolio."
During the six-month period ended June 30, 1997, Sovereign charged-off (net
of recoveries) $4.2 million of loans compared to $2.7 million for the same
period in 1996. This increased level of charge-offs is primarily related to the
charge-offs of certain non-performing assets acquired from First State, which
coincides with the addition of $7.9 million of reserves taken as part of the
one-time, merger-related charge. This additional loan loss provision and related
charge-offs reflects Sovereign's decision to take a more conservative approach
than First State with regard to the workout of certain assets. In Sovereign's
experience, strategy that involves the accelerated resolution of problem assets
has been more economical than a long-term workout approach. In connection with
this change in philosophy, additional reserves were deemed prudent.
- 22 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
The following table presents the activity in the allowance for possible
loan losses for the periods indicated: (dollars in thousands)
Six-Month Period Ended June 30,
-------------------------------
1997 1996
---- ----
Allowance, beginning of period $46,093 $40,938
Charge-offs:
Residential 2,976 1,713
Commercial Real Estate 518 650
Commercial 1,303 13
Consumer 998 595
------- -------
Total Charge-offs 5,795 2,971
------- -------
Recoveries:
Residential 422 175
Commercial Real Estate 1,012 64
Commercial 161 --
Consumer 29 46
------- -------
Total Recoveries 1,624 285
------- -------
Charge-offs, net of recoveries 4,171 2,686
Provision for possible loan losses 9,700 2,216
Other additions (1) (2,674) 714
------- -------
Allowance, end of period $48,948 $41,182
======= =======
- ----------
(1) Represents net charge-offs of First State for the three-month period ended
December 31, 1996 resulting from the differing fiscal year end of First
State as previously discussed in Note 9 in the Notes to Consolidated
Financial Statements.
Other Income
Other income was $9.5 million and $16.9 million for the three-month and
six-month periods ended June 30, 1997 compared to $9.3 million and $17.7 million
for the same periods in 1996.
Other loan fees and service charges were $1.6 million and $3.2 million for
the three-month and six-month periods ended June 30, 1997 compared to $4.5
million and $7.4 million for the same periods in 1996. The decrease in other
loan fees and service charges is primarily the result of fees earned in 1996 by
First State's credit card portfolio which was sold prior to Sovereign's
acquisition of First State in February 1997. Excluding First State's credit card
portfolio in 1996, other loan fees and service charges result primarily from
Sovereign's loan servicing portfolio. Sovereign serviced $5.33 billion of its
own loans and $1.37 billion of loans for others at June 30, 1997 compared to
$4.99 billion of its own loans and $1.28 billion of loans for others at June 30,
1996.
- 23 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Deposit fees were $3.8 million and $7.2 million for the three-month and
six-month periods ended June 30, 1997 compared to $3.1 million and $6.0 million
for the same periods in 1996. This increase is primarily the result of growth in
the number of Sovereign's transaction accounts over the last year.
Gains on sales of loans and investment and mortgage-backed securities
available-for-sale were $1.1 million for both the three-month and six-month
periods ended June 30, 1997 compared to $46,000 and $1.2 million for the same
periods in 1996.
Gains on sales of loans held for resale were $1.7 million and $2.7 million
for the three-month and six-month periods ended June 30, 1997 compared to
$569,000 and $1.1 million for the same periods in 1996. This increase is
primarily due to increased mortgage banking gains resulting from a gain of $1.3
million from the sale of mortgage servicing rights during the second quarter of
1997 and profitability enhancements made to Sovereign's secondary marketing area
in 1997.
Miscellaneous income was $1.3 million and $2.7 million for the three-month
and six-month periods ended June 30, 1997 compared to $1.1 million and $2.0
million for the same periods in 1996. This increase is primarily due to
increased inter-change income resulting from growth in the number of Sovereign's
check cards and credit cards over the last year.
General and Administrative Expenses
Total general and administrative expenses were $33.5 million and $66.9
million for the three-month and six-month periods ended June 30, 1997 compared
to $38.1 million and $71.3 million for the same periods in 1996. This decrease
is primarily the result of outside services expenses incurred in 1996 which
relate to First State's credit card portfolio.
The ratio of general and administrative expenses to average assets for the
three-month period ended June 30, 1997 was 1.27% compared to 1.65% for the same
period in 1996. Sovereign's efficiency ratio (all general and administrative
expenses as a percentage of net interest income and recurring non-interest
income) for the three-month period ended June 30, 1997 was 45.9% compared to
54.4% for the same period in 1996. The decrease in these expense ratios is the
result of efficiencies realized from recent acquisitions and an increase in
average balances and net interest income without a corresponding increase in
operating expenses.
Other operating expenses were $5.0 million and $15.9 million for the
three-month and six-month periods ended June 30, 1997 compared to $3.1 million
and $6.7 million for the same periods in 1996. This year-to-date increase is
primarily the result of $2.4 million of Trust Preferred Securities expense
incurred in 1997 verses none in 1996 and a one-time charge of $8.0 million
related to the acquisition of First State. Expenses included as part of the
one-time charge were human resources related costs, loss on sale of certain
assets and other expenses, including investment banker fees and legal expenses.
- 24 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Income Tax Provision
The income tax provision was $13.2 million and $20.2 million for the
three-month and six-month periods ended June 30, 1997 compared to $10.4 million
and $20.8 million for the same periods in 1996. The effective tax rate for the
three-month and six-month periods ended June 30, 1997 was 38.0% and 39.7%
compared to 37.8% for each of the same periods in 1996. The increase in the
effective tax rate for the six-month period ended June 30, 1997 was primarily
attributable to certain non-deductible expenses incurred in conjunction with the
merger of First State.
FINANCIAL CONDITION
Loan Portfolio
Sovereign's loan portfolio at June 30, 1997 was $6.83 billion compared to
$6.65 billion at December 31, 1996. This increase is primarily the result of
strong consumer loan originations. During the six-month period ended June 30,
1997, Sovereign closed approximately $663.3 million of first mortgage loans
including approximately $520.5 million of variable rate mortgage loans. This
compares to first mortgage loan closings of $1.40 billion including
approximately $1.13 billion of variable rate mortgage loans for the same period
in 1996.
During the six-month period ended June 30, 1997, Sovereign closed $36.5
million of commercial loans compared to $62.8 million of commercial loans closed
during the same period in 1996.
Sovereign closed $304.5 million of consumer loans during the six-month
period ended June 30, 1997. This compares to $347.1 million of consumer loans
(including the purchase of $200.0 million of government guaranteed student
loans) closed during the same period in 1996.
Sovereign's primary residential loan products are variable rate mortgage
loans on owner-occupied residential real estate. As a result, at June 30, 1997,
91% of Sovereign's total loan portfolio was secured by residential real estate
and 73% of the total loan portfolio was comprised of variable rate loans.
However, as a result of Sovereign's use of interest rate swaps for interest rate
risk management, at June 30, 1997, $557.1 million of variable rate mortgage
loans have been effectively converted to fixed rate mortgage loans. In addition,
$227.8 million of intermediate variable rate mortgage loans (loans with a
five-year fixed rate period) and $150.0 million of short-term variable rate
mortgage loans (loans with less than a five-year fixed rate period) have
effectively been converted to a variable rate over the fixed rate period through
the use of interest rate swaps.
- 25 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
At June 30, 1997, Sovereign's total loan portfolio included $5.35 billion
of first mortgage loans secured primarily by liens on owner-occupied one-to-four
family residential properties. With its increased focus on non-residential
lending, at June 30, 1997, Sovereign's total loan portfolio also included $324.3
million of commercial loans and $1.09 billion of consumer loans, including
$706.0 million of outstanding home equity loans secured primarily by second
mortgages on owner-occupied one-to-four family residential properties. Sovereign
has recorded as off-balance sheet liabilities $623.4 million of additional
unused commitments for home equity lines of credit.
At June 30, 1997, Sovereign's non-performing assets were $57.2 million
compared to $74.1 million at December 31, 1996. Non-performing assets as a
percentage of total assets were .53% at June 30, 1997 compared to .74% at
December 31, 1996. This decrease is primarily attributable to the sale of $21.0
million of certain problem commercial loans and non-performing assets during the
first quarter which were acquired in the First State transaction. At June 30,
1997, 86% of non-performing assets consisted of loans or REO related to real
estate compared to 76% at December 31, 1996. The remainder of Sovereign's
non-performing assets consist principally of commercial and multi-family REO;
most of which have been acquired through acquisitions. Non-performing assets at
June 30, 1997, included $8.9 million of REO which is carried at lower of cost or
estimated fair value less estimated costs to sell. Sovereign places all loans 90
days or more delinquent (except loans guaranteed by the government or secured by
deposit accounts) on non-performing status.
- 26 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
The following table presents the composition of non-performing assets at
the dates indicated: (dollars in thousands)
June 30, December 31,
1997 1996
---- ----
Non-Accrual Loans:
Past due 90 days or more
as to interest or principal:
Real estate related $40,079 $49,018
Other 7,195 12,076
Past due less than 90 days
as to interest and principal:
Real estate related 635 639
Other -- 160
------- -------
Total Non-Accrual Loans 47,909 61,893
Restructured Loans 390 1,561
------- -------
Total Non-Performing Loans 48,299 63,454
------- -------
Real Estate Owned:
Real estate related 8,565 6,974
Other 371 3,660
------- -------
Total Real Estate Owned 8,936 10,634
------- -------
TOTAL NON-PERFORMING ASSETS $57,235 $74,088
======= =======
Past due 90 days or more as to
interest or principal and
accruing interest (1) $ 4,844 $12,869
Non-Performing Assets as a
percentage of Total Assets .53% .74%
Non-Performing Loans as a
percentage of Total Loans .71% .95%
Non-Performing Assets as a
percentage of Total Loans
and Real Estate Owned .91% 1.30%
Allowance for Possible Loan
Losses as a percentage of
Total Non-Performing Assets 83.56% 57.41%
Allowance for Possible Loan
Losses as a percentage of
Total Non-Performing Loans 99.01% 67.03%
- 27 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
- ----------
(1) At June 30, 1997 and December 31, 1996, non-performing assets past due 90
days or more as to interest or principal and accruing interest included
$4.8 million and $10.5 million, respectively, of government-guaranteed
student loans which are 100% guaranteed and Sovereign retains minimal risk
of credit losses related to these loans.
Management constantly evaluates the adequacy of its allowance for possible
loan losses. Management's evaluation of the adequacy of the allowance to absorb
potential loan losses takes into consideration the risks inherent in the loan
portfolio, past loan loss experience, specific loans which could have loss
potential, geographic and industry concentrations, delinquency trends, economic
conditions and other relevant factors. At June 30, 1997, the allowance for
possible loan losses was $48.9 million or .72% of total loans compared to $46.1
million or .69% of total loans at December 31, 1996.
The following table presents the allocation of the allowance for possible
loan losses and the percentage of such allocation to each loan type for the
dates indicated: (dollars in thousands)
June 30, December 31,
1997 1996
Balance at End of ---- ----
Period Attributable to Amount Percent Amount Percent
- ---------------------- ------ ------- ------ -------
Residential real estate $13,630 27.85% $17,390 37.73%
Commercial real estate 7,184 14.68 5,581 12.11
Commercial 4,484 9.16 3,100 6.72
Consumer 7,941 16.22 8,037 17.44
Unallocated 15,709 32.09 11,985 26.00
------- ------ ------- ------
Total $48,948 100.00% $46,093 100.00%
======= ====== ======= ======
Potential problem loans (consisting of loans as to which management has
serious concerns as to the ability of such borrowers to comply with present
repayment terms, although not currently classified as non-performing loans)
amounted to approximately $16.6 million at June 30, 1997. These loans consist of
$2.1 million of multi-family loans and $14.5 million of commercial real estate
loans.
- 28 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Investment and Mortgage-backed Securities
Investment securities consist primarily of U.S. Treasury and government
agency securities, corporate debt securities and stock in the Federal Home Loan
Bank of Pittsburgh ("FHLB"). Mortgage-backed securities consist of collateral
mortgage obligations issued by FHLMC, FNMA, GNMA, RTC or private label issues.
Sovereign's mortgage-backed securities are generally either guaranteed as to
principal and interest by the issuer or have ratings of "AAA" by Standard and
Poor's and Fitch at the date of issuance. The classes are backed by single
family residential loans which are primary residences geographically dispersed
throughout the United States. Sovereign purchases classes which are senior
positions backed by subordinate classes. The subordinate classes absorb the
losses and must be completely eliminated before any losses flow through the
senior positions. Sovereign's strategy is to purchase classes which have an
average life of three years or less. At June 30, 1997, two securities, or
approximately 3% of Sovereign's total investment portfolio were classified as
high risk as defined by the FFIEC Policy Statement on securities activities. The
effective duration of the total investment portfolio at June 30, 1997 was 2.4
years.
At June 30, 1997, total investment and mortgage-backed securities
available-for-sale were $718.1 million compared to $495.0 million at December
31, 1996 and investment and mortgage-backed securities held-to-maturity were
$2.94 billion compared to $2.49 billion at December 31, 1996. For additional
information with respect to Sovereign's investment and mortgage-backed
securities, see Notes 3 and 4 in the Notes to Consolidated Financial Statements.
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
adopted SFAS No. 121 in the first quarter of 1996 and the effect of adoption was
not material.
Goodwill and Other Intangible Assets
Total goodwill and other intangible assets at June 30, 1997 were $108.0
million compared to $113.6 million at December 31, 1996.
- 29 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 June 30, 1997 were $5.86 billion compared to $5.61
billion at December 31, 1996. For additional information with respect to
Sovereign's deposit portfolio composition, see Note 6 in the Notes to
Consolidated Financial Statements.
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 June 30, 1997 were $4.35 billion of which $3.75 billion
were short-term compared to $3.86 billion of which $2.77 billion were short-term
at December 31, 1996. This increase in short-term borrowings is the result of
balance sheet growth being funded principally by borrowings. For additional
information with respect to Sovereign's borrowings, see Note 7 in the Notes to
Consolidated Financial Statements.
Through the use of interest rate swaps, $1.06 billion of FHLB advances have
been effectively converted from variable rate obligations to fixed rate
obligations and a $75.0 million FHLB advance has been effectively converted from
a fixed rate obligation to a variable rate obligation.
At June 30, 1997, other borrowings included $50.0 million of subordinated
debentures which have, through the use of an interest rate swap, been converted
from a fixed rate obligation to a variable rate obligation.
In addition, $1.0 billion, $100.0 million, and $100.0 million of borrowings
have been protected from upward repricing through the use of interest rate caps,
floors, and corridors, respectively. Effective July 15, 1997 and March 18, 1998,
$150.0 million and $250.0 million, respectively, of short-term borrowings will
be converted to longer-term, fixed rate borrowings through the use of forward
swaps.
- 30 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Stockholders' Equity
Total stockholders' equity at June 30, 1997 was $534.0 million compared to
$508.8 million at December 31, 1996. This increase is primarily attributable to
the retention of earnings less dividends paid to shareholders, net of
unallocated common stock held by ESOP and an adjustment to stockholders' equity
to reflect First State's activity for the three-month period ended December 31,
1996 resulting from the differing fiscal year end of First State as previously
discussed in Note 9 in the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Sovereign's banking subsidiaries are 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's banking subsidiaries 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.
The liquidity ratio of Sovereign Bank for June 30, 1997 was 5.44%.
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. While the majority of Sovereign's
certificate of deposit accounts are expected to mature within a one year period,
historically, the retention rate has been approximately 70%. If a significant
portion of maturing certificates would not renew at maturity, the impact on
Sovereign's operations and liquidity would be minimal due to cash flows produced
by Sovereign's investment portfolio which approximate $70 million per month. At
June 30, 1997, Sovereign had $3.05 billion in unpledged investments 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.
For the six-month period ended June 30, 1997, cash and cash equivalents
increased $34.6 million. Net cash provided by operating activities was $150.9
million for the six-month period ended June 30, 1997. Net cash used by investing
activities for the six-month period ended June 30, 1997 was $859.2 million
consisting primarily of purchases of mortgage-backed securities which are
classified as held-to-maturity and loans, partially offset by proceeds from
sales of investment and mortgage-backed securities held-to-maturity acquired in
the First State transaction. Net cash provided by financing activities for the
six-month period ended June 30, 1997 was $742.9 million which includes an
increase in deposits of $251.0 million and an increase in short-term borrowings
of $462.8 million.
- 31 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"),
requires the OTS to prescribe uniformly applicable capital standards for all
savings associations. These standards require savings associations 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 has
issued a regulation that 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 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 are subject to various restrictions
regarding capital distributions, payment of management fees, acceptance of
brokered deposits and other operating activities.
At June 30, 1997, Sovereign Bank was classified as well capitalized and in
compliance with all capital requirements. Management anticipates that Sovereign
Bank will continue to be classified as well capitalized and will be in
compliance with all regulatory capital requirements.
The following table sets forth the capital ratios of Sovereign Bancorp and
Sovereign Bank and the current regulatory requirements at June 30, 1997:
<TABLE>
<CAPTION>
Well
Sovereign Sovereign Minimum Capitalized
Bancorp (1) Bank Requirement Requirement
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Stockholders' equity to
total assets 4.90% 6.18% None None
Tangible capital to tangible
assets 3.88 5.19 1.50% None
Leverage (core) capital to
tangible assets 4.82 5.19 3.00 5.00%
Leverage (core) capital to
risk adjusted assets 10.15 11.18 4.00 6.00
Risk-based capital to risk
adjusted assets 14.43 12.11 8.00 10.00
</TABLE>
- ----------
(1) OTS capital regulations do not apply to savings and loan holding companies.
These ratios are computed as if those regulations did apply to Sovereign
Bancorp.
- 32 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
ASSET AND LIABILITY MANAGEMENT
The objective of Sovereign's asset and liability management is to identify,
manage and control its interest rate risk in order to produce consistent
earnings that are not largely 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
accomplished 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 of 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
9.25% at June 30, 1997. A negative gap position implies that the Bank is
liability sensitive which could cause net interest income to decrease if
interest rates rise.
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. Sovereign also monitors the impact to net interest income of
a +200 basis point instantaneous rate shock. At June 30, 1997, Sovereign
estimates that if interest rates would instantaneously rise by 200 basis points,
net interest income would decrease by 7.28%.
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. For additional information on
interest rate exchange agreements, see Note 8 in the Notes to Consolidated
Financial Statement.
- 33 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 rate 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 generally utilizes non-amortizing swaps to convert fixed
rate liabilities to floating rate, 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 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 marketable fixed rate mortgage-backed
securities which are generally sold, or cash. This helps insulate Sovereign from
the interest rate and prepayment 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.
- 34 -
<PAGE>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Items 1 through 5 are not applicable or the responses are negative.
Item 6 - Reports on Form 8-K.
Report on Form 8-K, dated June 17, 1997 (date of earliest event -
June 17, 1997), contained Sovereign's 1996 Form 10-K restated to
include the merger of First State Financial Services, Inc. with and
into Sovereign Bancorp, Inc. First State's 1996 Form 10-K was also
presented.
Report on Form 8-K, dated March 17, 1997 (date of earliest event -
March 17, 1997), contained pro forma financial information showing
the effects of the merger of First State Financial Services, Inc.
with and into Sovereign Bancorp, Inc., which was effective as of
February 18, 1997, and the pending acquisition of Bankers Corp.
Report on Form 8-K, dated February 13, 1997 (date of earliest event
- February 5, 1997), described the Agreement and Plan of Merger
dated February 5, 1997 pursuant to which Sovereign will acquire
Bankers Corp.
Report on Form 8-K, dated February 6, 1997 (date of earliest event -
February 6, 1997), contained a press release announcing the
execution of an Agreement and Plan of Merger for Sovereign to
acquire Bankers Corp.
Report on Form 8-K, dated February 3, 1997 (date of earliest event -
January 20, 1997), contained a press release announcing Sovereign's
earnings for the year ended December 31, 1996 and a press release
announcing an amendment to the timing of the 6 for 5 stock split on
Sovereign common stock which was declared on January 16, 1997.
- 35 -
<PAGE>
SIGNATURES
Pursuant to the requirements 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)
Date August 11, 1997 /s/ Karl D. Gerhart
------------------------- --------------------------------------
Karl D. Gerhart
Chief Financial Officer
Date August 11, 1997 /s/ Mark R. McCollom
------------------------- ----------------------------------------
Mark R. McCollom
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
PART III - FINANCIAL DATA SCHEDULE
ARTICLE 9 OF REGULATION S-X
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 133,910
<INT-BEARING-DEPOSITS> 18,268
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 718,052
<INVESTMENTS-CARRYING> 2,943,867
<INVESTMENTS-MARKET> 2,927,042
<LOANS> 6,842,853
<ALLOWANCE> (48,948)
<TOTAL-ASSETS> 10,898,572
<DEPOSITS> 5,856,717
<SHORT-TERM> 3,752,000
<LIABILITIES-OTHER> 162,666
<LONG-TERM> 593,152
0
96,441
<COMMON> 268,658
<OTHER-SE> 168,938
<TOTAL-LIABILITIES-AND-EQUITY> 10,898,572
<INTEREST-LOAN> 246,612
<INTEREST-INVEST> 114,204
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 360,816
<INTEREST-DEPOSIT> 115,455
<INTEREST-EXPENSE> 234,302
<INTEREST-INCOME-NET> 126,514
<LOAN-LOSSES> 9,700
<SECURITIES-GAINS> 2,541
<EXPENSE-OTHER> 15,908
<INCOME-PRETAX> 50,943
<INCOME-PRE-EXTRAORDINARY> 50,943
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,713
<EPS-PRIMARY> .41
<EPS-DILUTED> .39
<YIELD-ACTUAL> 2.50
<LOANS-NON> 47,909
<LOANS-PAST> 4,844
<LOANS-TROUBLED> 390
<LOANS-PROBLEM> 16,626
<ALLOWANCE-OPEN> 46,093
<CHARGE-OFFS> 5,795
<RECOVERIES> 1,624
<ALLOWANCE-CLOSE> 48,948
<ALLOWANCE-DOMESTIC> 33,239
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 15,709
</TABLE>
