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SECURITIES AND EXCHANGE COMMISSION

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, 2003

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: 001-16581

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.)
     
1500 Market Street, Philadelphia, Pennsylvania   19103
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number: (215) 557-4630

2000 Market Street, Philadelphia, Pennsylvania                                        19103                 
(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 [  ].

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) 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 1, 2003
 
Common Stock (no par value)
   292,101,095 shares

 

 

FORWARD LOOKING STATEMENTS

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

     The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Sovereign Bancorp, Inc. (“Sovereign”). Sovereign may from time to time make forward-looking statements in Sovereign’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the Exhibits hereto), in its reports to shareholders (including its 2002 Annual Report) and in other communications by Sovereign, which are made in good faith by Sovereign, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Some of the disclosure communications by Sovereign, including any statements preceded by, followed by or which include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “will,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “strive,” “hopefully,” “try,” “assume” or similar expressions constitute forward-looking statements.

     These forward-looking statements include statements with respect to Sovereign’s vision, mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business of Sovereign, including statements relating to:

  •   growth in net income, shareholder value and internal tangible equity generation;
 
  •   growth in earnings per share;
 
  •   return on equity;
 
  •   return on assets;
 
  •   efficiency ratio;
 
  •   Tier 1 leverage ratio;
 
  •   annualized net charge-offs and other asset quality measures;
 
  •   fee income as a percentage of total revenue;
 
  •   ratio of tangible equity to assets;
 
  •   book value and tangible book value per share; and
 
  •   loan and deposit portfolio compositions, employee retention, deposit retention, asset quality and reserve adequacy.

     These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements. Although Sovereign believes that the expectations reflected in these forward-looking statements are reasonable, these statements involve risks and uncertainties which are subject to change based on various important factors (some of which are beyond Sovereign’s control). The following factors, among others, could cause Sovereign’s financial performance to differ materially from its goals, plans, objectives, intentions, expectations, forecasts and projections (and the underlying assumptions) expressed in the forward-looking statements:

  •   the strength of the United States economy in general and the strength of the regional and local economies in which Sovereign conducts operations;

 

 

FORWARD LOOKING STATEMENTS
(continued)

  •   the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
 
  •   inflation, interest rate, market and monetary fluctuations;
 
  •   Sovereign’s ability to successfully integrate any assets, liabilities, customers, systems and management personnel Sovereign acquires into its operations and its ability to realize related revenue synergies and cost savings within expected time frames;
 
  •   Sovereign’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers;
 
  •   the willingness of customers to substitute competitors’ products and services and vice versa;
 
  •   the ability of Sovereign and its third party vendors to convert and maintain Sovereign’s data processing and related systems on a timely and acceptable basis and within projected cost estimates;
 
  •   the impact of changes in financial services policies, laws and regulations, including laws, regulations, policies and practices concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles;
 
  •   technological changes;
 
  •   changes in consumer spending and savings habits;
 
  •   terrorist attacks in the United States or upon United States interests abroad, or armed conflicts relating to these attacks;
 
  •   armed conflicts involving the United States military;
 
  •   regulatory or judicial proceedings;
 
  •   changes in asset quality; and
 
  •   Sovereign’s success in managing the risks involved in the foregoing.

     If one or more of the factors affecting Sovereign’s forward-looking information and statements proves incorrect, then its actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Therefore, Sovereign cautions you not to place undue reliance on any forward-looking information and statements.

     Sovereign does not intend to update any forward-looking information and statements, whether written or oral, to reflect any change. All forward-looking statements attributable to Sovereign are expressly qualified by these cautionary statements.

 

 

INDEX

           
      Page
PART I. FINANCIAL INFORMATION
        
 
Item 1. Financial Statements
        
 
Consolidated Balance Sheets at June 30, 2003 and December 31, 2002
     5  
 
Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2003 and 2002
     6  
 
Consolidated Statement of Stockholders’ Equity for the six-month period ended June 30, 2003
     8  
 
Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2003 and 2002
     9  
 
Notes to Consolidated Financial Statements
     10 - 21  
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     22 - 42  
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     42  
 
Item 4. Controls and Procedures
     42  
PART II. OTHER INFORMATION
        
 
Item 4. Submission of Matters to a Vote of Security Holders
     43  
 
Item 6. Exhibits and Reports on Form 8-K
     43  
SIGNATURES
     45  
EXHIBITS INDEX
     46  

-4-

 

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)
                       
          June 30,   December 31,
          2003   2002
         
 
          (in thousands, except per
          share data)
ASSETS
                
 
Cash and amounts due from depository institutions
   $ 1,497,981     $ 972,614  
 
Investment securities:
                
   
Available-for-sale
     10,832,862       10,733,564  
   
Held-to-maturity
     492,343       632,513  
 
Loans (including loans held for sale of $403,845 and $382,055 at June 30, 2003 and December 31, 2002, respectively)
     24,329,431       23,193,434  
   
Allowance for loan losses
     (319,537 )     (298,750 )
 
    
     
 
   
Net loans
     24,009,894       22,894,684  
 
    
     
 
 
Premises and equipment
     273,403       281,427  
 
Accrued interest receivable
     169,288       175,291  
 
Goodwill
     1,025,292       1,025,292  
 
Core deposit intangibles, net
     305,540       343,305  
 
Bank owned life insurance
     785,978       765,534  
 
Other assets
     1,950,556       1,766,078  
 
    
     
 
     
TOTAL ASSETS
   $ 41,343,137     $ 39,590,302  
 
 
    
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
 
Deposits and other customer accounts
   $ 27,616,655     $ 26,851,089  
 
Borrowings and other debt obligations
     9,507,297       8,829,289  
 
Advance payments by borrowers for taxes and insurance
     18,970       17,158  
 
Other liabilities
     660,234       531,491  
 
    
     
 
     
TOTAL LIABILITIES
     37,803,156       36,229,027  
 
    
     
 
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding junior subordinated debentures of Sovereign (“Trust Preferred Securities”)
     207,608       396,331  
Minority interests
     201,379       200,626  
 
    
     
 
STOCKHOLDERS’ EQUITY
                
 
Common stock; no par value; 400,000,000 shares authorized; 297,415,617 shares issued at June 30, 2003 and 265,548,293 shares issued at December 31, 2002
     1,869,535       1,580,282  
 
Warrants and stock options
     12,483       101,892  
 
Unallocated common stock held by the Employee Stock Ownership Plan at cost; 3,878,855 shares at June 30, 2003 and 3,342,521 shares at December 31, 2002
     (28,465 )     (21,313 )
 
Treasury stock at cost; 1,557,183 shares at June 30, 2003 and 582,262 shares at December 31, 2002
     (24,171 )     (6,060 )
 
Accumulated other comprehensive income
     53,368       28,009  
 
Retained earnings
     1,248,244       1,081,508  
 
    
     
 
     
TOTAL STOCKHOLDERS’ EQUITY
     3,130,994       2,764,318  
 
    
     
 
     
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   $ 41,343,137     $ 39,590,302  
 
 
    
     
 

See accompanying notes to consolidated financial statements.

-5-

 

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                         
            Three-Month Period   Six-Month Period
            Ended June 30,   Ended June 30,
           
 
            2003   2002   2003   2002
           
 
 
 
                    (in thousands, except        
                    per share data)        
INTEREST INCOME:
                                
   
Interest-earning deposits
   $ 542     $ 978     $ 1,217     $ 2,918  
   
Investment securities:
                                
     
Available-for-sale
     149,468       158,638       307,699       299,336  
     
Held-to-maturity
     7,580       12,351       16,023       25,884  
   
Interest on loans
     332,123       353,809       665,738       692,465  
 
    
     
     
     
 
       
TOTAL INTEREST INCOME
     489,713       525,776       990,677       1,020,603  
 
    
     
     
     
 
INTEREST EXPENSE:
                                
   
Deposits and customer accounts
     84,903       116,295       178,554       227,305  
   
Borrowings and other debt obligations
     97,993       112,476       202,266       224,364  
 
    
     
     
     
 
       
TOTAL INTEREST EXPENSE
     182,896       228,771       380,820       451,669  
 
    
     
     
     
 
NET INTEREST INCOME
     306,817       297,005       609,857       568,934  
Provision for loan losses
     42,000       28,000       85,357       72,500  
 
    
     
     
     
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
     264,817       269,005       524,500       496,434  
 
    
     
     
     
 
NON-INTEREST INCOME:
                                
   
Consumer banking fees
     53,285       44,243       101,510       82,806  
   
Commercial banking fees
     26,787       23,554       52,010       46,305  
   
Mortgage banking revenues
     8,827       6,609       16,835       16,075  
   
Capital markets revenue
     9,062       1,808       16,811       5,145  
   
Bank owned life insurance
     10,116       10,644       20,448       20,933  
   
Miscellaneous income
     4,208       5,588       7,730       8,152  
 
    
     
     
     
 
       
TOTAL FEES AND OTHER INCOME
     112,285       92,446       215,344       179,416  
 
Gain on investment securities and related derivatives transactions, net
     19,446       3,841       36,977       24,407  
 
    
     
     
     
 
       
TOTAL NON-INTEREST INCOME
     131,731       96,287       252,321       203,823  
 
    
     
     
     
 
GENERAL AND ADMINISTRATIVE EXPENSES:
                                
   
Compensation and benefits
     99,466       92,258       192,648       178,269  
   
Occupancy and equipment expenses
     51,144       49,984       104,486       100,271  
   
Technology expense
     17,296       17,715       35,235       34,355  
   
Outside services
     13,623       12,631       27,096       24,083  
   
Marketing expense
     10,895       8,088       21,221       14,916  
   
Other administrative expenses
     25,271       25,017       48,097       47,838  
 
    
     
     
     
 
       
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES
     217,695       205,693       428,783       399,732  
 
    
     
     
     
 

-6-

 

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(continued)
                                     
        Three-Month Period   Six-Month Period
        Ended June 30,   Ended June 30,
       
 
        2003   2002   2003   2002
       
 
 
 
        (in thousands, except
        per share data)
OTHER EXPENSES:
                                
 
Amortization of intangibles
   $ 18,671     $ 20,457     $ 37,766     $ 40,691  
 
Trust Preferred Securities and other minority interest expense
     15,898       15,906       31,941       31,464  
 
Merger-related and integration charges
     —       —       —       15,871  
 
Loss on debt extinguishment
     —       —       28,981       —  
 
    
     
     
     
 
   
TOTAL OTHER EXPENSES
     34,569       36,363       98,688       88,026  
 
    
     
     
     
 
INCOME BEFORE INCOME TAXES
     144,284       123,236       249,350       212,499  
Income tax provision
     40,110       32,892       69,320       56,737  
 
    
     
     
     
 
NET INCOME
   $ 104,174     $ 90,344     $ 180,030     $ 155,762  
 
 
    
     
     
     
 
EARNING PER SHARE:
                                
 
Basic
   $ .40     $ .35     $ .69     $ .61  
 
 
    
     
     
     
 
 
Diluted
   $ .37     $ .32     $ .64     $ .57  
 
 
    
     
     
     
 
DIVIDENDS DECLARED PER COMMON SHARE
   $ .025     $ .025     $ .050     $ .050  
 
 
    
     
     
     
 

See accompanying notes to consolidated financial statements.

-7-

 

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands)
                                       
          Common           Warrants        
          Shares Out-   Common   & Stock   Treasury
          standing   Stock   Options   Stock
         
 
 
 
Balance, December 31, 2002
     261,624     $ 1,580,282     $ 101,892     $ (6,060 )
Comprehensive income:
                                
   
Net income
     —       —       —       —  
   
Change in unrealized gain/loss, net of tax: