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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the fiscal year ended
December 31, 1995, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the transition period
from N/A to __________.
Commission File Number 0-16533
SOVEREIGN BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2453088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610
(Address of principal executive offices) Zip Code)
Registrant's telephone number: (215) 320-8400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (without par value)
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No. .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of Common Stock of the
Registrant held by nonaffiliates of the Registrant was
$508,253,463 at March 4, 1996. As of March 4, 1996, the
Registrant had 47,835,620 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement to be used in
connection with its 1996 Annual Meeting of Shareholders is
incorporated herein by reference in response to Part III hereof.
PART I
Item 1. BUSINESS.
General
Sovereign Bancorp, Inc. ("Sovereign") is a Pennsylvania
business corporation and is the holding company for Sovereign
Bank, a Federal Savings Bank ("Sovereign Bank") and for Colonial
Bank for Savings, a Federal Savings Bank ("Colonial Bank"). Both
Sovereign and Sovereign Bank are headquartered in Wyomissing,
Pennsylvania, a suburb of Reading, Pennsylvania. Colonial Bank
is headquartered in Freehold, New Jersey.
Sovereign Bank was created in 1984 under the name Penn
Savings Bank, F.S.B. through the merger of two financial
institutions with market areas primarily in Berks and Lancaster
Counties, Pennsylvania. Sovereign Bank assumed its current name
on December 31, 1991. Sovereign was incorporated by Sovereign
Bank in 1987.
From 1989 through 1994, Sovereign expanded its markets
throughout eastern Pennsylvania and central New Jersey by
completing ten acquisitions with assets totaling approximately
$3.3 billion. At December 31, 1994, Sovereign had 130 offices
and $6.6 billion in assets.
On November 17, 1995, Sovereign acquired two branch offices
located in Bergen County, New Jersey, and related deposits from
Berkeley. Sovereign assumed approximately $111.7 million in
deposits for a premium of $5.5 million. The acquisition was
accounted for as a purchase.
On November 15, 1995, Sovereign acquired Colonial State Bank
in a transaction accounted for as a purchase. After receipt of
regulatory approvals and pursuant to the terms of the agreement
entered into by Sovereign and Colonial State Bank, upon
acquisition, Colonial State Bank became a wholly-owned, BIF
insured, subsidiary of Sovereign and converted to a federal
savings bank under the name Colonial Bank for Savings, a Federal
Savings Bank. Sovereign acquired Colonial Bank in exchange for
$6.3 million in cash. Sovereign acquired $46.5 million in
assets, consisting principally of loans and investment
securities, and also assumed approximately $42.0 million in
deposit liabilities.
On November 10, 1995, Sovereign completed the sale of its
Pottsville, Pennsylvania, branch office with related deposits
totaling $23.9 million to Northwest Savings Bank and the sale of
its English Village branch office in North Wales, Pennsylvania
with related deposits of $12.4 million to Union National Bank &
Trust Company.
On April 21, 1995, Sovereign completed its sale of seven
southern New Jersey offices with related deposits totalling
$106.7 million to Collective Bancorp, Inc. ("Collective"). Six
of these offices had previously been purchased from Berkeley as
part of the transaction which closed on January 1, 1995. In
addition, Sovereign acquired $7.0 million in deposits from
Collective's Wilmington, Delaware branch office.
On January 1, 1995, Sovereign acquired 23 branch offices
located in New Jersey and Delaware, $909.3 million of related
deposits, cash and fixed assets from Berkeley Federal Bank &
Trust, FSB ("Berkeley") for a premium of $66.6 million. The
acquisition was accounted for as a purchase.
On November 1, 1994, Sovereign acquired Charter FSB Bancorp,
Inc. ("Charter"), with assets of $405.8 million and 10 offices
located in Morris and Sussex Counties, New Jersey. Sovereign
exchanged a total of 7.0 million new shares (7.7 million shares
as adjusted for all subsequent stock dividends) of Sovereign
common stock for all the outstanding shares of Charter. The
acquisition was accounted for as a pooling-of-interests.
On September 16, 1994, Sovereign acquired the Chadds Ford
Pennsylvania office and $14.4 million of related deposits of
Second National Federal Savings Association ("Second National")
from the Resolution Trust Corporation, receiver for Second
National, and received approximately $13.7 million of cash. The
acquisition was accounted for as a purchase.
On August 5, 1994, Sovereign acquired all the capital stock
of Shadow Lawn Savings Bank ("Shadow Lawn") with assets of
$787.5 million and 17 offices located in Monmouth and Ocean
Counties, New Jersey. Sovereign also assumed approximately
$730.6 million of deposit liabilities. Sovereign acquired Shadow
Lawn in exchange for $78.4 million of cash. The acquisition was
accounted for as a purchase.
On November 5, 1993, Sovereign acquired Valley Federal
Savings and Loan Association ("Valley Federal"). At
September 30, 1993, Valley Federal had total assets, deposits and
stockholders' equity of $315.7 million, $256.4 million and
$18.6 million, respectively. Sovereign exchanged a total of
2.9 million new shares (3.5 million shares as adjusted for all
subsequent stock dividends) of Sovereign common stock with a
value of $32.3 million for all of the outstanding shares of
Valley Federal common stock. The acquisition was accounted for
as a pooling-of-interests.
On August 27, 1993, Sovereign assumed $252.3 million of
deposit liabilities and received $233.7 million of cash from the
RTC as receiver of 9 branch offices of Home Unity Federal Savings
and Loan Association.
On January 15, 1993, Sovereign formally acquired Harmonia
Bancorp, Inc. ("Harmonia") in a transaction that was accounted or
as a purchase. Sovereign acquired total assets of $621.0 million
and assumed liabilities consisting principally of deposits in
exchange for $19.6 million of cash and 9.6 million new shares
(11.6 million shares as adjusted for all subsequent stock
dividends) of Sovereign common stock, issued at a value of
$66.1 million.
On October 2, 1995, Sovereign entered into an Agreement to
acquire West Jersey Bancshares, Inc. ("West Jersey") and West
Jersey's wholly-owned subsidiary, West Jersey Community Bank
("WJCB"). WJCB is a $101 million New Jersey commercial bank
headquartered in Fairfield, New Jersey. The terms of the
Agreement call for Sovereign to exchange $8.40 in Sovereign
common stock (subject to adjustment) for each share of West
Jersey common stock. Subject to regulatory approvals and
pursuant to the Agreement, the acquisition will be effected by
the merger of West Jersey with and into Sovereign and the merger
of WJCB with and into Sovereign Bank. The acquisition is
expected to close in April 1996, and is expected to be tax free
and accounted for as a pooling-of-interests.
At December 31, 1995, Sovereign's consolidated assets,
deposits and shareholders' equity were approximately $8.08
billion, $5.04 billion and $427.0 million, respectively. Based
on assets at December 31, 1995, Sovereign is the largest thrift
holding company headquartered in Pennsylvania.
Sovereign's primary business consists of attracting deposits
from its network of community banking offices, located in
Pennsylvania, New Jersey and Delaware, and originating
residential mortgage loans and home equity lines of credit in
those communities. Sovereign Bank originates mortgage loans
through its community banking offices and its Outside Sales
Division that consists of commissioned employees who conduct
business out of loan production offices. Sovereign also
originates mortgage loans through its Wholesale Division that
uses a network of independent mortgage bankers and brokers. All
underwriting for the Wholesale Division is performed by Sovereign
Bank.
Sovereign operates in a heavily regulated environment.
Changes in laws and regulations affecting it and its subsidiaries
may have an impact on its operations. See "Business -
Supervision and Regulation."
For additional information with respect to Sovereign's
business activities see Part III, Item 7 hereof.
The following table sets forth the maturity schedule for
Sovereign's loan portfolio (excluding residential real estate and
consumer loans):
Amounts at December 31, 1995, Maturing
-------------------------------------------------
LOAN MATURITY SCHEDULE In One Year After One Year After
(IN THOUSANDS) or Less - Five Years Five Years Total
----------- -------------- ---------- -----
Commercial real estate
loans: $2,487 $ 7,793 $36,897 $ 47,177
Real estate construction
loans:
Residential
(net of loans in
process of
$23,365) 267 791 37,093 38,151
Residential development
(net of loans in
process of
$736) 1,255 - 421 1,676
Commercial loans 4,871 3,674 7,286 15,831
------- ------- ------- --------
Total $ 8,880 $12,258 $81,697 $102,835
======= ======= ======= ========
Loans with:
Fixed rates $ 2,403 $ 8,631 $15,742 $ 26,776
Variable rates 6,477 3,627 65,955 76,059
------- ------- ------- --------
Total $ 8,880 $12,258 $81,697 $102,835
======= ======= ======= ========
The following table summarizes the allocation of the
allowance for possible loan losses and the percentage of such
allocation to each loan type for the past five years:
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(IN THOUSANDS)
December 31,
--------------------------------------------------------------------------------------------------------
Balance at end of
Period Attributable to: 1995 1994 1993 1992 1991
- ----------------------- ------------------- ------------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Residential real
estate $10,520 30.18% $10,540 29.05% $ 6,737 20.35% $ 7,316 27.54% $ 4,061 30.77%
Commercial real
estate 698 2.00 657 1.81 1,180 3.57 1,663 6.26 777 5.89
Commercial 181 .52 164 0.45 125 0.38 135 0.51 225 1.70
Consumer 4,190 12.02 4,435 12.22 927 2.80 997 3.75 754 5.71
Unallocated 19,267 55.28 20,493 56.47 24,130 72.90 16,451 61.94 7,381 55.93
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $34,856 100.00% $36,289 100.00% $33,099 100.00% $26,562 100.00% $13,198 100.00%
======= ======= ======= ====== ======= ====== ======= ====== ======= ======
The following table sets forth the maturity and yields of
Sovereign's investment and mortgage-backed securities held-to-
maturity at December 31, 1995. The maturities of mortgage-backed
securities held-to-maturity are based upon contractually
scheduled repayments. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or repay obligations with or without call or prepayment
penalties. Yields on tax-exempt securities were computed on a
tax equivalent basis using Sovereign's federal tax rate of 35%.
Amounts at December 31, 1995, Due
----------------------------------------------------------------
INVESTMENT AND MORTGAGE-BACKED
SECURITIES HELD-TO-MATURITY
(IN THOUSANDS)
After One After Five
In One Year Year- Years- After
or Less Five Years Ten Years Ten Years Total
----------- ---------- ---------- --------- -----
Investment Securities:
- ----------------------
U.S. Treasury and U.S. $498 $2,995 $1,500 -- $4,993
Government Agency 6.84% 6.40% 7.09% -- 6.65%
Securities
Corporate securities -- 1,010 -- -- 1,010
-- 8.20% -- -- 8.20%
Other securities -- 305 177 -- 482
-- 4.17% 1.94% -- 3.35%
Mortgage-backed Securities:
- ---------------------------
FHLMC 6,022 63,896 88,237 10,558 168,713
7.61% 7.34% 6.36% 7.97% 6.88%
FNMA 633 48,131 156,822 15,460 221,046
7.77% 7.11% 6.45% 7.01% 6.64%
GNMA -- 540 12,891 156,633 170,064
-- 9.61% 6.61% 8.90% 8.73%
RTC -- -- 28,954 -- 28,954
-- -- 6.80% -- 6.80%
Private Issues -- 139,489 91,509 53,642 284,640
-- 6.33% 6.82% 6.98% 6.61%
Collateralized Mortgage Obligations 478 1,088,394 42,168 66,270 1,197,310
7.75% 7.40% 6.45% 6.52% 7.32%
----- --------- ------ ------ ---------
TOTAL $7,631 $1,344,760 $422,258 $302,563 $2,077,212
====== ========== ======== ======== ==========
7.58% 7.27% 6.54% 7.91% 7.22%
====== ========== ======== ======== ==========
The following table sets forth the maturities and yields of
Sovereign's investment and mortgage-backed securities
available-for-sale at December 31, 1995. The maturities of the
mortgage-backed securities available-for-sale are based upon
contractually scheduled repayments. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or repay obligations with or without call or
prepayment penalties. Yields on tax-exempt securities were
computed on a tax equivalent basis using Sovereign's federal tax
rate of 35%.
Amounts at December 31, 1995, Due
INVESTMENT AND MORTGAGE-BACKED
SECURITIES AVAILABLE-FOR-SALE
(IN THOUSANDS)
No
After One After Five Stated
In One Year Year- Years- After Maturity
or Less Five Years Ten Years Ten Years or Rate Total
Investment Securities:
U.S. Treasury and U.S.
Government Agency
Securities $12,001 $133,234 $5,007 $ -- $ -- $150,242
4.61% 5.26% 6.25% -- -- 5.24%
Equity Securities -- -- -- -- 135,494 135,494
-- -- -- -- 4.75% 4.75%
Mortgage-backed Securities:
FHLMC -- 131,370 -- 24,753 -- 156,123
-- 5.42% -- 7.61% -- 5.77%
FNMA -- 64,906 -- 71,955 -- 136,861
-- 5.63% -- 7.65% -- 6.69%
GNMA -- -- -- 59,215 -- 59,215
-- -- -- 8.87% -- 8.87%
Collateralized Mortgage
Obligations 46,201 198,836 -- -- -- 245,037
7.50% 7.54% -- -- -- 7.53%
TOTAL $58,202 $528,346 $5,007 $155,923 $135,494 $882,972
6.90% 6.20% 6.25% 8.11% 4.75% 6.36%
At December 31, 1995, Sovereign held the following
securities of single issuers (other than obligations of the
United States and its political subdivisions, agencies and
corporations) having an aggregate book value in excess of 10% of
Sovereign's shareholders' equity:
INVESTMENT AND MORTGAGE-BACKED
SECURITIES At December 31, 1995
(IN THOUSANDS)
Issuer Book Value Market Value
G.E. Capital Mortgage Servicing, Inc. $ 189,944 $ 190,868
Prudential Home Mortgage Securities,
Inc. 162,809 164,260
Residential Funding Mortgage
Securities, Inc. 138,472 139,262
Securitized Asset Sales, Inc. 136,244 136,804
PHH Mortgage Servicing Corp. 101,097 102,986
Housing Security, Inc. 91,682 90,581
Independent National Mortgage Corp. 73,095 73,508
Capstead Mortgage Corp. 72,906 72,969
Saxon Mortgage Securities Corp. 55,822 54,820
TOTAL $1,022,071 $1,026,058
========== ==========
The following table sets forth the maturity of certificates
of deposit of $100,000 or more at December 31, 1995:
At December 31,
1995
(IN THOUSANDS)
Three months or less. . . . . . . . $94,918
Over three through six months. . . 71,231
Over six through twelve months. . . 40,002
Over twelve months. . . . . . . . . 20,245
Total. . . . . . . . . . . . . $226,396
========
Subsidiaries
Sovereign has three wholly-owned subsidiaries: Sovereign
Bank, Colonial Bank and Sovereign Investment Corporation, a
Delaware corporation that purchases and holds investment
securities.
In 1995, Sovereign Bank reorganized its existing subsidiary
structure. Sovereign Bank now has the following wholly-owned
subsidiaries: First Lancaster Financial Corp. and
201 Associates, Inc. 201 Associates, Inc. is a Delaware
corporation whose primary purpose is to purchase and hold certain
investment securities. First Lancaster Financial Corp. is a
Pennsylvania business corporation whose primary function is to
act as a holding company for The Sovereign Annuity Corp. and The
Sovereign Agency, Inc. Sovereign Annuity Corp. is a New Jersey
corporation whose primary purpose is to market investment
securities and mutual funds. The Sovereign Agency, Inc. is a
New Jersey corporation whose primary purpose is to market
insurance annuities. Colonial Bank has one subsidiary: CSB
Building Corporation, a New Jersey corporation whose primary
purpose is to hold title to property.
Federal regulations generally permit federally-chartered
savings institutions to invest up to 2% of assets in the capital
stock of, and make secured and unsecured loans to, certain types
of subsidiary service corporations. At December 31, 1995,
Sovereign Bank was authorized to have a maximum investment of
approximately $160.2 million in such subsidiaries, pursuant to
applicable federal regulations. As of such date, Sovereign Bank
had a total investment of $28.4 million in subsidiary service
corporations.
Employees
At December 31, 1995, Sovereign had 1,272 full-time and 232
part-time employees. None of these employees is represented by a
collective bargaining agent, and Sovereign believes it enjoys
good relations with its personnel.
Competition
Sovereign experiences substantial competition in attracting
and retaining deposits and in lending funds. The primary factors
in competing for deposits are the ability to offer attractive
rates and the convenience of office locations. Direct
competition for deposits comes primarily from other thrift
institutions and commercial banks. Competition for deposits also
comes from money market mutual funds, corporate and government
securities, and credit unions. The primary factors in the
competition for loans are interest rates, loan origination fees
and the range of products and services offered. Competition for
origination of real estate loans normally comes from other thrift
institutions, commercial banks, mortgage bankers, mortgage
brokers and insurance companies.
Environmental Laws
Environmentally related hazards have become a source of high
risk and potentially unlimited liability for financial
institutions relative to their loans. Environmentally
contaminated properties owned by an institution's borrowers may
result in a drastic reduction in the value of the collateral
securing the institution's loans to such borrowers, high
environmental clean up costs to the borrower affecting its
ability to repay the loans, the subordination of any lien in
favor of the institution to a state or federal lien securing
clean up costs, and liability to the institution for clean up
costs if it forecloses on the contaminated property or becomes
involved in the management of the borrower. To minimize this
risk, Sovereign Bank and Colonial Bank may require an
environmental examination of and report with respect to the
property of any borrower or prospective borrower if circumstances
affecting the property indicate a potential for contamination,
taking into consideration the potential loss to the institution
in relation to the burdens to the borrower. Such examination
must be performed by an engineering firm experienced in
environmental risk studies and acceptable to the institution, and
the costs of such examinations and reports are the responsibility
of the borrower. These costs may be substantial and may deter a
prospective borrower from entering into a loan transaction with
Sovereign Bank or Colonial Bank. Sovereign is not aware of any
borrower who is currently subject to any environmental
investigation or clean up proceeding which is likely to have a
material adverse effect on the financial condition or results of
operations of Sovereign Bank or of Colonial Bank.
Supervision and Regulation
General. Sovereign is a "savings and loan holding company"
registered with the Office of Thrift Supervision ("OTS") under
the Home Owners' Loan Act ("HOLA") and, as such, Sovereign is
subject to OTS regulation, examination, supervision and
reporting. The deposits of Sovereign Bank are insured by the
Savings Association Insurance Fund (the "SAIF") of the Federal
Deposit Insurance Corporation (the "FDIC"). The deposits of
Colonial Bank are insured by the Bank Insurance Fund (the "BIF")
of the FDIC. The SAIF and the BIF are administered by the FDIC,
but are required to be separately maintained and not combined.
See "Insurance of Deposit Accounts" below. Sovereign Bank and
Colonial Bank are required to file reports with the OTS
describing their respective activities and financial condition
and are periodically examined to test compliance with various
regulatory requirements. Sovereign Bank and Colonial Bank are
also subject to examination by the FDIC. Such examinations are
conducted for the purpose of protecting depositors and the
insurance fund and not for the purpose of protecting holders of
equity or debt securities of Sovereign, Sovereign Bank or
Colonial Bank. Sovereign Bank is a member of the Federal Home
Loan Bank ("FHLB") of Pittsburgh, which is one of the twelve
regional banks comprising the FHLB system. Colonial Bank is a
member of the FHLB of New York. Sovereign Bank and Colonial Bank
are also subject to regulation by the Board of Governors of the
Federal Reserve System with respect to reserves maintained
against deposits and certain other matters. Except as described
herein, Sovereign's management is not aware of any current
recommendations by regulatory authorities that would have a
material effect on Sovereign's operations, capital resources or
liquidity.
Holding Company Regulation. The HOLA prohibits a registered
savings and loan holding company from directly or indirectly
acquiring control, including through an acquisition by merger,
consolidation or purchase of assets, of any savings association
(as defined in HOLA to include a federal savings bank) or any
other savings and loan holding company, without prior OTS
approval. Generally, a savings and loan holding company may not
acquire more than 5% of the voting shares of any savings
association unless by merger, consolidation or purchase of
assets. Certain regulations of the OTS describe standards for
control under the HOLA. See "Control of Sovereign" below.
Federal law empowers the Director of the OTS to take
substantive action when the Director determines that there is
reasonable cause to believe that the continuation by a savings
and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness or stability of a
savings and loan holding company's subsidiary savings
institution. The Director of the OTS has oversight authority for
all holding company affiliates, not just the insured institution.
Specifically, the Director of the OTS may, as necessary,
(i) limit the payment of dividends by the savings institution;
(ii) limit transactions between the savings institution, the
holding company and the subsidiaries or affiliates of either;
(iii) limit any activities of the savings institution that might
create a serious risk that the liabilities of the holding company
and its affiliates may be imposed on the savings institution.
Any such limits would be issued in the form of a directive having
the legal efficacy of a cease and desist order.
Control of Sovereign. Under the Savings and Loan Holding
Company Act and the related Change in Bank Control Act (the
"Control Act"), individuals, corporations or other entities
acquiring Sovereign common stock may, alone or "in concert" with
other investors, be deemed to control Sovereign and thereby
Sovereign Bank and Colonial Bank. If deemed to control
Sovereign, such person or group will be required to obtain OTS
approval to acquire Sovereign's common stock and will be subject
to certain ongoing reporting procedures and restrictions under
federal law and regulations. Under the regulations, ownership of
25% of the capital stock of Sovereign will be deemed to
constitute "control," and ownership of more than 10% of the
capital stock may also be deemed to constitute "control" if
certain other control factors are present. It is possible that
even lower levels of ownership of such securities could
constitute "control" under the regulations.
Regulatory Capital Requirements. OTS Regulations require
savings associations to maintain a minimum tangible capital ratio
of not less than 1.5%, a minimum core capital, or "leverage,"
ratio of not less than 3% and a minimum risk-based capital ratio
(based upon credit risk) of not less than 8%. These standards
are the same as the capital standards that are applicable to
other insured depository institutions, such as banks. Federal
banking agencies are required to ensure that their risk-based
capital guidelines take adequate account of interest rate risk,
concentration of credit risk and risks of nontraditional
activities. In August, 1995, the federal banking agencies,
including the OTS, issued a rule modifying their then-existing
risk-based capital standards to provide for consideration of
interest rate risk when assessing the capital adequacy of an
institution. This new rule implements the first step of a
two-step process by explicitly including a depository
institution's exposure to declines in the value of its capital
due to changes in interest rates as one factor that the banking
agencies will consider in evaluating an institution's capital
adequacy. The new rule does not establish a measurement
framework for assessing an institution's interest rate risk
exposure level. Examiners will use data collected by the banking
agencies to determine the adequacy of an individual institution's
capital in light of interest rate risk. Examiners will also
consider historical financial performance, earnings exposure to
interest rate movements and the adequacy of internal interest
rate risk management, among other things. This case-by-case
approach for assessing an institution's capital adequacy for
interest rate risk is transitional. The second step of the
Federal banking agencies' interest rate risk regulation will be
to establish an explicit minimum capital charge for interest rate
risk, based on measured levels of interest rate risk exposure.
The banking agencies will implement this second step at some
future date.
The federal banking agencies, including the OTS, also
adopted final rules relating to concentration of credit risk and
risks of non-traditional activities effective on January 17,
1995. The agencies declined to adopt a quantitative test for
concentrations of credit risk and, instead, provided that such
risk would be considered in addition to other risks in assessing
an institution's overall capital adequacy. Institutions with
higher concentration of credit risk will be required to maintain
greater levels of capital. Similarly, the federal agencies
incorporated the evaluation of the risks of non-traditional
activities into the overall assessment of capital adequacy. The
agencies also indicated that proposed rules regarding specific
types of non-traditional activities will be promulgated from time
to time.
Under the Federal Deposit Insurance Act ("FDIA") insured
depository institutions must be classified in one of five defined
categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized). Under OTS regulations, an institution will be
considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater
and (iv) is not subject to any order or written directive to meet
and maintain a specific capital level. An "adequately
capitalized" institution is one that has (i) a total risk-based
capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater, (iii) a leverage ratio of 4% or greater
(or 3% or greater in the case of a bank with the highest
composite regulatory examination rating) and (iv) does not meet
the definition of a well capitalized institution. An institution
will be considered (A) "undercapitalized" if it has (i) a total
risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-
based capital ratio of less than 4% or (iii) a leverage ratio of
less than 4% (or 3% in the case of an institution with the
highest regulatory examination rating); (B) "significantly
undercapitalized" if the institution has (i) a total risk-based
capital ratio of less than 6%, (ii) a Tier 1 risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3%;
and (C) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets of equal to or less than
2%. The OTS may, under certain circumstances, reclassify a "well
capitalized" institution as "adequately capitalized" or require
an "adequately capitalized" or "undercapitalized" institution to
comply with supervisory actions as if it were in the next lower
category. Such a reclassification could be made if the OTS
determines that the institution is in an unsafe or unsound
condition (which could include unsatisfactory examination
ratings). A savings institution's capital category is determined
with respect to its most recent thrift financial report filed
with the OTS. In the event an institution's capital deteriorates
to the undercapitalized category or below, the FDIA and OTS
regulations prescribe an increasing amount of regulatory
intervention, including the adoption by the institution of a
capital restoration plan, a guarantee of the plan by its parent
holding company and the placement of a hold on increases in
assets, number of branches and lines of business.
If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be
imposed, including restrictions on interest payable on accounts,
dismissal of management and (in critically undercapitalized
situations) appointment of a receiver or conservator. Critically
undercapitalized institutions generally may not, beginning 60
days after becoming critically undercapitalized, make any payment
of principal or interest on their subordinated debt. All but
well capitalized institutions are prohibited from accepting
brokered deposits without prior regulatory approval. Pursuant to
the FDIA and OTS regulations, savings associations which are not
categorized as well capitalized or adequately capitalized are
restricted from making capital distributions which include cash
dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other
transactions charged to the capital account of a savings
association. At December 31, 1995, Sovereign Bank and Colonial
Bank each met the criteria to be classified as "well
capitalized."
Standards for Safety and Soundness. The federal banking
agencies adopted, effective in August, 1995, certain operational
and managerial standards for depository institutions, including
internal audit system components, loan documentation
requirements, asset growth parameters, and compensation standards
for officers, directors and employees. Sovereign does not
anticipate that the implementation or enforcement of these
guidelines will have a material adverse effect on its results of
operations.
Insurance of Deposit Accounts. The FDIC has implemented a
risk-related premium schedule for all insured depository
institutions that results in the assessment of premiums based on
capital and supervisory measures. Under the risk-related premium
schedule, the FDIC assigns, on a semiannual basis, each
institution to one of three capital groups (well-capitalized,
adequately capitalized or undercapitalized) and further assigns
such institution to one of three subgroups within a capital
group. The institution's subgroup assignment is based upon the
FDIC's judgment of the institution's strength in light of
supervisory evaluations, including examination reports,
statistical analyses and other information relevant to measuring
the risk posed by the institution. Only institutions with a
total capital to risk-adjusted assets ratio of 10.00% or greater,
a Tier 1 capital to risk-based assets ratio of 6% or greater, and
a Tier 1 leverage ratio of 5.0% or greater, are assigned to the
well-capitalized group. As of December 31, 1995, Sovereign Bank
and Colonial Bank were classified as well capitalized for
purposes of calculating insurance assessments. Institutions are
prohibited from disclosing the risk classification to which they
have been assigned. As of December 31, 1995, the FDIC calculated
deposit insurance assessments at the rate of $.23 for every $100
of deposits for the members of SAIF in the lowest risk-based
premium category and $0.31 for every $100 of insured deposits for
members of SAIF in the highest risk-based premium category.
In August, 1995, the FDIC adopted an amendment to the BIF
risk-based assessment schedule that lowers the deposit insurance
assessment rate for most (90% or more) commercial banks and other
depository institutions with deposits insured by BIF to $.04 per
$100 of insured deposits. On November 14, 1995, the FDIC further
reduced the BIF assessment rates to a range of $.00 per $100 of
insured deposits (subject to a minimum annual premium of $2,000)
for those institutions with the least risk to $0.27 for every
$100 of insured deposits for institutions deemed to have the
highest risk, beginning January 1, 1996. At the same time, the
FDIC voted to retain the existing assessment rates for SAIF-
insured institutions. The reduced BIF assessment rates result in
a substantial disparity in the deposit insurance premiums paid by
BIF and SAIF members and could place SAIF-insured savings
associations at a significant competitive disadvantage to
BIF-insured institutions.
Sovereign Bank is subject to FDIC deposit insurance
assessments at the rate applicable to SAIF-insured institutions
except, however, that the deposits acquired, on January 15, 1993,
when Sovereign acquired Harmonia Bancorp, Inc., remain subject to
BIF insurance assessment rates. The balance of these Harmonia
deposits was $756.0 million at December 31, 1995. Colonial Bank,
acquired by Sovereign on November 15, 1995, is subject to FDIC
deposit insurance assessments at the rate applicable to BIF
insured institutions.
Federal savings banks like Sovereign Bank and Colonial Bank
are required by OTS regulations to pay assessments to the OTS to
fund the operations of the OTS. The general assessment is paid
on a quarterly basis and is computed based on total assets of the
institution, including subsidiaries.
Taxation
Federal Taxation. Sovereign and its subsidiaries are
subject to those rules of federal income taxation generally
applicable to corporations and report their respective income and
expenses on the accrual basis method of accounting. Sovereign
and its subsidiaries file a consolidated federal income tax
return on a calendar year basis. Each member of the consolidated
group separately computes its income and deductions.
Intercompany distributions (including dividends) and certain
other items of income and loss derived from intercompany
transactions are eliminated upon consolidation of all the
consolidated group members' respective taxable income and losses.
In computing separate taxable income and loss, Sovereign
Bank and Colonial Bank each separately computes additions to its
bad debt reserves, pursuant to the special preferential rules of
Section 593 of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable only to certain savings banks, cooperative
banks, and domestic building and loan associations (generically,
sometimes referred to as either a "thrift" or a "savings
institution"). Under certain circumstances, the separate bad
debt reserve additions of Sovereign Bank and of Colonial Bank may
be subject to adjustments upon consolidation.
For purposes of computing the annual deductible addition to
the bad debt reserve, Sovereign Bank and Colonial Bank each must
separate its loans into "qualifying real property loans" (i.e.,
generally those loans secured by interests in real property -
"qualifying loans") and all other loans ("nonqualifying loans").
The deduction with respect to "nonqualifying loans" must be
computed under the experience method (using actual historical
experience), which essentially approximates a deduction for
Sovereign Bank's or Colonial Bank's actual charge-offs, as the
case may be. A savings institution, which meets the qualifying
assets test (as further described below), is able to compute its
bad debt deduction with respect to "qualifying loans" using one
of two methods (whichever results in the larger deduction):
(i) experience method, or (ii) the "percentage of taxable income
method" (less the amount deductible for the addition to the
reserve for "nonqualifying loans"). The amount so determined is
subject to limitation in certain cases. The sum of the additions
to each reserve for Sovereign Bank and for Colonial Bank for each
year is the annual consolidated bad debt deduction, subject to
any consolidating adjustments referred to above. Sovereign Bank
and Colonial Bank intend to elect to utilize whatever available
method provides the maximum bad debt reserve additions.
If Sovereign Bank or Colonial Bank distributes amounts to
stockholders (i.e., to Sovereign) and the distribution is treated
as being from accumulated bad debt reserves, the distribution
will cause Sovereign Bank or Colonial Bank, as the case may be,
to have additional taxable income. A distribution to
stockholders is deemed to have been made from accumulated bad
debt reserves to the extent that (a) the bad debt reserves exceed
the amount that would have been accumulated on the basis of the
experience method, and (b) the distribution is a "nondividend
distribution." A distribution in respect of stock is a
"nondividend distribution" to the extent that, for federal income
tax purposes, (i) it is in redemption of shares, (ii) it is
pursuant to a partial or complete liquidation of the institution
or (iii) the distribution, together with all other such
distributions during the taxable year, exceeds the distributing
savings institution's current and post-1951 accumulated earnings
and profits. The amount of additional taxable income resulting
from a "nondividend distribution" is an amount that, when reduced
by the tax attributable to such distribution, is equal to the
amount of the distribution.
The Code imposes a corporate alternative minimum tax
("AMT"). The corporate AMT only applies if such tax exceeds a
corporation's regular tax liability. In general, the AMT is
calculated by multiplying the corporate AMT rate of 20% by an
amount equal to the excess of (i) the sum of (a) regular taxable
income plus (b) certain adjustments and tax preference items
("alternative minimum taxable income" or "AMTI") over (ii) an
exemption amount ($40,000 for a corporation, but such amount is
reduced by 25% of the excess of AMTI over $150,000 and is
completely eliminated when AMTI equals $310,000). The excess, if
any, of the bad debt deduction using the "percentage of taxable
income" method over the bad debt deduction calculated on the
basis of actual experience method is treated as a preference item
for determining AMTI. Although there are other applicable
adjustment and preference items (e.g., the adjustment for
depreciation) for determining AMTI of a savings institution, this
particular preference item is significant in determining AMTI.
If a savings institution is subject to AMT, then all or a portion
of the amount of such preference will effectively be subject to a
20% surtax.
Sovereign's consolidated federal income tax return, as well
as certain prior year separate returns of Jersey Shore and
Harmonia, for the tax years beginning after 1991 are open under
the statute of limitations.
State Taxation. Sovereign and its nonthrift Pennsylvania
subsidiaries are subject to the Pennsylvania Corporate Net Income
Tax and Capital Stock Tax. The Corporate Net Income Tax rate for
1995 and thereafter is 9.99% and is imposed on a corporate
taxpayer's unconsolidated taxable income for federal purposes
with certain adjustments. In general, the Capital Stock Tax is a
property tax imposed on a corporate taxpayer's capital stock
value apportionable to the Commonwealth of Pennsylvania, which is
determined in accordance with a fixed formula based upon average
book income and net worth. In the case of a holding company, an
optional elective method permits the corporate taxpayer to be
taxed on only 10% of such capital stock value. The Capital Stock
Tax rate is presently 1.275%.
Sovereign Bank is taxed under the Pennsylvania Mutual Thrift
Institutions Tax Act (the "Mutual Tax Act"). The Mutual Tax Act
exempts Sovereign Bank from all other corporate taxes imposed by
the Commonwealth of Pennsylvania for Pennsylvania purposes and
from all local taxation imposed by political subdivisions of
Pennsylvania, except taxes on real estate and real estate
transfers. The Mutual Tax Act is a tax upon net income
apportioned to Pennsylvania, determined in accordance with
generally accepted accounting principles ("GAAP"), with certain
modifications. The Mutual Tax Act, in computing GAAP income,
allows for the deduction of interest earned on Pennsylvania
governmental and federal securities, while disallowing a
percentage of a thrift's interest expense deduction in the
proportion of the interest income from those securities to the
overall interest income of the institution. Pursuant to the
Mutual Tax Act, Sovereign Bank's tax rate is presently 11.5% of
such net income.
Sovereign Bank and Colonial Bank are also taxed under the
New Jersey Savings Institution Tax. The Savings Institution Tax
rate is 3% and is imposed on the portion of the taxpayer's
modified federal taxable income (with certain adjustments) that
is properly attributable to New Jersey. Effective September 29,
1995, Sovereign Bank is subject to a Delaware Franchise Tax that
is imposed on federal savings banks not headquartered in
Delaware. The tax, which is imposed on taxable income properly
attributable to Delaware branches, varies from a rate of 8.7% on
taxable income up to $20 million to a rate of 2.7% on taxable
income over $30 million.
Item 2. PROPERTIES.
Sovereign Bank is the owner of a five-story office building
in Wyomissing, Berks County, Pennsylvania. The building is used
as Sovereign's and Sovereign Bank's executive offices and as
Sovereign Bank's operations center. Colonial Bank leases its
office building in Freehold, Monmouth County, New Jersey, from
its wholly-owned subsidiary, CSB Building Corporation. The
building is used as Colonial Bank's executive offices, retail
banking office and operations center.
Sovereign Bank has 120 branch offices, including 6 loan
production and personalized banking offices. Sovereign owns 65
of these offices and leases 55. Branch office leases are
generally long-term. Loan production and personalized banking
office leases generally have terms of two years or less.
Colonial Bank has no branch offices.
Item 3. LEGAL PROCEEDINGS.
Sovereign is not involved in any pending legal proceedings
other than nonmaterial legal proceedings occurring in the
ordinary course of business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information, including principal occupation during
the past five years, relating to the principal executive officers
of Sovereign, as of March 4, 1996, is set forth below:
Richard E. Mohn - Age 65. Mr. Mohn was elected the Chairman
of the Board of Sovereign on April 24, 1995. Mr. Mohn became
Chairman of the Board of Sovereign Bank in November, 1989. He
is Chairman of Cloister Spring Water Company, Lancaster,
Pennsylvania, a bottler and distributor of spring water.
Jay S. Sidhu - Age 44. Mr. Sidhu has served as President
and Chief Executive Officer of Sovereign since November 21, 1989.
Prior thereto, Mr. Sidhu served as Treasurer and Chief Financial
Officer of Sovereign. Mr. Sidhu is also President and Chief
Executive Officer of Sovereign Bank and Colonial Bank. Prior to
becoming President and Chief Executive Officer of Sovereign Bank
on March 28, 1989, Mr. Sidhu served as Vice Chairman and Chief
Operating Officer of Sovereign Bank.
Lawrence M. Thompson, Jr. - Age 43. Mr. Thompson serves as
Chief Administrative Officer and Secretary of Sovereign and Chief
Administrative Officer and Secretary of Sovereign Bank. Upon
Sovereign's acquisition of Colonial Bank on November 15, 1995,
Mr. Thompson became Secretary of Colonial Bank. Mr. Thompson was
hired as Sovereign Bank's General Counsel and Secretary in 1984.
He was promoted to Vice President in 1985. In April 1986 he
became Sovereign Bank's Senior Vice President for legal affairs
and administration. In January, 1990, he became Group Executive
Officer - Lending and in June, 1995, he became Chief
Administrative Officer of Sovereign and Sovereign Bank.
Karl D. Gerhart - Age 43. Mr. Gerhart was elected Chief
Financial Officer and Treasurer of Sovereign on February 20,
1990. Mr. Gerhart is also Group Executive Officer, Treasurer and
Chief Financial Officer of Sovereign Bank and Treasurer and Chief
Financial Officer of Colonial Bank. Mr. Gerhart joined Sovereign
Bank in 1975 and in 1986 was promoted to Vice President-
Investments. In 1987, he became Sovereign Bank's Senior Vice
President, Treasurer and Chief Investment Officer, responsible
for managing Sovereign Bank's investment portfolio and interest
rate risk.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Sovereign's common stock is traded in the over-the-counter
market and is quoted on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") National Market
System under the symbol "SVRN." At March 4, 1996, the total
number of holders of record of Sovereign's common stock was
8,452.
The high and low bid prices reported on the NASDAQ National
Market System for Sovereign's common stock for 1994, adjusted to
reflect all stock dividends and splits, including a 5% stock
dividend declared on December 20, 1995, were $11.000 and $7.000
and for 1995 were $10.375 and $7.000, respectively.
During 1995, Sovereign paid a cash dividend of $.0209 per
share in the first quarter, $.0209 per share in the second
quarter, $.0209 per share in the third quarter and $.0210 per
share in the fourth quarter. During 1994, Sovereign paid a cash
dividend of $.0336 per share in the first quarter, $.0256 per
share in the second quarter, $.0258 per share in the third
quarter and $.0209 per share in the fourth quarter. During 1993,
Sovereign paid a cash dividend of $0.0250 per share in the first
quarter, $.0259 in the second quarter, $.0252 in the third
quarter and $.0231 in the fourth quarter. These per share
amounts have been adjusted to reflect all stock dividends and
stock splits and acquisitions accounted for as pooling-
of-interests.
For certain limitations on the ability of Sovereign Bank and
of Colonial Bank to pay dividends to Sovereign, see Note 10 to
Sovereign's consolidated financial statements, incorporated by
reference herein at Item 8 "Financial Statements and
Supplementary Data" and Item 1 "Business--Supervision and
Regulation--Restriction on Capital Distributions" hereof.
Item 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA(1)
BALANCE SHEET DATA
(IN THOUSANDS)
AT DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992(2) 1991
---------- ---------- ---------- ---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,078,287 $6,564,082 $4,877,166 $3,699,084 $2,274,702
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,674,364 4,350,898 2,898,014 2,337,382 1,437,247
Allowance for possible loan losses . . . . . . . . . . . . . . . . 34,856 36,289 33,099 26,562 13,198
Investment and mortgage-backed securities available-for-sale . . . 889,509 87,128 -- -- --
Investment and mortgage-backed securities held-to-maturity . . . . 2,077,212 1,816,840 1,689,304 1,001,356 644,061
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,039,143 4,027,119 3,183,107 2,961,058 1,815,679
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,530,656 2,162,587 1,367,100 427,591 285,059
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 427,025 303,900 259,121 220,419 137,259
SUMMARY STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992(2) 1991
---------- ---------- ---------- ---------- ----------
Total interest income . . . . . . . . . . . . . . . . . . . . . . $ 493,031 $ 354,141 $ 282,790 $ 199,431 $ 182,015
Total interest expense . . . . . . . . . . . . . . . . . . . . . 318,805 198,741 153,318 118,585 125,326
---------- ---------- ---------- ---------- ----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . 174,226 155,400 129,472 80,846 56,689
Provision for possible loan losses . . . . . . . . . . . . . . . 1,000 4,100 8,650 10,080 6,796
---------- ---------- ---------- ---------- ----------
Net interest income after provision for possible loan losses. . . 173,226 151,300 120,822 70,766 49,893
---------- ---------- ---------- ---------- ----------
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . 25,829 14,554 15,167 10,965 5,083
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 113,108 90,989 77,377 47,036 33,460
---------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative effect of change
in accounting principle . . . . . . . . . . . . . . . . . . . . 85,947 74,865 58,612 34,695 21,516
Income tax provision . . . . . . . . . . . . . . . . . . . . . . 29,539 28,467 22,998 15,057 9,534
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in accounting principle 56,408 46,398 35,614 19,638 11,982
Cumulative effect of change in accounting principle . . . . . . . -- -- 4,800 -- --
---------- ---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414 $ 19,638 $ 11,982
========== ========== ========== ========== ==========
Net income applicable to common stock . . . . . . . . . . . . . . $ 51,719 $ 46,398 $ 40,414 $ 19,638 $ 11,982
========== ========== ========== ========== ==========
SHARE DATA(3)
Common shares outstanding at end of period (in thousands) . . . . 45,465 45,567 41,357 40,682 23,898
Preferred shares outstanding at end of period (in thousands) . . . 2,000 -- -- -- --
Earnings per common and common equivalent share:
Before cumulative effect of change in accounting principle. . $ 1.00 $ .90 $ .70 $ .51 $ .37
After cumulative effect of change in accounting principle . . 1.00 .90 .80 .51 .37
Book value per common and common equivalent share at end of
period(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.40 6.05 5.24 4.53 3.73
Common share price at end of period . . . . . . . . . . . . . . . 9 5/8 7 10 11/16 6 1/16 3 3/16
Dividends paid per common share . . . . . . . . . . . . . . . . . .084 .106 .099 .082 .058
Dividend payout ratio. . . . . . . . . . . . . . . . . . . . . . . 8.40% 11.78% 14.14% 16.08% 15.68%
(1) The acquisitions of Valley Federal and Charter were
accounted for as pooling-of-interests and accordingly, the
consolidated financial statements have been restated to
include the accounts of Valley Federal and Charter for all
periods presented.
(2) The acquisition of Harmonia was accounted for as a purchase
at the close of business on December 31, 1992. Sovereign's
consolidated balance sheet at December 31, 1992, includes
Harmonia. Sovereign's 1992 consolidated results of
operations do not include Harmonia's results.
(3) All per share data have been adjusted to reflect all stock
dividends and stock splits.
(4) Book value is calculated using equity divided by common
shares and, if converted, preferred shares.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General. Sovereign and subsidiaries reported net income of
$56.4 million for the year ended December 31, 1995. This
represents an increase of 22% over net income of $46.4 million
reported for 1994. Earnings per share were $1.00 for 1995 which
represents an increase of 11% over 1994 earnings per share of
$.90. Return on average equity and return on average assets were
14.95% and .78%, respectively, for 1995 compared to 16.47% and
.84%, respectively, for 1994. Return on average risk-adjusted
assets was 1.68% for 1995 compared to 1.77% for 1994.
Sovereign's financial results include the following significant
events:
Interest Rate Environment. During 1995, the Board of
Governors of the Federal Reserve System lowered short-term
interest rates three times, resulting in a 1% reduction in
short-term rates. Long-term interest rates responded
dramatically to 1995's slowing economy and lower rate of
inflation by decreasing more than 2% during the year. This
tightening of interest rates resulted in a flat yield curve (a
shrinking of the difference between short-term rates and
long-term rates). The flat yield curve coupled with a low
interest rate environment caused a contraction of Sovereign's
interest rate spread (the difference between the yield on total
assets and the cost of total liabilities and stockholders'
equity) from 2.82% in 1994 to 2.42% in 1995. While the flat
yield curve compressed Sovereign's interest rate spread, it did
allow Sovereign the opportunity to extend the maturity and
repricing of its liabilities and shorten the maturity and
repricing of its assets. This repositioning shifted Sovereign's
one year gap position (the ratio representing the difference
between assets, liabilities and off-balance sheet positions which
will mature or reprice within one year expressed as a percentage
of average assets) from a negative 10.5% at December 31, 1994, to
a negative .29% at December 31, 1995.
Berkeley. On November 17, 1995, Sovereign acquired two
branch offices and related deposits from Berkeley Federal Bank &
Trust, FSB ("Berkeley"). Sovereign assumed approximately
$111.7 million of deposit liabilities and received approximately
$104.9 million of cash.
Colonial. On November 15, 1995, Sovereign acquired Colonial
Bank in a transaction accounted for as a purchase. Sovereign
acquired $46.5 million of assets consisting principally of loans
and investment securities. Sovereign also assumed approximately
$42.0 million of deposit liabilities. Sovereign acquired
Colonial Bank in exchange for $6.3 million in cash. Colonial
Bank operates as a separate banking subsidiary of Sovereign.
Colonial's results of operations from November 15, 1995,
and thereafter, have been included in Sovereign's consolidated
results of operations.
Northwest Savings Bank and Union National Bank & Trust
Company. On November 10, 1995, Sovereign completed the sale of
its Pottsville, Pennsylvania branch office with related deposits
totalling $23.9 million to Northwest Savings Bank ("Northwest")
and the sale of its English Village branch office in North Wales,
Pennsylvania with related deposits of $12.4 million to Union
National Bank & Trust Company ("Union National"). As a result of
these transactions, Sovereign recognized a pre-tax gain of
$1.1 million and reduced goodwill by $568,000, respectively.
Collective. On April 21, 1995, Sovereign completed the sale
of seven southern New Jersey offices with related deposits
totalling $106.7 million to Collective Bancorp, Inc.
("Collective"). Six of these offices had previously been
purchased from Berkeley as part of a transaction which occurred
on January 1, 1995. In addition, Sovereign acquired $7.0 million
of deposits from Collective's Wilmington, Delaware branch office.
As a result of this transaction, Sovereign recognized a pre-tax
gain of $1.5 million and reduced its existing core deposit
intangible by approximately $6.0 million.
Berkeley. On January 1, 1995, Sovereign acquired 23 branch
offices located in New Jersey and Delaware with $909.3 million of
deposit liabilities from Berkeley. In exchange for assuming the
deposits of the Berkeley offices, Sovereign acquired principally
cash and fixed assets, net of a deposit premium of $66.6 million.
Charter. On November 1, 1994, Sovereign acquired Charter
FSB Bancorp, Inc. ("Charter"). At September 30, 1994, Charter
had total assets, deposits and stockholders' equity of
approximately $405.8 million, $341.4 million and $41.7 million,
respectively. Sovereign exchanged a total of 7.0 million new
shares (7.7 million shares as adjusted for all subsequent stock
dividends) of Sovereign common stock with a value of
$62.7 million for all of the outstanding shares of Charter common
stock.
The acquisition of Charter was accounted for as a
pooling-of-interests and accordingly, the consolidated financial
statements have been restated to include the accounts of Charter
for all periods presented.
Second National. On September 16, 1994, Sovereign acquired
the Chadds Ford, Pennsylvania office and related deposits of
Second National Federal Savings Association ("Second National")
from the Resolution Trust Corporation ("RTC"), receiver for
Second National. Sovereign assumed approximately $14.4 million
of deposit liabilities and received approximately $13.7 million
of cash.
Shadow Lawn. On August 5, 1994, Sovereign acquired Shadow
Lawn Savings Bank ("Shadow Lawn") in a transaction accounted for
as a purchase. Sovereign acquired $787.5 million of assets
consisting principally of investment and mortgage-backed
securities and loans. Sovereign also assumed approximately
$730.6 million of deposit liabilities. Sovereign acquired Shadow
Lawn in exchange for $78.4 million of cash.
Shadow Lawn's results of operations from August 5, 1994, and
thereafter, have been included in Sovereign's consolidated
results of operations.
Valley Federal. On November 5, 1993, Sovereign acquired
Valley Federal Savings and Loan Association ("Valley Federal").
At September 30, 1993, Valley Federal had total assets, deposits
and stockholders' equity of $315.7 million, $256.4 million and
$18.6 million, respectively. Sovereign exchanged a total of
2.9 million new shares (3.5 million shares as adjusted for all
subsequent stock dividends) of Sovereign common stock with a
value of $32.3 million for all of the outstanding shares of
Valley Federal common stock.
The acquisition of Valley Federal was accounted for as a
pooling-of-interests and accordingly, the consolidated financial
statements have been restated to include the accounts of Valley
Federal for all periods presented.
Home Unity. On August 27, 1993, Sovereign assumed
$252.3 million of deposit liabilities and received $233.7 million
of cash from the RTC as receiver of nine branch offices of Home
Unity Federal Savings and Loan Association ("Home Unity").
Harmonia. On January 15, 1993, Sovereign formally acquired
Harmonia Bancorp, Inc. ("Harmonia") in a transaction which was
accounted for as a purchase. Pursuant to applicable accounting
guidance for business combinations, the Harmonia acquisition was
accounted for as having been completed at the close of business
on December 31, 1992, because control of Harmonia had been
transferred to Sovereign as of that date. Sovereign acquired
total assets of $621.0 million consisting principally of cash and
interest-earning deposits, federal funds sold, investment and
mortgage-backed securities and performing loans. Sovereign
assumed liabilities consisting principally of deposits.
Sovereign acquired Harmonia in exchange for $19.6 million of cash
and 9.6 million new shares (11.6 million shares as adjusted for
all subsequent stock dividends) of Sovereign common stock which
were issued at a value of $66.1 million.
Since the Harmonia acquisition was accounted for at the
close of business on December 31, 1992, Sovereign's consolidated
balance sheet at December 31, 1992, includes Harmonia.
Sovereign's consolidated results of operations include Harmonia's
results of operations from January 1, 1993, and thereafter.
Accounting Changes. In January 1994, Sovereign adopted
Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity
Securities," which requires management to classify investments in
equity securities that have readily determinable fair values and
all investments in debt securities as either held-to-maturity and
reported at amortized cost, available-for-sale and reported at
fair value with unrealized gains and losses reported in a
separate component of stockholders' equity, or trading securities
and reported at fair value with unrealized gains and losses
included in earnings. Effective January 1, 1994, Sovereign
classified $1.29 billion of securities as held-to-maturity,
$391.0 million of securities as available-for-sale and
$6.5 million of securities as trading securities. The adoption
of SFAS No. 115 resulted in an $836,000 increase to stockholders'
equity accounted for as the cumulative effect of a change in
accounting principle in 1994. On November 15, 1995, the
Financial Accounting Standards Board ("FASB") issued a Special
Report, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities". On
December 7, 1995, in accordance with provisions in that Special
Report, Sovereign reclassified $750.2 million of securities from
held-to-maturity to available-for-sale. This reclassification
resulted in a $1.7 million unrealized gain, net of tax, which is
included in Sovereign's stockholders' equity at December 31,
1995.
In October 1995, the FASB issued SFAS No. 123 "Accounting
for Stock-Based Compensation" which provides companies with a
choice either to expense the fair value of employee stock options
over the vesting period (recognition method) or to continue the
previous practice but disclose the pro forma effects on net
income and earnings per share had the fair value method been used
(disclosure only method). Companies electing the disclosure only
method will be required to include the pro forma effects of all
awards granted in fiscal years beginning after December 15, 1994.
Sovereign plans to adopt the disclosure only method during 1996.
Effective July 1, 1995, Sovereign prospectively adopted SFAS
No. 122 "Accounting for Mortgage Servicing Rights". SFAS No.
122 requires that management recognize as separate assets, rights
to service mortgage loans for others, however those servicing
rights are acquired. Management allocates the total cost of
mortgage loans, either purchased or originated, to the loans and
the mortgage servicing rights based on their relative fair value.
The Statement also requires that management assess its
capitalized mortgage servicing rights for impairment based on the
fair value of those rights, and that this impairment be
recognized through a valuation allowance. The adoption of SFAS
No. 122 will not have a material effect on Sovereign's
operations.
Sovereign adopted SFAS No. 109 in January 1993, and has
applied the provisions of the statement without restating prior
years' financial statements. The adoption of SFAS No. 109
resulted in a $4.8 million increase to net income ($.10 per
share) that was accounted for as the cumulative effect of a
change in accounting principle.
Subordinated Debentures. On July 18, 1995, Sovereign issued
$50.0 million of 6.75% non-amortizing subordinated debentures due
July 1, 2000, receiving net proceeds of approximately
$49.4 million. On September 1, 1993, Sovereign issued
$50.0 million of 6.75% non-amortizing subordinated debentures due
September 1, 2000, receiving net proceeds of approximately
$49.2 million. On April 7, 1993, Sovereign issued $50.0 million
of 8.00% non-amortizing subordinated debentures due March 15,
2003, receiving net proceeds of approximately $48.7 million. All
of the subordinated debentures qualify as supplementary capital
at Sovereign Bancorp. Approximately $100.0 million of the net
proceeds of Sovereign's subordinated debentures has been
contributed to the capital of Sovereign Bank and qualifies as
primary capital at Sovereign Bank.
Preferred Stock. On May 17, 1995, Sovereign completed the
sale of 2.0 million shares of Convertible Preferred Stock,
raising $96.7 million in capital. The 6 1/4%, non-voting,
Cumulative Convertible Preferred Stock is convertible at the
option of the holder at any time, unless previously redeemed, at
a conversion rate of 4.989 shares of common stock for each share
of preferred stock, equivalent to a conversion price of
$10.022 per share of common stock.
Stock Dividends. Sovereign declared a 5% stock dividend on
December 20, 1995 and on February 22, 1995, and a 10% stock
dividend on April 19, 1994. All per share information such as
earnings, book value, share price and dividends have been
restated to reflect all stock dividends and stock splits. See
Item 8, at Note 1(c) to Sovereign Consolidated Financial
Statements for a detailed discussion of Sovereign's stock
dividends and stock splits.
Federal Deposit Insurance Corporation. Sovereign Bank is
insured by the SAIF of the FDIC and pays insurance fees equal to
$.23 per $100.00 (23 basis points) of insured deposits annually,
the lowest rate permitted. The average SAIF premium is 24 basis
points. Colonial Bank is insured by the BIF of the FDIC. During
recent years, the FDIC's BIF, which insures commercial banks and
certain savings banks, has also charged an average premium to its
members of 24 basis points, and a minimum assessment of 23 basis
points.
Effective September 30, 1995, the average BIF premium was
reduced from 24 basis points to 4.4 basis points, with the
minimum assessment being reduced from 23 basis points to 4 basis
points. Subsequently, the minimum BIF assessment was reduced to
0 basis points effective January 1, 1996, subject to the minimum
FDIC annual assessment of $1,000. The average and minimum SAIF
premiums remain at 24 and 23 basis points, respectively, until
the SAIF reserves reach $1.25 per $100.00 in insured deposits.
In order to accelerate the recapitalization of the SAIF, it
has been proposed that SAIF-insured institutions such as
Sovereign Bank be assessed a one-time charge of between 85 and
90 basis points of their insured deposits as of March 31, 1995.
If enacted, this assessment would result in a pre-tax charge to
Sovereign Bank's earnings of approximately $36.0 million to
$38.1 million. This charge would have a significant negative
impact on earnings in the period enacted. In accordance with
FASB guidance on this specific issue, no liability or charge for
this assessment is included in the 1995 audited financial
statements.
While it cannot be determined at this time what the outcome
of these events and proposals will be, Sovereign Bank has been
placed at a significant competitive disadvantage which will
remain until the BIF and SAIF insurance premiums are again made
equal.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994
Net Interest Income. Net interest income for 1995 was
$174.2 million compared to $155.4 million in 1994. This
represents an increase of 12% and is primarily due to an increase
in the size of the balance sheet resulting from the recent
acquisitions and internal growth, partially offset by a decline
in Sovereign's interest rate spread.
Interest and fees on loans were $327.5 million for 1995
compared to $248.7 million for 1994. The average balance of
loans was $4.50 billion with an average yield of 7.29% for 1995
compared to an average balance of $3.58 billion with an average
yield of 6.95% for 1994. The increase in average balance was
primarily due to the origination of $1.06 billion of residential
mortgage loans of which $808.8 million (principally discounted
adjustable rate loans) were retained in Sovereign's loan
portfolio. The increase in yield was the result of the upward
repricing of discounted adjustable rate loans which Sovereign
originated in 1994.
Interest on investment and mortgage-backed securities
available-for-sale was $10.1 million for 1995 compared to
$6.2 million for 1994. The average balance of investment and
mortgage-backed securities available-for-sale was $147.7 million
with an average yield of 7.09% for 1995 compared to an average
balance of $104.3 million with an average yield of 6.27% in 1994.
The increase in average yield is the result of generally higher
interest rates.
Interest on investment and mortgage-backed securities
held-to-maturity was $151.6 million for 1995 compared to
$96.7 million for 1994. The average balance of investment and
mortgage-backed securities held-to-maturity was $2.19 billion
with an average yield of 6.92% for 1995 compared to an average
balance of $1.55 billion with an average yield of 6.24% for 1994.
Interest on interest-earning deposits was $3.8 million for
1995 compared to $2.5 million for 1994. The average balance of
interest-earning deposits was $23.9 million with an average yield
of 16.10% for 1995 compared to an average balance of
$43.5 million with an average yield of 5.77% for 1994.
Interest on total deposits was $210.3 million for 1995
compared to $121.8 million for 1994. The average balance of
total deposits was $4.95 billion with an average cost of 4.25%
for 1995 compared to an average balance of $3.58 billion with an
average cost of 3.40% for 1994. The increase in average balance
was primarily due to the Berkeley acquisition. The increase in
the average cost of deposits was a result of a general rise in
interest rates.
Interest on total borrowings was $108.5 million for 1995
compared to $76.9 million for 1994. The average balance of total
borrowings was $1.83 billion with an average cost of 5.92% for
1995 compared to an average balance of $1.59 billion with an
average cost of 4.84% for 1994. The increase in average cost of
borrowings is a result of the general rise in interest rates and
the cost of the subordinated debentures issued during 1995.
Table 1 presents a summary of Sovereign's average balances,
the yields earned on average assets and the cost of average
liabilities and stockholders' equity for the years ended
December 31, 1995, 1994 and 1993 (in thousands):
Table 1: Spread Analysis
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1994
---------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------
Interest-earning assets:
Interest-earning deposits . . . . . . . . . . . . $ 23,868 $ 3,843 16.10% $ 43,503 $ 2,508 5.77%
Investment and mortgage-backed securities
available-for-sale(1) . . . . . . . . . . . . . 147,658 10,118 7.09 104,296 6,188 6.27
Investment and mortgage-backed securities
held-to-maturity(2)(3) . . . . . . . . . . . . 2,191,395 151,620 6.92 1,549,999 96,729 6.24
Net loans(4)(5) . . . . . . . . . . . . . . . . 4,496,756 327,450 7.29 3,581,685 248,716 6.95
---------- -------- ----- ---------- -------- ----
Total interest-earning assets . . . . . . . . . . 6,859,677 493,031 7.19 5,279,483 354,141 6.72
Non-interest-earning assets . . . . . . . . . . . 366,931 -- -- 250,836 -- --
---------- -------- ----- ---------- -------- ----
Total assets . . . . . . . . . . . . . . . . . $7,226,608 493,031 6.83 $5,530,319 354,141 6.41
========== -------- ----- ========== -------- ----
Interest-bearing liabilities:
Deposits:
Savings deposits . . . . . . . . . . . . . . . $2,017,194 53,059 2.63 $1,594,473 36,677 2.30
Certificates . . . . . . . . . . . . . . . . . 2,929,025 157,208 5.37 1,989,931 85,135 4.28
---------- -------- ----- ---------- -------- ----
Total deposits . . . . . . . . . . . . . . . . 4,946,219 210,267 4.25 3,584,404 121,812 3.40
Total borrowings . . . . . . . . . . . . . . . . 1,832,446 108,538 5.92 1,588,560 76,929 4.84
---------- -------- ----- ---------- -------- ----
Total interest-bearing liabilities 6,778,665 318,805 4.70 5,172,964 198,741 3.84
Non-interest-bearing liabilities 70,630 -- -- 75,694 -- --
---------- -------- ----- ---------- -------- ----
Total liabilities . . . . . . . . . . . . . . 6,849,295 318,805 4.65 5,248,658 198,741 3.79
Stockholders' equity . . . . . . . . . . . . . . 377,313 -- -- 281,661 -- --
---------- -------- ----- ---------- -------- ----
Total liabilities and stockholders' equity . . $7,226,608 318,805 4.41 $5,530,319 198,741 3.59
========== -------- ----- ========== -------- ----
Interest rate spread(6) . . . . . . . . . . . . 2.42% 2.82%
===== ====
Net interest income/net yield on total
interest-earning assets(7) $174,226 2.54% $155,400 2.96%
======== ===== ======== ====
Ratio of interest-earning assets to interest-
bearing liabilities . . . . . . . . . . . . . . 1.01x 1.02x
===== ====
YEAR ENDED DECEMBER 31,
------------------------------
1993
------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
---------- -------- ------
Interest-earning assets:
Interest-earning deposits . . . . $ 82,980 $ 3,344 4.03%
Investment and
mortgage-backed securities
available-for-sale(1) . . . . . -- -- --
Investment and
mortgage-backed securities
held-to-maturity(2)(3) . . . . 1,530,073 92,534 6.06
Net loans(4)(5) . . . . . . . . 2,547,943 186,912 7.34
---------- -------- -----
Total interest-earning assets . 4,160,996 282,790 6.80
Non-interest-earning assets . . . 213,247 -- --
---------- -------- -----
Total assets . . . . . . . . . $4,374,243 282,790 6.47
========== -------- -----
Interest-bearing liabilities:
Deposits:
Savings deposits . . . . . . . $1,388,795 38,368 2.76
Certificates . . . . . . . . . 1,665,038 69,702 4.19
---------- -------- -----
Total deposits . . . . . . . . 3,053,833 108,070 3.54
Total borrowings . . . . . . . . 1,001,793 45,248 4.52
---------- -------- -----
Total interest-bearing liabilities 4,055,626 153,318 3.78
Non-interest-bearing liabilities 77,447 -- --
---------- -------- -----
Total liabilities . . . . . . 4,133,073 153,318 3.71
Stockholders' equity . . . . . . 241,170 -- --
---------- -------- -----
Total liabilities and
stockholders' equity . . . . $4,374,243 153,318 3.51
========== -------- -----
Interest rate spread(6) . . . . 2.96%
====
Net interest income/net yield on
total interest-earning assets(7) $129,472 3.11%
======== ====
Ratio of interest-earning
assets to interest-
bearing liabilities . . . . . . 1.03x
====
(1) The tax equivalent adjustments for the years ended
December 31, 1995 and 1994 were $344,000 and $346,000,
respectively, and are based on a tax rate of 38% in 1995 and
35% in 1994.
(2) The tax equivalent adjustment for the year ended
December 31, 1993 was $145,000 and is based on a tax rate of
35%, (none in 1994 or 1995).
(3) Amortization of fees of $52,000 pertaining to
mortgage-backed securities is included in interest income
for the year ended December 31, 1993, (none in 1994 or
1995).
(4) Amortization of net fees of $2,574,000, $476,000 and
$4,491,000 for the years ended December 31, 1995, 1994 and
1993, respectively, are included in interest income.
Average loan balances include non-accrual loans and loans
held for resale.
(5) The tax equivalent adjustments for the years ended
December 31, 1995, 1994 and 1993, were $144,000, $150,000
and $152,000, respectively, and are based on a tax rate of
38% in 1995 and 35% in 1994 and 1993.
(6) Represents the difference between the yield on total assets
and the cost of total liabilities and stockholders' equity.
(7) Represents tax equivalent net interest income divided by
interest-earning assets.
Table 2 presents, prior to any tax equivalent adjustments,
the relative contribution of changes in volumes and changes in
rates to changes in net interest income for the periods
indicated. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has
been allocated proportionately to the change due to volume and
the change due to rate (in thousands):
Table 2: Volume/Rate Analysis
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 VS. 1994 1994 VS. 1993
INCREASE/(DECREASE) INCREASE/(DECREASE)
------------------------------------- --------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- --------- -------- -------- -------- -------
Interest-earning assets:
Interest-earning deposits . . . . $ (449) $ 1,784 $ 1,335 $ (8,809) $ 7,973 $ (836)
Investment and mortgage-backed
securities available-for-sale 2,863 1,067 3,930 6,188 -- 6,188
Investment and mortgage-backed
securities held-to-maturity . 43,472 11,419 54,891 1,216 2,979 4,195
Net Loans(1) . . . . . . . . . . 66,140 12,594 78,734 72,255 (10,451) 61,804
======= ======== -------- ======== ======== --------
Total interest-earning assets . . 138,890 71,351
-------- --------
Interest-bearing liabilities:
Deposits . . . . . . . . . . . 53,273 35,182 88,455 18,169 (4,427) 13,742
Borrowings . . . . . . . . . . 12,885 18,724 31,609 28,205 3,476 31,681
======= ======== -------- ======== ======== --------
Total interest-bearing liabilities 120,064 45,423
-------- --------
Net change in net interest income $42,395 $(23,569) $ 18,826 $ 32,183 $ (6,255) $25,928
======= ======== ======== ======== ======== ========
(1) Includes non-accrual loans and loans held for resale.
Provision for Possible Loan Losses. The provision for
possible loan losses was $1.0 million for 1995 compared to
$4.1 million for 1994. This decreased provision was the result of
improved asset quality. See "Credit Quality" for a detailed
discussion of Sovereign's asset quality.
During 1995, Sovereign charged-off (net of recoveries)
$2.9 million of loans compared to $5.6 million during 1994. The
decreased level of charge-offs is primarily due to $2.4 million
of charge-offs in 1994 that did not recur in 1995. The
$2.4 million of charge-offs in 1994 were related to the
disposition of $40.4 million of non-performing assets acquired in
the Shadow Lawn acquisition. Sovereign also acquired a $485,000
allowance for possible loan losses in the Colonial acquisition.
Table 3 presents the activity in the allowance for possible
loan losses for the years indicated (in thousands):
Table 3: Reconciliation of the Allowance for Possible Loan
Losses
DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Allowance, beginning of year . . . . . . . . . . . . $36,289 $33,099 $26,562 $13,198 $ 8,823
Charge-offs:
Residential . . . . . . . . . . . . . . . . . . . . 2,679 2,563 1,077 905 2,216
Commercial real estate . . . . . . . . . . . . . . 498 2,932 292 618 133
Commercial . . . . . . . . . . . . . . . . . . . . -- -- 1 1,853 104
Consumer (including home equity lines of credit) . 403 933 894 740 5
------- ------- ------- ------- -------
Total charge-offs . . . . . . . . . . . . . . . 3,580 6,428 2,264 4,116 2,458
------- ------- ------- ------- -------
Recoveries:
Residential . . . . . . . . . . . . . . . . . . . 514 352 7 41 17
Commercial real estate . . . . . . . . . . . . . . 125 82 49 54 5
Commercial . . . . . . . . . . . . . . . . . . . . -- 75 45 3 12
Consumer (including home equity lines of credit) . 23 297 6 28 3
------- ------- ------- ------- -------
Total recoveries . . . . . . . . . . . . . . . . 662 806 107 126 37
------- ------- ------- ------- -------
Charge-offs, net of recoveries . . . . . . . . . . . 2,918 5,622 2,157 3,990 2,421
Provision for possible loan losses . . . . . . . . . 1,000 4,100 8,650 10,080 6,796
Acquired reserves and other additions . . . . . . . . 485 4,712 44 7,274 --
------- ------- ------- ------- -------
Allowance, end of year . . . . . . . . . . . . . . . $34,856 $36,289 $33,099 $26,562 $13,198
======= ======= ======= ======= =======
Charge-offs, net of recoveries to average loans . . . .064% .155% .084% .237% .179%
======= ======= ======= ======= =======
Other Income. Total other income was $25.8 million for 1995
compared to $14.6 million for 1994.
Other loan fees and service charges were $4.4 million for
1995 compared to $5.0 million for 1994. This decrease was
primarily due to a decrease in Sovereign's servicing portfolio.
At December 31, 1995, Sovereign serviced $4.04 billion of its own
loans and $947.1 million of loans for others. This compares to
$3.90 billion of its own loans and $1.11 billion of loans for
others at December 31, 1994.
Deposit fees were $9.4 million for 1995 compared to
$5.8 million for 1994. This increase was primarily the result of
the Berkeley acquisition and the full year effect of the Shadow
Lawn acquisition.
The gain on loans and investment and mortgage-backed
securities was $419,000 for 1995 compared to $494,000 for 1994.
Mortgage banking gains were $6.1 million for 1995 compared
to $1.5 million for 1994. The 1995 gain includes a $3.6 million
gain recognized on the sale of $238.5 million of mortgage
servicing rights. The 1994 gain includes a $1.1 million gain on
the sale of servicing rights related to $111.4 million of
residential mortgage loans.
Miscellaneous income was $5.5 million for 1995 compared to
$1.8 million for 1994. This increase includes a $2.6 million
gain on the sale of $130.6 million of deposits sold during 1995.
General and Administrative Expenses. Total general and
administrative expenses were $100.3 million for 1995 compared to
$84.4 million for 1994. The 19% increase in general and
administrative expenses from 1994 to 1995 compares to a 31%
increase in the average balance sheet over the same time period.
The ratio of general and administrative expenses to average
assets was 1.39% for 1995 compared to 1.53% for 1994. This
decrease in the expense ratio is the result of efficiencies
realized from recent acquisitions and an increase in average
balances without a corresponding increase in operating expenses.
Other operating expenses were $12.8 million for 1995
compared to $6.6 million for 1994. Included in other operating
expenses was amortization of goodwill and other intangible assets
of $12.2 million for 1995 compared to $6.5 million for 1994.
This increase was primarily the result of the Berkeley
acquisition and a full year of amortization of goodwill and core
deposit intangibles resulting from the Shadow Lawn acquisition.
Real estate owned ("REO") losses were $657,000 for 1995 compared
to $91,000 for 1994.
Income Tax Provision. The income tax provision was
$29.5 million for 1995 compared to $28.5 million for 1994. The
effective tax rate for 1995 was 34.4% compared to 38.0% for 1994.
FINANCIAL CONDITION
Loan Portfolio. Sovereign's primary loan products are
variable rate mortgage loans on owner occupied residential real
estate. Sovereign's focus on these products has resulted in
97.8% of Sovereign's total loan portfolio at December 31, 1995
being secured by residential real estate and $3.54 billion or
75.7% of the total loan portfolio being comprised of variable
rate loans. However, as a result of Sovereign's use of interest
rate swaps, $426.1 million of variable rate mortgage loans have
been effectively converted to fixed rate mortgage loans. Also,
$295.7 million of intermediate variable rate mortgage loans
(loans with a five-year fixed rate period) have effectively been
converted to a variable rate over the fixed rate period. At
December 31, 1995, Sovereign's total loan portfolio of
$4.67 billion included $4.00 billion of first mortgage loans
secured primarily by liens on owner occupied one-to-four family
residential properties and $456.9 million of outstanding home
equity loans ($293.1 million of additional unused commitments for
home equity lines of credit) secured primarily by second
mortgages on owner occupied one-to-four family residential
properties. At December 31, 1995, Sovereign's residential loan
portfolio also included $75.2 million of multi-family loans.
Table 4 presents the composition of Sovereign's loan
portfolio by type of loan and by fixed and adjustable rates at
the dates indicated (in thousands):
Table 4: Composition of Loan Portfolio
AT DECEMBER 31,
-----------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- ----------------------
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
---------- ------- ---------- -------- ---------- --------
Residential real estate
loans: . . . . . . . . . . . . . $3,998,048 85.53% $3,710,150 85.27% $2,434,520 84.01%
Real estate construction
loans:
Residential . . . . . . . . . . 38,151 .82 49,094 1.13 23,086 .80
Residential development . . . . 1,676 .04 3,226 .08 3,205 .11
Multi-family loans . . . . . . . . 75,218 1.61 95,216 2.19 117,257 4.04
Home equity loans . . . . . . . . . 456,922 9.77 413,037 9.49 270,471 9.33
---------- ------ ---------- ----- --------- ------
Total Residential
Loans . . . . . . . . . . . . . 4,570,015 97.77 4,270,723 98.16 2,848,539 98.29
Commercial real estate
loans . . . . . . . . . . . . . . 47,177 1.01 39,717 .91 18,259 .63
Commercial loans . . . . . . . . . 15,831 .34 5,730 .13 8,351 .29
Consumer loans . . . . . . . . . . 41,341 .88 34,728 .80 22,865 .79
---------- ------ ---------- ------ ---------- ------
Total Loans . . . . . . . . . . . $4,674,364 100.00% $4,350,898 100.00% $2,898,014 100.00%
========== ====== ========== ====== ========== ======
Total Loans with:
Fixed rates . . . . . . . . . . . $1,134,542 24.27% $1,097,469 25.22% $905,320 31.24%
Variable rates . . . . . . . . . 3,539,822 75.73 3,253,429 74.78 1,992,694 68.76
---------- ------ ---------- ------ ---------- ------
Total Loans . . . . . . . . . . $4,674,364 100.00% $4,350,898 100.00% $2,898,014 100.00%
========== ====== ========== ====== ========== ======
AT DECEMBER 31,
-------------------------------------------------
1992 1991
---------------------- ----------------------
BALANCE PERCENT BALANCE PERCENT
---------- ------- ---------- -------
Residential real estate
loans: . . . . . . . . . . . . . $1,830,629 78.32% $1,113,224 77.46%
Real estate construction
loans:
Residential . . . . . . . . . . 38,954 1.67 28,040 1.95
Residential development . . . . 2,029 .09 2,522 .18
Multi-family loans . . . . . . . . 125,443 5.37 6,748 .47
Home equity loans . . . . . . . . . 260,514 11.14 191,651 13.33
---------- ----- ---------- -----
Total Residential
Loans . . . . . . . . . . . . . 2,257,569 96.59 1,342,185 93.39
Commercial real estate
loans . . . . . . . . . . . . . . 31,214 1.34 42,455 2.95
Commercial loans . . . . . . . . . 7,565 .32 7,878 .55
Consumer loans . . . . . . . . . . 41,034 1.75 44,729 3.11
---------- ----- ---------- -----
Total Loans . . . . . . . . . . . $2,337,382 100.00% $1,437,247 100.00%
========== ====== ========== ======
Total Loans with:
Fixed rates . . . . . . . . . . . $ 737,339 31.55% $ 420,151 29.23%
Variable rates . . . . . . . . . 1,600,043 68.45 1,017,096 70.77
--------- ------ --------- ------
Total Loans . . . . . . . . . . $2,337,382 100.00% $1,437,247 100.00%
========== ====== ========== ======
Credit Quality. Since Sovereign's primary loan products are
residential loans, Sovereign has instituted various controls
specifically designed to improve the credit quality of
residential loans. For instance, Sovereign utilizes underwriting
standards which in some cases are more conservative than the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal
National Mortgage Association ("FNMA"). Sovereign maintains an
independent Loan Review Department which each month reviews a
statistical sampling of all new originations for sound
underwriting practices and reviews and rates all mortgage loan
requests in excess of $300,000 with a loan-to-value ratio in
excess of 75% and all applications for home equity lines of
credit of $100,000 and over with a loan-to-value ratio in excess
of 70%, prior to submission of the loan for underwriting.
Results of these loan reviews are discussed at quarterly Loan
Review meetings. Criticized loans and deficiencies in those
loans are discussed and corrected.
Sovereign also closely monitors delinquencies as a means of
maintaining high asset quality. Collection efforts begin as
early as 15 days after a loan payment is due. All borrowers
whose loans are more than 30 days past due are contacted by a
collection officer in an effort to correct the delinquency. Once
a loan is more than 90 days past due, it is referred to the Asset
Recovery and Liquidation Department and the process of
liquidation begins. Sovereign monitors delinquency trends at 30,
60 and 90 days past due. These trends are discussed at the
quarterly Loan Review and monthly Asset Review meetings, and with
the Boards of Directors of Sovereign Bancorp and Sovereign Bank.
At December 31, 1995, Sovereign's non-performing assets were
$43.7 million compared to $40.5 million at December 31, 1994.
Non-performing assets as a percentage of total assets were .54%
at December 31, 1995 compared to .62% at December 31, 1994. At
December 31, 1995, 84% of non-performing assets consisted of
loans or REO related to one-to-four family residential real
estate. Historically, losses on the disposition of non-
performing residential real estate have been lower than non-
performing commercial and commercial real estate loans. The
remainder of Sovereign's non-performing assets consist
principally of commercial, residential development and multi-
family REO acquired in the Shadow Lawn acquisition. Non-
performing assets at December 31, 1995, included $4.5 million of
REO which is carried at lower of cost or estimated fair value
minus estimated costs to sell. Sovereign places all loans
90 days or more delinquent (except loans guaranteed by the
government) on non-performing status.
Table 5 presents the composition of non-performing assets at
the dates indicated (in thousands):
Table 5: Non-performing Assets
AT DECEMBER 31,
------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Non-accrual loans:
Past due 90 or more days as to interest or principal:
Residential . . . . . . . . . . . . . . . . . . . $33,580 $25,379 $20,740 $20,465 $14,327
Other . . . . . . . . . . . . . . . . . . . . . . 3,902 2,892 1,795 835 762
Past due less than 90 days as to interest or principal:
Residential . . . . . . . . . . . . . . . . . . . 644 2,980 1,056 -- --
Other . . . . . . . . . . . . . . . . . . . . . . 739 -- -- -- 81
------- ------- ------- ------- -------
Total non-accrual loans . . . . . . . . . . . . . . . . . . 38,865 31,251 23,591 21,300 15,170
Restructured loans . . . . . . . . . . . . . . . . . . . . 296 99 372 1,183 30
------- ------- ------- ------- -------
Total non-performing loans . . . . . . . . . . . . . . . . 39,161 31,350 23,963 22,483 15,200
Real estate owned:
Residential . . . . . . . . . . . . . . . . . . . . . 2,437 6,104 4,510 7,655 10,079
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,076 3,087 8,306 12,247 1,148
------- ------- ------- ------- -------
Total real estate owned . . . . . . . . . . . . . . . . . . 4,513 9,191 12,816 19,902 11,227
------- ------- ------- ------- -------
Total non-performing assets . . . . . . . . . . . . . . . . 43,674 40,541 36,779 42,385 26,427
Past due 90 days or more as to interest or principal
and accruing interest . . . . . . . . . . . . . . . . -- -- 63 75 130
------- ------- ------- ------- -------
Non-performing assets and loans past due 90 days or more
and accruing . . . . . . . . . . . . . . . . . . . . $43,674 $40,541 $36,842 $42,460 $26,557
======= ======= ======= ======= =======
Non-performing assets as a percentage of total assets . . . .54% .62% .75% 1.15% 1.16%
Non-performing loans as a percentage of total loans . . . . .83 .72 .81 .94 1.03
Non-performing assets as a percentage of total loans
and real estate owned . . . . . . . . . . . . . . . . .92 .93 1.24 1.75 1.78
Allowance for possible loan losses as a percentage of total
non-performing assets . . . . . . . . . . . . . . . . 78.95 88.24 89.24 61.91 49.00
Allowance for possible loan losses as a percentage of total
non-performing loans . . . . . . . . . . . . . . . . . 88.05 114.11 136.97 116.72 85.18
In May 1993, the FASB issued SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 requires that
certain impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if
the loan is collateral dependent. In October 1994, the FASB
issued SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," that amends SFAS
No. 114 and eliminates its provisions regarding how a creditor
should report income on an impaired loan. Originally, SFAS No.
114 would have required creditors to apply one of two allowable
methods. As a result of the amendment, creditors may now
continue to use existing methods for recognizing income on
impaired loans, including methods that are required by certain
industry regulators. SFAS No. 118 also clarified SFAS No. 114's
disclosure requirements. SFAS No. 114 and SFAS No. 118 were
adopted by Sovereign beginning January 1, 1995. The effect of
SFAS No. 114 and SFAS No. 118 on Sovereign was not significant.
Potential problem loans (consisting of loans which
management has serious doubts as to the ability of such borrowers
to comply with present repayment terms, although not currently
classified as non-performing loans) were comprised of 17 loans
which amounted to $5.7 million at December 31, 1995 and consisted
principally of multi-family loans.
At December 31, 1995, Sovereign serviced, with recourse, a
total of $78.2 million of single-family residential loans.
Substantially all of this recourse servicing was acquired in the
Jersey Shore acquisition. These are seasoned loans and
historical loss experience has been minimal.
The adequacy of Sovereign's allowance for possible loan
losses is constantly evaluated. Management's evaluation of the
adequacy of the allowance to absorb potential future loan losses
takes into consideration the risks inherent in the loan
portfolio, past loan loss experience, specific loans which have
loss potential, geographic and industry concentrations,
delinquency trends, economic conditions, the level of
originations and other relevant factors. Sovereign's loan
delinquencies (all loans greater than 30 days delinquent) as a
percentage of total loans was 1.32% at December 31, 1995, up
slightly from 1994 delinquencies of 1.16% of total loans.
These factors indicated to management that a provision for
possible loan losses of $1.0 million was necessary to maintain
the allowance for possible loan losses at a level which
management conservatively estimates is necessary to absorb
potential future losses in consideration of the factors noted
above.
Investment and Mortgage-backed Securities Available-For-
Sale. Securities expected to be held for an indefinite period of
time are classified as available-for-sale and are carried at fair
value, with unrealized gains and losses reported as a separate
component of stockholders' equity, net of estimated income taxes.
Decisions to purchase or sell these securities are based on
economic conditions including changes in interest rates,
liquidity, and asset liability management strategies.
Table 6 presents the amortized cost and estimated fair value
of investment and mortgage-backed securities available-for-sale
at the dates indicated (in thousands):
Table 6: Investment and Mortgage-backed Securities
Available-for-Sale
AT DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993
-------------------- ------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- -----
Investment Securities:
U.S. Treasury and government
agency securities . . . . . . . $150,242 $149,109 $ -- $ -- $ -- $ --
Equity Securities . . . . . . . . 135,494 136,571 88,583 87,128 -- --
Mortgage-backed Securities: . . . .
FHLMC . . . . . . . . . . . . . . 156,123 155,529 -- -- -- --
FNMA . . . . . . . . . . . . . . 136,861 138,445 -- -- -- --
GNMA . . . . . . . . . . . . . . 59,215 61,912 -- -- -- --
Collateralized mortgage obligations 245,037 247,943 -- -- -- --
-------- -------- ------- ------- ------ ------
Total investment and mortgage-backed
securities available-for-sale . . $882,972 $889,509 $88,583 $87,128 $ -- $ --
======== ======== ======= ======= ====== ======
Investment and Mortgage-backed Securities Held-To-Maturity.
Securities that Sovereign has the intent and ability to hold to
maturity are classified as held-to-maturity and reported at
amortized cost. This portfolio is primarily comprised of
U.S. Treasury and government agency securities; corporate debt
securities; mortgage-backed securities issued by FHLMC, FNMA, the
Government National Mortgage Association ("GNMA"), the RTC and
private issuers; and collateralized mortgage obligations.
Table 7 presents the amortized cost and estimated fair value
of investment and mortgage-backed securities held-to-maturity at
the dates indicated (in thousands):
Table 7: Investment and Mortgage-backed Securities
Held-To-Maturity
AT DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
----------------------- --------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- -----
Investment Securities:
U.S. Treasury and government
agency securities . . . . . . . $ 4,993 $ 5,030 $ 159,353 $ 146,695 $ 125,077 $ 125,021
Corporate securities . . . . . . 1,010 1,070 4,025 3,982 14,070 14,332
Other securities . . . . . . . . 482 482 420 416 81,754 82,930
Mortgage-backed Securities: . . . .
FHLMC . . . . . . . . . . . . . . 168,713 169,169 336,556 310,446 190,076 192,459
FNMA . . . . . . . . . . . . . . 221,046 220,260 316,968 290,595 243,688 246,417
GNMA . . . . . . . . . . . . . . 170,064 176,532 237,308 234,578 47,783 50,043
RTC . . . . . . . . . . . . . . . 28,954 24,498 33,976 28,749 44,744 44,757
Private issues . . . . . . . . . 284,640 282,636 272,833 252,341 361,826 361,346
Collateralized mortgage obligations 1,197,310 1,207,679 455,401 433,341 580,286 579,565
---------- ---------- ---------- ---------- ---------- ----------
Total investment and mortgage-
backed securities held-to-maturity $2,077,212 $2,087,356 $1,816,840 $1,701,143 $1,689,304 $1,696,870
========== ========== ========== ========== ========== ==========
In January 1994, Sovereign adopted SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities," which
requires management to classify investments in equity securities
that have readily determinable fair values and all investments in
debt securities as either held-to-maturity and reported at
amortized cost, available-for-sale and reported at fair value
with unrealized gains and losses reported in a separate component
of stockholders' equity, or trading securities and reported at
fair value with unrealized gains and losses included in earnings.
Effective January 1, 1994, Sovereign adopted SFAS No. 115 and
classified $1.29 billion of securities as held-to-maturity,
$391.0 million of securities as available-for-sale and
$6.5 million of securities as trading securities. The adoption
of SFAS No. 115 resulted in an $836,000 increase to stockholders'
equity accounted for as the cumulative effect of a change in
accounting principle in 1994.
On November 15, 1995, the FASB issued a Special Report, "A
Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities". On
December 7, 1995, in accordance with provisions in that Special
Report, Sovereign reclassified $750.2 million of securities from
held-to-maturity to available-for-sale. This reclassification
resulted in a $2.8 million unrealized gain which is included in
Sovereign's stockholders' equity at December 31, 1995.
Prior to the adoption of SFAS No. 115, management determined
the appropriate classification of securities at the time of
purchase. If Sovereign had the intent and the ability at the
time of purchase to hold securities until maturity or on a
long-term basis, they were classified as investments and carried
at amortized historical cost. Securities to be held for
indefinite periods of time and not intended to be
held-to-maturity or on a long-term basis were classified as
available-for-sale and carried at the lower of cost or estimated
fair value. Securities held for indefinite periods of time
included securities that management intended to use as part of
its asset/liability management strategy and that may have been
sold in response to changes in interest rates, resultant
prepayment risk, and other factors related to interest rate and
resultant prepayment risk changes.
Other Assets. Other assets at December 31, 1995, were
$26.3 million compared to $46.2 million at December 31, 1994.
Premises and equipment at December 31, 1995, was
$57.0 million compared to $48.1 million at December 31, 1994.
The increase is primarily due to capital expenditures related to
system conversions and the expansion of Sovereign's market.
Goodwill and intangible assets at December 31, 1995, were
$123.2 million compared to $64.6 million at December 31, 1994.
The increase is primarily related to the Berkeley acquisition in
January 1995.
Deposits. Deposits are attracted from within Sovereign's
primary market area through the offering of various deposit
instruments including NOW accounts, money market accounts,
savings accounts, certificates of deposit and retirement savings
plans.
Total deposits at December 31, 1995, were $5.04 billion
compared to $4.03 billion at December 31, 1994. The increase was
primarily the result of the acquisition of the Berkeley deposits
which added $909.3 million of deposits.
Table 8 presents the composition of Sovereign's deposits at
the dates indicated (in thousands):
Table 8: Deposit Portfolio Composition
AT DECEMBER 31,
---------------------------------------------------------------------
1995 1994 1993
---------------------- --------------------- ---------------------
% OF % OF % OF
ACCOUNT TYPE BALANCE DEPOSITS BALANCE DEPOSITS BALANCE DEPOSITS
------------ ------- -------- ------- -------- ------- --------
Savings accounts . . . . . . . . . $ 925,842 18.37% $ 925,667 22.98% $ 779,016 24.48%
NOW and money market accounts . . 1,101,472 21.86 696,781 17.30 557,465 17.51
Demand deposit accounts . . . . . 168,757 3.35 118,346 2.94 105,787 3.32
Retail certificates of deposit . . 2,731,009 54.20 2,207,531 54.82 1,637,721 51.45
---------- ------ ---------- ------ ---------- ------
Total retail deposits . . . . . . 4,927,080 97.78 3,948,325 98.04 3,079,989 96.76
Jumbo certificates of deposit . . . 112,063 2.22 78,794 1.96 103,118 3.24
---------- ------ ---------- ------ ---------- ------
Total deposits . . . . . . . . . $5,039,143 100.00% $4,027,119 100.00% $3,183,107 100.00%
========== ====== ========== ====== ========== ======
Borrowings. Sovereign utilizes borrowings as a source of
funds for its asset growth and its asset/liability management.
Collateralized advances are available from the FHLB provided
certain standards related to creditworthiness have been met.
Another source of funds for Sovereign is reverse repurchase
agreements. Reverse repurchase agreements are short-term
obligations collateralized by securities fully guaranteed as to
principal and interest by the U.S. Government or an agency
thereof.
Total borrowings at December 31, 1995, were $2.53 billion of
which $1.51 billion were short-term compared to total borrowings
of $2.16 billion of which $1.72 billion were short-term at
December 31, 1994.
Table 9 presents information regarding borrowings at the
dates indicated (in thousands):
Table 9: Borrowings
AT DECEMBER 31,
-------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE BALANCE AVERAGE RATE
------- ------------ ------- ------------ ------- ------------
Securities sold under
repurchase agreements . . $ 382,279 6.38% $ 608,810 5.72% $ 315,616 3.40%
FHLB advances . . . . . . . 1,979,551 5.75 1,434,081 5.25 929,106 4.39
Other borrowings . . . . . 168,826 7.49 119,696 7.71 122,378 7.84
---------- ----- ---------- ----- ---------- -----
Total borrowings . . . . $2,530,656 5.96% $2,162,587 5.52% $1,367,100 4.47%
========== ===== ========== ===== ========== =====
Of the above advances, $280.0 million have been effectively
converted to fixed rate obligations through the use of interest
rate swaps.
Of the other borrowings, $50.0 million of subordinated
debentures have, through the use of an interest rate swap, been
converted from a fixed rate obligation to a variable rate
obligation.
In addition, $996.0 million of borrowings have been
protected from upward repricing through the use of interest rate
caps.
Stockholders' Equity. Total stockholders' equity at
December 31, 1995, was $427.0 million compared to $303.9 million
at December 31, 1994. The increase in stockholders' equity was
primarily attributable to the retention of earnings of
$56.4 million and the issuance of $100.0 million of preferred
stock.
LIQUIDITY AND CAPITAL RESOURCES
Sovereign Bank is required under applicable federal
regulations to maintain specified levels of "liquid" investments
in cash and U.S. Treasury and other qualifying investments.
Regulations currently in effect require Sovereign Bank to
maintain liquid assets of not less than 5% of its net
withdrawable accounts plus short-term borrowings, of which
short-term liquid assets must consist of not less than 1%. These
levels are changed from time to time by the OTS to reflect
economic conditions. Sovereign Bank's liquidity ratio was 12.80%
for December 1995.
Sovereign's primary financing sources are deposits obtained
in its own market area and borrowings in the form of securities
sold under repurchase agreements and advances from the FHLB.
During 1995, Sovereign increased its deposit base and market
share when it acquired the Berkeley offices. At December
31, 1995, Sovereign had $2.37 billion in unpledged investment and
mortgage-backed securities which could be used to collateralize
additional borrowings. Sovereign Bank can also borrow from the
FHLB, subject to required collateralization. Other sources of
funds include operating activities, repayments of principal on
investment and mortgage-backed securities, repayment of principal
on loans and other investing activities. The interest rate
environment experienced in 1995 resulted in slower prepayments of
mortgage-backed securities and loans than in prior years.
Therefore, Sovereign obtained required funding in the form of
borrowings and additional deposits.
Cash and cash equivalents increased $8.4 million for 1995.
Net cash provided by operating activities was $5.7 million for
1995. Net cash used by investing activities for 1995 was
$1.33 billion consisting primarily of purchases of
mortgage-backed securities which were classified as
held-to-maturity. In the fourth quarter of 1995, $587.0 million
of these mortgage-backed securities were transferred to the
available-for-sale portfolio. The considerable flattening of the
yield curve has diminished the market for originating adjustable
rate mortgage loans. As a result, Sovereign has focused on the
mortgage-backed security portfolio to provide earning assets.
Net cash provided by financing activities for 1995 was
$1.33 billion which includes the assumption of $818.9 million of
deposits from recent acquisitions net of sales, and proceeds from
long-term borrowings of $905.5 million which was partially offset
by a decrease in short-term borrowings due to Sovereign's effort
to extend borrowings to manage its interest rate risk.
The Financial Institutions Reform, Recovery and Enforcement
Act ("FIRREA") requires the OTS to prescribe uniformly applicable
capital standards for all savings associations. These standards
currently require institutions to maintain a minimum tangible
capital ratio of not less than 1.5%, a minimum leverage capital
ratio of not less than 3% of tangible assets and not less than 4%
of risk-adjusted assets and a minimum risk-based capital ratio
(based upon credit risk) of not less than 8%. In all cases,
these standards are to be no less stringent than the capital
standards that are applicable to national banks. The OTS
requires a minimum leverage capital requirement of 3% for
associations rated composite 1 under the OTS MACRO rating system.
For all other savings associations, the minimum leverage capital
requirement will be 3% plus at least an additional 100 to 200
basis points.
The OTS issued its final regulations on incorporating an
interest rate risk component into its risk-based capital
requirements. Under the regulation, savings associations which
are deemed to have an "above normal" level of interest rate risk
must deduct a portion of that risk from total capital for
regulatory capital purposes. Implementation of this interest
rate risk capital deduction has been delayed by the OTS until
further notification.
The Federal Deposit Insurance Corporation Improvement Act
("FDICIA") established five capital tiers: well capitalized,
adequately capitalized, under capitalized, significantly under
capitalized and critically under capitalized. A depository
institution's capital tier depends upon its capital levels in
relation to various relevant capital measures, which include
leverage and risk-based capital measures and certain other
factors. Depository institutions that are not classified as well
capitalized or adequately capitalized are subject to various
restrictions regarding capital distributions, payment of
management fees, acceptance of brokered deposits and other
operating activities.
At December 31, 1995, Sovereign Bank and Colonial Bank were
classified as well capitalized and were in compliance with all
capital requirements. The following table sets forth the capital
ratios of Sovereign Bank, Colonial Bank and Sovereign Bancorp and
the current regulatory requirements at December 31, 1995:
SOVEREIGN COLONIAL SOVEREIGN
BANK BANK BANCORP(1) REQUIREMENT
--------- -------- ---------- -----------
Tangible capital to tangible assets . . . . . . . 5.12% 6.26% 3.79% 1.50%
Leverage (core) capital to tangible assets . . . 5.12 6.26 3.79 3.00
Leverage (core) capital to risk-adjusted assets . 11.80 9.23 8.53 4.00
Risk-based capital to risk-adjusted assets . . . 12.64 10.38 14.27 8.00
(1) OTS capital regulations do not apply to holding companies.
These ratios are computed as if those regulations did apply
to Sovereign Bancorp.
ASSET AND LIABILITY MANAGEMENT
The objective of Sovereign's asset and liability management
is to identify, measure and control its interest rate risk in
order to produce consistent earnings that are not contingent upon
favorable trends in interest rates. Sovereign manages its assets
and liabilities to attain a stable net interest margin across a
wide spectrum of interest rate environments. This is attained by
monitoring the levels of interest rates, the relationships
between the rates earned on assets and the rates paid on
liabilities, the absolute amount of assets and liabilities which
reprice or mature over similar periods, off-balance sheet
positions and the effect of all these factors on the estimated
level of net interest income.
There are a number of industry standards used to measure an
institution's interest rate risk position. Most common among
these is the one year gap which is the ratio representing the
difference between assets, liabilities and off-balance sheet
positions which will mature or reprice within one year expressed
as a percentage of total assets. Using management's estimates of
asset prepayments, core deposit decay and core deposit repricing
in its computation, Sovereign estimates that its cumulative one
year gap position was a negative .29% at December 31, 1995.
Sovereign also utilizes income simulation modeling in
measuring its interest rate risk and managing its interest rate
sensitivity. Income simulation considers not only the impact of
changing market interest rates on forecasted net interest income,
but also other factors such as yield curve relationships, the
volume and mix of assets and liabilities, customer preferences
and general market conditions.
Pursuant to its interest rate risk management strategy,
Sovereign enters into off-balance sheet transactions which
involve interest rate exchange agreements (swaps, caps and
floors) for interest rate risk management purposes. Sovereign's
objective in managing its interest rate risk is to provide
sustainable levels of net interest income while limiting the
impact changes in interest rates have on net interest income.
Amortizing and non-amortizing interest rate swaps are
generally used to convert fixed rate assets and liabilities to
variable rate assets and liabilities and vice versa. Sovereign
utilizes amortizing interest rate swaps to convert discounted
adjustable rate loans to fixed rates for a period of time. The
amortization of the notional amount of the interest rate swaps
are tied to the level of an index such as the One Year Treasury
Constant Maturity, LIBOR, or a prepayment rate of a pool of
mortgage-backed securities. In order for interest rate swaps to
achieve the desired objective, Sovereign selects interest rate
swaps that will have a high degree of correlation to the related
financial instrument. Sovereign utilizes non-amortizing interest
rate swaps to convert fixed rate liabilities to floating, and
floating rate liabilities to fixed, to reduce Sovereign's overall
cost of funds.
Interest rate caps are generally used to limit the exposure
from the repricing and maturity of liabilities and interest rate
floors are generally used to limit the exposure from the
repricing and maturity of assets. Interest rate caps and floors
are also used to limit the exposure created by other interest
rate swaps. In certain cases, interest rate caps or floors are
simultaneously bought and sold to create a range of protection
against changing interest rates while limiting the cost of that
protection.
Due to competitive conditions, Sovereign originates fixed
rate residential mortgages. It exchanges the majority of these
loans with FHLMC, FNMA and private investors. The loans are
exchanged for cash or marketable fixed rate mortgage-backed
securities which are generally sold. This helps insulate
Sovereign from the interest rate risk associated with these fixed
rate assets. Sovereign uses forward sales, cash sales and
options on mortgage-backed securities as means of hedging loans
in the mortgage pipeline which are originated for resale.
Sovereign's primary funding source is deposits obtained in
its own marketplace. Deposit programs at Sovereign are priced to
meet management's asset/liability objectives, while taking into
account the rates available on investment opportunities and also
considering the cost of alternative funding sources. Borrowings
are a significant funding source for Sovereign and have primarily
been in the form of securities sold under repurchase agreements
and advances from the FHLB. Since borrowings are not subject to
the market constraints to which deposits are, Sovereign uses
borrowings to add flexibility to its interest rate risk position.
Table 10 presents the amounts of interest-earning assets and
interest-bearing liabilities that are assumed to mature or
reprice during the periods indicated at December 31, 1995, and
their related average yields and costs. Adjustable and floating
rate loans and securities are included in the period in which
interest rates are next scheduled to adjust rather than the
period in which they mature (in thousands).
Table 10: Gap Analysis
2-3 3-5 OVER 5
1 YEAR YEARS YEARS YEARS TOTAL
------ ----- ----- ------ -----
Interest-earning assets:
Loans(1) . . . . . . . . . . . . . $ 2,680,622 $ 1,400,761 $ 280,801 $ 347,836 $ 4,710,020
7.78% 7.02% 7.51% 8.41% 7.46%
Investment and mortgage-backed
securities(2)(3) . . . . . . . . 1,284,229 1,042,269 398,366 258,787 2,983,651
7.08% 6.48% 6.88% 6.94% 6.94%
----------- ------------ --------- ---------- -----------
Total interest-earning assets . . . . . 3,964,851 2,443,030 679,167 606,623 7,693,671
7.56% 6.79% 7.14% 7.79% 7.26%
Non-interest-earning assets . . . . . . -- -- -- 384,616 384,616
----------- ------------ --------- ---------- -----------
Total assets . . . . . . . . . . . . . $ 3,964,851 $ 2,443,030 $ 679,167 $ 991,239 $ 8,078,287
7.56% 6.79% 7.14% 4.76% 7.01%
Interest-bearing liabilities:
Deposits(4) . . . . . . . . . . . $ 3,243,138 $ 379,477 $ 723,052 $ 693,476 $ 5,039,143
5.05% 4.94% 2.28% 2.15% 4.24%
Borrowings . . . . . . . . . . . 1,685,354 689,763 98,831 56,708 2,530,656
5.79% 5.95% 7.73% 9.32% 5.96%
----------- ------------ --------- ---------- -----------
Total interest-bearing liabilities . . 4,928,492 1,069,240 821,883 750,184 7,569,799
5.30% 5.59% 2.93% 2.69% 4.83%
Non-interest-bearing liabilities . . . -- -- -- 81,463 81,463
Stockholders' equity . . . . . . . . . -- -- -- 427,025 427,025
----------- ------------ --------- ---------- -----------
Total liabilities and stockholders' equity $ 4,928,492 $ 1,069,240 $ 821,883 $1,258,672 $ 8,078,287
5.30% 5.59% 2.93% 1.60% 4.55%
----------- ------------ --------- ---------- -----------
Excess assets (liabilities) before effect
of off-balance sheet positions . . . $ (963,641) $ 1,373,790 $(142,716) $ (267,433)
----------- ------------ --------- ----------
To total assets . . . . . . . . . . (11.93)% 17.01% (1.77)% (3.31)% 2.46%
=========== ============ ========= ========== ===========
Cumulative excess assets (liabilities)
before effect of off-balance sheet
positions . . . . . . . . . . . . $ (963,641) $ 410,149 $ 267,433 $ --
=========== ============ ========= ==========
To total assets . . . . . . . . . (11.93)% 5.08% 3.31%
Effect of off-balance sheet positions on
assets and liabilities . . . . . $ 940,262 $ (1,276,000) $ 254,948 $ 80,790
----------- ------------ --------- ----------
Excess assets (liabilities) after effect of
off-balance sheet positions . . . $ (23,379) $ 97,790 $ 112,232 $ (186,643)
=========== ============ ========= ==========
To total assets . . . . . . . . . (.29)% 1.21% 1.39% (2.31)%
Cumulative excess assets (liabilities)
after off-balance sheet positions $ (23,379) $ 74,411 $ 186,643 $ --
=========== ============ ========= ==========
To total assets . . . . . . . . . (.29)% .92% 2.31%
(1) Loan balances include annual prepayment and repayment
assumptions between 6% and 35% initially with gradual
slowing thereafter. Loan balances are presented net of
deferred loan fees and include loans held for resale and the
allowance for loan losses.
(2) Mortgage-backed securities include annual prepayment and
repayment assumptions between 6% and 30% initially with
gradual slowing thereafter. Balances on these securities are
presented net of deferred loan fees.
(3) Includes interest-earning deposits.
(4) Savings, NOW, money market and demand deposit accounts have
been assumed to decay at an annual rate of 20%.
Table 11 presents selected quarterly consolidated financial
data (in thousands, except per share data):
Table 11: Selected Quarterly Consolidated Financial Data
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1995 1995 1995 1995 1994 1994 1994 1994
---- ---- ---- ---- ---- ---- ---- ----
Total interest income . . . . . . . $ 136,575 $ 128,827 $ 116,220 $ 111,409 $ 102,367 $ 94,366 $ 80,715 $ 76,693
Total interest expense . . . . . . 90,137 85,150 74,845 68,673 60,881 53,871 43,657 40,332
--------- --------- --------- --------- --------- -------- --------- --------
Net interest income . . . . . . . . 46,438 43,677 41,375 42,736 41,486 40,495 37,058 36,361
Provision for possible loan
losses . . . . . . . . . . . . . 250 250 250 250 600 950 1,013 1,537
--------- --------- --------- --------- --------- -------- --------- --------
Net interest income after
provision . . . . . . . . . . . 46,188 43,427 41,125 42,486 40,886 39,545 36,045 34,824
Other income . . . . . . . . . . . 6,774 4,894 9,294 4,867 4,389 4,016 2,972 3,177
Other expenses . . . . . . . . . . 28,940 26,447 28,929 28,792 26,744 23,137 20,579 20,529
--------- --------- --------- --------- --------- -------- --------- --------
Income before income taxes . . . . 24,022 21,874 21,490 18,561 18,531 20,424 18,438 17,472
Income tax provision . . . . . . . 8,325 7,436 7,347 6,431 6,964 8,188 6,769 6,546
--------- --------- --------- --------- --------- -------- --------- --------
Net income . . . . . . . . . . . . $ 15,697 $ 14,438 $ 14,143 $ 12,130 $ 11,567 $ 12,236 $ 11,669 $ 10,926
========= ========= ========= ========= ========= ======== ========= ========
Net income applicable to common
stock . . . . . . . . . . . . . . $ 14,134 $ 12,875 $ 12,580 $ 12,130 $ 11,567 $ 12,236 $ 11,669 $ 10,926
========= ========= ========= ========= ========= ======== ========= ========
Earnings per share:(1) . . . . . . $ .27 $ .24 $ .25 $ .24 $ .22 $ .24 $ .23 $ .21
Market Prices(1)
High . . . . . . . . . . . . . . 10 3/8 10 1/4 9 3/16 8 13/16 9 1/16 10 3/16 10 7/16 11
Low . . . . . . . . . . . . . . 9 3/16 8 15/16 7 5/8 7 7 8 3/4 8 3/4 7 13/16
Dividends per share(1) . . . . . . .0210 .0209 .0209 .0209 .0209 .0258 .0256 .0336
(1) All per share data have been adjusted to reflect all stock
dividends and stock splits.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND
1993
Net Income. Net income for the year ended December 31,
1994, was $46.4 million, a 30% increase over $35.6 million for
the year ended December 31, 1993. On a per share basis, net
income rose to $.90 in 1994 from $.70 in 1993. Return on average
assets was .84% for 1994, compared to .81% for 1993. Return on
average equity for 1994 was 16.47% compared to 14.77% for 1993.
The 1993 results presented above exclude a $4.8 million
increase to net income from the adoption of SFAS No. 109.
Net Interest Income. Net interest income was $155.4 million
for 1994 compared to $129.5 million for 1993. The increase was
primarily due to an increase in the size of the balance sheet
resulting from the Shadow Lawn acquisition and strong loan
growth.
Interest and fees on loans were $248.7 million in 1994
compared to $186.9 million in 1993. Loans averaged $3.58 billion
with an average yield of 6.95% in 1994 compared to $2.55 billion
with an average yield of 7.34% in 1993. The increase in average
balance was primarily due to the Shadow Lawn acquisition and the
origination of $1.66 billion of residential mortgage loans of
which $1.44 billion were retained in Sovereign's loan portfolio.
The decrease in yield was the result of discounted rates during
the initial term on newly originated adjustable rate loans
somewhat offset by generally higher interest rates.
Interest on investment and mortgage-backed securities
available-for-sale was $6.2 million with an average yield of
6.27% for 1994. There were no investment and mortgage-backed
securities classified as available-for-sale in 1993.
Interest on investment and mortgage-backed securities
held-to-maturity was $96.7 million for 1995 compared to
$92.5 million for 1993. The average balance of investment and
mortgage-backed securities held-to-maturity was $1.55 billion
with an average yield of 6.24% for 1994 compared to an average
balance of $1.53 billion with an average yield of 6.06% for 1993.
Interest on deposits was $121.8 million for 1994 compared to
$108.1 million for 1993. Average deposits were $3.58 billion for
1994 compared to $3.05 billion for 1993. The increase in average
balance was primarily due to the Shadow Lawn acquisition. The
average rate paid on deposits was 3.40% for 1994 compared to
3.54% for 1993. The decrease in the average cost of deposits was
a result of a change in deposit composition toward lower cost
transaction accounts.
Interest on borrowings was $76.9 million for 1994 compared
to $45.2 million for 1993. During 1994, average outstanding
borrowings were $1.59 billion with a cost of 4.84% compared to
$1.00 billion for 1993 with a cost of 4.52%. The increase in
average balance is the result of the significant loan growth
being funded principally by borrowings. The increase in average
cost of borrowings is a result of the general rise in interest
rates and the full year effect of the cost of subordinated
debentures issued during 1993.
Provision for Possible Loan Losses. The provision for
possible loan losses for 1994 was $4.1 million compared to
$8.7 million in 1993. This decreased provision was the result of
improved asset quality.
Other Income. Other income was $14.6 million for 1994
compared to $15.2 million for 1993.
Mortgage banking gains were $1.5 million for 1994 compared
to $2.4 million for 1993. During 1994, Sovereign recognized a
gain of $1.1 million on the sale of servicing rights related to
$111.4 million of residential mortgage loans.
Other loan fees and service charges were $5.0 million for
1994 compared to $4.4 million for 1993. This increase was
primarily due to an increase in Sovereign's servicing portfolio.
Deposit fee income was $5.8 million for 1994 compared to
$4.4 million for 1993. This increase was the result of the
Shadow Lawn acquisition.
General and Administrative Expenses. Total general and
administrative expenses were $84.4 million for 1994 compared to
$73.3 million for 1993. The 15% increase in general and
administrative expenses from 1993 to 1994 compares to a 26%
increase in the average balance sheet over the same time period.
Other operating expenses were $6.6 million for 1994 compared
to $4.1 million for 1993. Amortization of goodwill and other
intangible assets was $6.5 million for 1994 compared to
$3.5 million for 1993. This increase was primarily the result of
the Shadow Lawn acquisition and a full year of amortization of
core deposit intangible resulting from the Home Unity
acquisition. Net REO losses were $91,000 for 1994 compared to
$603,000 for 1993.
Income Tax Provision. The income tax provision was
$28.5 million for 1994 compared to $23.0 million for 1993. The
effective tax rate for 1994 was 38.0% compared to 39.2% for 1993.
MARKET AND DIVIDEND INFORMATION
Sovereign's common and preferred stock is traded and listed
on the NASDAQ Stock market under the symbol "SVRN" and "SVRNP",
respectively. Options on Sovereign common stock are traded on
the Philadelphia Stock Exchange (PHLX) under the symbol "SVRN" or
"SQV". At December 31, 1995, the total number of holders of
record of Sovereign's common stock was 8,338.
Holders of Sovereign's common stock are entitled to receive
dividends when, as and if declared by Sovereign's Board of
Directors, out of funds legally available therefor. The timing
and amount of any future dividends will depend on earnings,
capital requirements, federal and state laws, regulations and
policies and other factors including the amounts of dividends
payable to Sovereign by its subsidiaries. The current quarterly
dividend is $.021 per share.
Holders of Sovereign's preferred stock are entitled to
receive, when and as declared by the Board of Directors, out of
assets of the Corporation legally available for payment, cash
dividends payable quarterly at the rate of 6-1/4% per annum.
Dividends on the preferred stock, calculated as a percentage of
the liquidation preference, are payable quarterly on February 15,
May 15, August 15 and November 15 of each year.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sovereign Bancorp, Inc.
We have audited the accompanying consolidated balance sheets
of Sovereign Bancorp, Inc. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the
1993 financial statements of Charter FSB Bancorp, Inc., a company
acquired on November 1, 1994 as more fully described in Note 2,
which statements reflect net income constituting 12% of the
related 1993 consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Charter FSB
Bancorp, Inc., is based solely on the report of other auditors.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant assumptions made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1993, the
report of other auditors, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Sovereign Bancorp, Inc. and
subsidiaries at December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
In 1995, the Company changed its method of accounting for
mortgage servicing rights, as discussed in Note 1, to the
consolidated financial statements. In 1994, the Company changed
its method of accounting for investment and mortgage-backed
securities, as discussed in Note 1 to the consolidated financial
statements. In 1993, the Company changed its method of
accounting for income taxes, as discussed in Note 13 to the
consolidated financial statements.
/s/ ERNST & YOUNG LLP
January 17, 1996
Reading, Pennsylvania
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
AT DECEMBER 31,
--------------------------
1995 1994
----------- -----------
ASSETS
Cash and amounts due from depository institutions . . . . . . . . . . . . $ 130,841 $ 110,270
Interest-earning deposits . . . . . . . . . . . . . . . . . . . . . . . . . 16,930 29,131
Loans held for resale (approximate fair value of $71,297 and $7,666
at December 31, 1995 and 1994, respectively) . . . . . . . . . . . . . . 70,512 7,666
Investment and mortgage-backed securities available-for-sale . . . . . . . 889,509 87,128
Investment and mortgage-backed securities held-to-maturity
(approximate fair value of $2,087,356 and $1,701,143 at
December 31, 1995 and 1994, respectively) . . . . . . . . . . . . . . . 2,077,212 1,816,840
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,674,364 4,350,898
Allowance for possible loan losses . . . . . . . . . . . . . . . . . . . . (34,856) (36,289)
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 56,951 48,096
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,514 9,191
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . 42,785 30,369
Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . 123,243 64,553
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,282 46,229
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,078,287 $ 6,564,082
=========== ===========
LIABILITIES
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,039,143 $ 4,027,119
Borrowings
Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,512,720 1,722,726
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,017,936 439,861
Advance payments by borrowers for taxes and insurance . . . . . . . . . . 22,117 25,893
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,346 44,583
----------- -----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,651,262 $ 6,260,182
=========== ===========
STOCKHOLDERS' EQUITY
Preferred stock; 7,500,000 shares authorized; 2,000,000 shares
issued at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 96,446 --
Common stock; no par value; 100,000,000 shares authorized;
48,438,944 shares issued at December 31, 1995
and 45,566,971 shares issued at December 31, 1994 . . . . . . . . . . . . 248,875 224,958
Unallocated Common stock held by ESOP at cost;
2,974,346 shares at December 31, 1995 . . . . . . . . . . . . . . . . . . (28,772) --
Unrecognized gain (loss) on investment and mortgage-backed securities
available-for-sale, net of tax . . . . . . . . . . . . . . . . . . . . . 3,988 (887)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,488 79,829
----------- -----------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 427,025 303,900
----------- -----------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . . $ 8,078,287 $ 6,564,082
=========== ===========
See accompanying notes to consolidated financial statements.
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---- ---- ----
INTEREST INCOME:
Interest and dividends on investment and mortgage-backed
securities and other interest-earning deposits . . . . . . . . . . . . . $ 165,581 $ 105,425 $ 95,878
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . 327,450 248,716 186,912
--------- --------- --------
Total interest income . . . . . . . . . . . . . . . . . . . . . . . 493,031 354,141 282,790
--------- --------- --------
INTEREST EXPENSE:
Interest on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,267 121,812 108,070
Interest on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,538 76,929 45,248
--------- --------- --------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . 318,805 198,741 153,318
--------- --------- --------
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,226 155,400 129,472
Provision for possible loan losses . . . . . . . . . . . . . . . . . . . . . . . . 1,000 4,100 8,650
--------- --------- --------
Net interest income after provision for possible loan losses . . . . . . . . . . . 173,226 151,300 120,822
--------- --------- --------
OTHER INCOME:
Other loan fees and service charges . . . . . . . . . . . . . . . . . . . . . 4,445 5,018 4,431
Deposit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,427 5,755 4,364
Gain on loans and investment and mortgage-backed securities . . . . . . . . . 419 494 2,173
Mortgage banking gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,079 1,486 2,367
Miscellaneous income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,459 1,801 1,832
--------- --------- --------
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . 25,829 14,554 15,167
--------- --------- --------
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . 41,158 33,896 32,414
Occupancy and equipment expenses . . . . . . . . . . . . . . . . . . . . . . . 19,286 15,908 12,543
Outside services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,890 7,627 6,360
Deposit insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 10,423 7,627 6,444
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,602 4,013 3,356
Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . 13,908 15,319 12,195
--------- --------- --------
Total general and administrative expenses . . . . . . . . . . . . . 100,267 84,390 73,312
--------- --------- --------
OTHER OPERATING EXPENSES:
Amortization of goodwill and other intangible assets . . . . . . . . . . . . . 12,184 6,508 3,462
Real estate owned losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 657 91 603
--------- --------- --------
Total other operating expenses . . . . . . . . . . . . . . . . . . . 12,841 6,599 4,065
--------- --------- --------
Income before income taxes and cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,947 74,865 58,612
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,539 28,467 22,998
--------- --------- --------
Income before cumulative effect of change in accounting principle . . . . . . . . . 56,408 46,398 35,614
Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . -- -- 4,800
--------- --------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414
========= ========= ========
NET INCOME APPLICABLE TO COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . $ 51,719 $ 46,398 $ 40,414
========= ========= ========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:(1)
Before cumulative effect of change in accounting principle . . . . . . . . . . $ 1.00 $ .90 $ .70
========= ========= ========
After cumulative effect of change in accounting principle . . . . . . . . . . $ 1.00 $ .90 $ .80
========= ========= ========
DIVIDENDS PER COMMON SHARE(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .084 $ .106 $ .099
========= ========= ========
(1) All per share data have been adjusted to reflect all stock
dividends and stock splits.
See accompanying notes to consolidated financial statements.
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON PREFERRED
SHARES SHARES COMMON PREFERRED RETAINED TREASURY
OUTSTANDING OUTSTANDING STOCK STOCK EARNINGS STOCK
----------- ----------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 1992 . . . . . . . 40,682 -- $ 182,543 $ -- $ 39,834 $ (1,958)
Net income . . . . . . . . . . . . . . . -- -- -- -- 40,414 --
Exercise of stock options . . . . . . . . 403 -- 727 -- -- --
Cash in lieu of fractional shares . . . . (4) -- (45) -- -- --
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . 229 -- 1,605 -- -- --
Dividends paid, $.0993 per share . . . . -- -- -- -- (4,570) --
Other . . . . . . . . . . . . . . . . . . 47 -- 56 -- 515 --
---------- ---------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 1993 . . . . . . . 41,357 -- 184,886 -- 76,193 (1,958)
---------- ---------- --------- -------- --------- --------
Net income . . . . . . . . . . . . . . . -- -- -- -- 46,398 --
Exercise of stock options . . . . . . . . 552 -- 1,318 -- -- --
Cash in lieu of fractional shares . . . . (1) -- (14) -- -- --
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . 191 -- 2,580 -- -- --
Stock Dividends . . . . . . . . . . . . . 3,468 -- 38,135 -- (38,135) --
Dividends paid, $.1059 per share . . . . -- -- -- -- (5,252) --
Treasury stock retired . . . . . . . . . -- -- (1,958) -- -- 1,958
Unrecognized loss on investment
and mortgage-backed securities
available-for-sale, net of tax . . . -- -- -- -- -- --
Other . . . . . . . . . . . . . . . . . . -- -- 11 -- 625 --
---------- ---------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 1994 . . . . . . . 45,567 -- 224,958 -- 79,829 --
---------- ---------- --------- -------- --------- --------
Net Income . . . . . . . . . . . . . . . -- -- -- -- 56,408 --
Exercise of stock options . . . . . . . . 377 -- 840 -- -- --
Cash in lieu of fractional shares . . . . -- -- (2) -- -- --
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . 209 -- 1,963 -- -- --
Stock dividends . . . . . . . . . . . . . 2,286 -- 20,571 -- (20,571) --
Dividends paid on common stock,
$.0837 per share . . . . . . . . . . -- -- -- -- (3,945) --
Preferred Stock offering . . . . . . . . -- 2,000 -- 96,446 -- --
Dividends paid on preferred stock,
$2.34 per share . . . . . . . . . . -- -- -- -- (4,688) --
Unrecognized gain on investment
and mortgage-backed securities
available-for-sale, net of tax . . . -- -- -- -- -- --
Purchase of shares under Employee
Stock Ownership Plan . . . . . . . . (3,131) -- -- -- -- --
Allocation of shares under Employee
Stock Ownership Plan . . . . . . . . 157 -- -- -- -- --
Other . . . . . . . . . . . . . . . -- -- 545 -- (545) --
---------- ---------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 1995 . . . . . . . 45,465 2,000 $ 248,875 $ 96,446 $ 106,488 --
========== ========== ========= ======== ========= ========
UNALLOCATED UNRECOGNIZED
COMMON LOSS/GAIN ON
STOCK AVAILABLE- TOTAL
HELD BY FOR-SALE STOCKHOLDERS'
ESOP PORTFOLIO EQUITY
----------- ----------- ------------
BALANCE, DECEMBER 31, 1992 . . . . . . . $ -- -- $ 220,419
Net income . . . . . . . . . . . . . . . -- -- 40,414
Exercise of stock options . . . . . . . . -- -- 727
Cash in lieu of fractional shares . . . . -- -- (45)
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . -- -- 1,605
Dividends paid, $.0993 per share . . . . -- -- (4,570)
Other . . . . . . . . . . . . . . . . . . -- -- 571
--------- ------- --------
BALANCE, DECEMBER 31, 1993 . . . . . . . -- -- 259,121
--------- ------- --------
Net income . . . . . . . . . . . . . . . -- -- 46,398
Exercise of stock options . . . . . . . . -- -- 1,318
Cash in lieu of fractional shares . . . . -- -- (14)
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . -- -- 2,580
Stock Dividends . . . . . . . . . . . . . -- -- --
Dividends paid, $.1059 per share . . . . -- -- (5,252)
Treasury stock retired . . . . . . . . . -- -- --
Unrecognized loss on investment
and mortgage-backed securities
available-for-sale, net of tax . . . -- (887) (887)
Other . . . . . . . . . . . . . . . . . . -- -- 636
--------- ------- --------
BALANCE, DECEMBER 31, 1994 . . . . . . . -- (887) 303,900
--------- ------- --------
Net Income . . . . . . . . . . . . . . . -- -- 56,408
Exercise of stock options . . . . . . . . -- -- 840
Cash in lieu of fractional shares . . . . -- -- (2)
Sale of stock under Dividend
Reinvestment Plan and
Employee Stock Purchase Plan . . . . -- -- 1,963
Stock dividends . . . . . . . . . . . . . -- -- --
Dividends paid on common stock,
$.0837 per share . . . . . . . . . . -- -- (3,945)
Preferred Stock offering . . . . . . . . -- -- 96,446
Dividends paid on preferred stock,
$2.34 per share . . . . . . . . . . -- -- (4,688)
Unrecognized gain on investment
and mortgage-backed securities
available-for-sale, net of tax . . . -- 4,875 4,875
Purchase of shares under Employee
Stock Ownership Plan . . . . . . . . (30,286) -- (30,286)
Allocation of shares under Employee
Stock Ownership Plan . . . . . . . . 1,514 -- 1,514
Other . . . . . . . . . . . . . . . -- -- --
--------- ------- --------
BALANCE, DECEMBER 31, 1995 . . . . . . . $ (28,772) $ 3,988 $427,025
========= ======= ========
See accompanying notes to consolidated financial statements.
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses and deferred taxes . . . . . . . . . . . . 5,269 9,837 8,452
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,154 4,873 4,144
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,162 (533) 3,626
Gain on loans, investment and mortgage-backed securities and real estate
owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,538) (1,504) (1,570)
Cumulative effect of change in accounting principle . . . . . . . . . . . . . -- -- (4,800)
Net change in:
Loans held for resale . . . . . . . . . . . . . . . . . . . . . . . . . . (62,846) 44,901 9,166
Official checks and other liabilities . . . . . . . . . . . . . . . . . . 14,647 (4,826) (19,350)
Accrued interest receivable and other assets . . . . . . . . . . . . . . . (15,586) (79,698) (11,858)
---------- ----------- -----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . 5,670 19,448 28,224
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment and mortgage-backed securities:
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,393 750,441 --
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 45,366
Proceeds from repayments and maturities of investment and mortgage-backed securities:
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,961 --
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,313 333,412 650,792
Purchases of investment and mortgage-backed securities:
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (83,860) (337,046) --
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,322,625) (655,664) (1,387,913)
Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,307 6,515 19,423
Purchase of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (305,794) (72,808) (49,075)
Net change in loans other than purchases and sales . . . . . . . . . . . . . . . . (3,933) (1,012,243) (546,783)
Proceeds from sales of premises and equipment . . . . . . . . . . . . . . . . . . 10,729 2,060 115
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . (18,551) (4,820) (5,726)
Proceeds from sales of real estate owned . . . . . . . . . . . . . . . . . . . . . 6,972 12,556 6,940
Net cash received from business combinations . . . . . . . . . . . . . . . . . . . 5,569 46,659 --
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (4,395) 13,896
---------- ----------- -----------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . (1,331,480) (931,372) (1,252,965)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Assumption of deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 818,913 13,687 233,703
Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . . . . . . . 88,085 101,535 (15,473)
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . (535,669) 731,231 229,175
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . 905,499 75,000 714,000
Repayments of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . (714) (3,019) (1,540)
Net increase (decrease) in advance payments by borrowers for taxes and insurance . (3,776) 3,992 (3,700)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . 2,801 3,884 2,287
Proceeds from issuance of preferred stock . . . . . . . . . . . . . . . . . . . . 96,446 -- --
Allocation of ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,514 -- --
Advance to the ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,286) -- --
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,633) (5,252) (4,570)
---------- ----------- -----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . 1,334,180 921,058 1,153,882
---------- ----------- -----------
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 8,370 9,134 (70,859)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . 139,401 130,267 201,126
---------- ----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . $ 147,771 $ 139,401 $ 130,267
========== =========== ===========
RECONCILIATION OF CASH AND CASH EQUIVALENTS TO CONSOLIDATED BALANCE SHEETS:
Cash and amounts due from depository institutions . . . . . . . . . . . . . . . . . . . $ 130,841 $ 110,270 $ 77,107
Interest-earning deposits and federal funds sold . . . . . . . . . . . . . . . . . . . 16,930 29,131 53,160
---------- ----------- -----------
$ 147,771 $ 139,401 $ 130,267
========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Income tax payments totaled $20.6 million in 1995, $23.7
million in 1994 and $17.1 million in 1993. Interest payments
totaled $303.6 million in 1995, $196.0 million in 1994 and $145.8
million in 1993. Noncash activity consisted of mortgage loan
securitization of $200.9 million in 1995, $159.5 million in 1994
and $243.1 million in 1993; reclassification of long-term
borrowings to short-term borrowings of $315.8 million in 1995,
$159.5 million in 1994 and $190.0 million in 1993; and
reclassification of mortgage loans to real estate owned of $4.5
million in 1995, $7.2 million in 1994 and $4.3 million in 1993.
See accompanying notes to consolidated financial statements.
SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting
policies of Sovereign Bancorp, Inc. and subsidiaries
("Sovereign"). Such accounting policies are in accordance with
generally accepted accounting principles and have been followed
on a consistent basis, except as separately noted herein.
a. Principles of Consolidation -- The accompanying
financial statements include the accounts of the parent company,
Sovereign Bancorp, Inc. and its wholly-owned subsidiaries:
Sovereign Bank, FSB ("Sovereign Bank") and its wholly-owned
subsidiaries, Colonial Bank for Savings, FSB ("Colonial Bank")
and its wholly-owned subsidiary and Sovereign Investment Company.
All material intercompany balances and transactions have been
eliminated in consolidation.
b. Use of Estimates -- The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
c. Per Share Information -- Earnings per share have been
calculated based on the average common shares outstanding
(including assumed conversion of preferred shares) for the
respective periods. Stock options are considered common stock
equivalents and are included in the computation of the number of
outstanding shares using the treasury stock method, unless
anti-dilutive. The number of shares used in the computation of
fully diluted earnings per share for the years ended December 31,
1995, 1994, and 1993 were 56.6 million, 51.4 million and
50.9 million, respectively. All per share data have been
restated to reflect the effect of the 5% stock dividends which
were authorized on December 20, 1995 and February 22, 1995, with
record dates of February 1, 1996 and March 31, 1995,
respectively, the 10% stock dividend which was authorized on
April 19, 1994, with a record date of April 29, 1994, the 20%
stock splits which were authorized on October 19, 1993 and
April 7, 1993, with record dates of November 15, 1993 and
April 30, 1993, respectively, the 5% stock dividend which was
authorized on December 22, 1992, with a record date of January 5,
1993, the 20% stock split which was authorized on October 13,
1992, with a record date of November 2, 1992, the 10% stock
dividends which were authorized on July 21, 1992, April 21, 1992,
and January 21, 1992, with record dates of August 4, 1992,
April 30, 1992, and February 17, 1992, respectively, the 25%
stock splits which were authorized on September 17, 1991,
June 18, 1991, and April 16, 1991 with record dates of
September 30, 1991, June 30, 1991, and April 30, 1991,
respectively, the 20% stock dividend which was authorized on
December 19, 1990, with a record date of January 31, 1991, and
the 25% stock dividend which was authorized on October 17, 1989,
with a record date of December 1, 1989.
d. Interest-Earning Deposits -- Interest-earning deposits
consist of deposit accounts with the Federal Home Loan Bank of
Pittsburgh ("FHLB") and deposits with other financial
institutions generally having maturities of three months or less.
e. Investment and Mortgage-backed Securities -- Effective
January 1, 1994, Sovereign adopted Statement of Financial
Accounting Standard ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115,
debt securities that the company has the intent and ability to
hold to maturity are classified as held-to-maturity and reported
at amortized cost. Securities expected to be held for an
indefinite period of time are classified as available-for-sale
and are carried at fair value with unrealized gains and losses
reported as a separate component of stockholders' equity, net of
estimated income taxes. Securities that are bought and held
principally for the purpose of selling are classified as trading
and reported at fair value, with unrealized gains and losses
included in earnings. Sovereign has no securities held for
trading. Gains or losses on the sales of securities are
recognized at trade date utilizing the specific identification
method. In 1993 and prior periods, investment and
mortgage-backed securities were intended to be held-to-maturity
and were generally carried at cost, adjusted for amortization of
premiums and accretion of discounts, because Sovereign had both
the intent and ability to hold these securities to maturity or on
a long-term basis. Marketable equity securities were carried at
the lower of cost or estimated fair value on an aggregate basis.
Trading securities were carried at fair value.
f. Forward Commitments and Options -- Sovereign utilizes
forward commitments and/or options to hedge interest rate risk
associated with loans held for resale and/or, commitments to fund
loans. Gains and losses on these transactions are included in
the net gain or loss when the asset is sold.
g. Mortgage Banking Activity -- Loans held for resale
consist of residential mortgage loans and mortgage-backed
securities originated or purchased by Sovereign. They are
recorded at the lower of cost or estimated fair value on an
aggregate basis. Gains and losses are included in the
consolidated statements of operations. The fair value
calculation includes consideration of all open positions,
outstanding commitments and related fees paid. Excess servicing
fees are computed as the present value of the difference between
the estimated future net revenues and normal servicing net
revenues as established by the federally sponsored secondary
market makers. Resultant premiums are deferred and amortized
over the estimated life of the related mortgages using the
constant yield method.
Effective July 1, 1995, Sovereign prospectively adopted SFAS
No. 122 "Accounting for Mortgage Servicing Rights". SFAS No. 122
requires that management recognize as separate assets, rights to
service mortgage loans for others, however these servicing rights
are acquired. Management should allocate the total cost of
mortgage loans, either purchased or originated, to the loans and
the mortgage servicing rights based on their relative fair value.
The Statement also requires that management assess its
capitalized mortgage servicing rights for impairment based on
the fair value of those rights, and that this impairment be
recognized through a valuation allowance. The adoption of SFAS
No. 122 will not have a material effect on Sovereign's
operations.
h. Allowance for Possible Loan Losses -- An allowance for
possible loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the loan portfolio.
Management's evaluation takes into consideration the risks
inherent in the loan portfolio, past loan loss experience,
specific loans which have loss potential, geographic and industry
concentrations, delinquency trends, economic conditions, the
level of originations and other relevant factors. While
management uses the best information available to make such
evaluations, future adjustments to the allowance may be necessary
if conditions differ substantially from the assumptions used in
making the evaluations.
i. Interest on Loans -- Interest on loans is credited to
income as it is earned. Interest income is not recognized for
those loans when interest is 90 days or more delinquent (unless
government guaranteed) or sooner if management feels the
possibility for receiving interest payments in the future is
doubtful. When a loan is placed on non-accrual, all uncollected
interest is reversed.
j. Loan Fees, Discounts and Premiums -- Loan origination
fees and certain direct loan origination costs are deferred and
recognized as interest income in the consolidated statement of
operations over the contractual life of the loan utilizing the
level yield method, except in the case of certain discounted
loans in which a portion of the net deferred fee may be amortized
over the discount period. Discounts and premiums on loans
purchased are amortized into income utilizing methods which
approximate the level yield method.
k. Premises and Equipment -- Premises and equipment are
carried at cost, less accumulated depreciation. Depreciation is
calculated utilizing both accelerated and straight-line methods.
Estimated useful lives are as follows:
Office buildings . . . . . . . . . . . . . . . 15 to 50 years
Leasehold improvements . . . . . . . . . . . . 5 to 10 years
Furniture, fixtures and equipment . . . . . . 3 to 10 years
Automobiles . . . . . . . . . . . . . . . . . 3 years
Expenditures for maintenance and repairs are charged to
expense as incurred.
l. Real Estate Owned -- Real estate owned consists of
properties acquired by or in lieu of foreclosure and properties
that qualify for in-substance foreclosure. Real estate owned is
stated at the lower of cost or estimated fair value minus
estimated costs to sell. Write-downs of real estate owned which
occur after the initial transfer from the loan portfolio are
recorded as other operating expenses. Costs of holding
foreclosed property are charged to expense in the current period,
except for significant property improvements which are
capitalized to the extent that carrying value does not exceed
estimated fair value.
m. Income Taxes -- Deferred income taxes are provided on
temporary differences between amounts reported for financial
statement and tax purposes in accordance with SFAS No. 109
"Accounting for Income Taxes".
n. Interest Rate Exchange Agreements (Including Swaps,
Caps, and Floors) -- Sovereign has entered into certain interest
rate exchange agreements in connection with its asset/liability
management program as hedges. Related fees are deferred and
amortized on a straight line basis over the life of the interest
rate exchange agreement. Net interest payments/receipts are
accrued as an adjustment of interest expense/income on the hedged
assets or liabilities. Gains or losses resulting from early
termination of interest rate exchange agreements are deferred and
amortized over the remaining term of the original exchange
agreements. In the event the related asset/liability is disposed
of, such deferred gains or losses are recognized as an adjustment
to the respective gain or loss on disposition. Changes in the
value of interest rate exchange agreements are not recorded in
the financial statements because the interest rate exchange
agreements are designated as hedges.
o. General and Administrative Expenses -- General and
administrative expenses are classified on a functional basis,
except for salaries and employee benefits. Certain direct loan
origination costs are deferred and are being amortized as a yield
adjustment through net interest income (see note 1-j).
p. Consolidated Statement of Cash Flows -- For purposes of
reporting cash flows, cash and cash equivalents include cash and
amounts due from depository institutions, interest-earning
deposits, federal funds sold and securities purchased under
resale agreements with an original maturity of three months or
less.
q. Reclassifications -- Certain amounts in the financial
statements of prior periods have been reclassified to conform
with the presentation used in these financial statements. These
reclassifications have no effect on net income.
r. Long-Lived Assets -- In March 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of", which requires impairment
losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less
than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed
of. Sovereign will adopt SFAS No. 121 in the first quarter of
1996, and based on current circumstances, Sovereign does not
believe the effect of adoption will be material.
s. Intangibles -- Core deposit intangibles are a measure of
the value of consumer demand and savings deposits acquired in
business combinations accounted for as purchases. Core deposit
intangibles are being amortized on accelerated bases pursuant to
core deposit studies and in accordance with SFAS No. 72
"Accounting for Certain Acquisitions of Banking or Thrift
Institutions," over the estimated lives of the existing deposit
relationships acquired, but not exceeding 15 years. Goodwill is
the excess of the purchase price over the fair value of net
assets of companies acquired through business combinations
accounted for as purchases. Goodwill is being amortized using
the straight line method over various periods not exceeding 20
years. The carrying amount of the goodwill is reviewed if facts
and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as
determined based on the loss of economic value, the carrying
amount of the goodwill is reduced by the estimated loss of value.
In addition, goodwill associated with impaired long-lived assets
is included in the impairment evaluation which Sovereign assesses
under the rules of SFAS No. 121. The carrying amount of the
goodwill is reviewed if facts and circumstances suggest that it
may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based on the loss of economic
value, the carrying amount of the goodwill is reduced by the
estimated loss of value.
(2) BUSINESS COMBINATIONS
On November 17, 1995, Sovereign acquired two branch offices
and related deposits of Berkeley Federal Bank & Trust, FSB
("Berkeley"). Sovereign assumed approximately $111.7 million of
deposits for a premium of $5.5 million. Of this premium,
$604,000 was recorded as a core deposit intangible and
$4.9 million was recorded as goodwill. The balances of this core
deposit intangible and goodwill at December 31, 1995 were
$579,000 and $4.9 million, respectively.
On November 15, 1995, Sovereign acquired Colonial State Bank
("Colonial") in a transaction accounted for as a purchase.
Sovereign acquired $46.5 million of assets consisting principally
of loans and investment securities. Sovereign also assumed
approximately $42.0 million of deposit liabilities. Sovereign
acquired Colonial in exchange for $6.3 million in cash. This
transaction added goodwill of $3.3 million to Sovereign's balance
sheet. The balance of the goodwill at December 31, 1995 was
$3.3 million. Colonial will operate as a separate Banking
subsidiary of Sovereign under the name Colonial Bank for Savings,
FSB ("Colonial Bank").
On November 10, 1995, Sovereign completed the sale of its
Pottsville, Pennsylvania branch office with related deposits
totalling $23.9 million to Northwest Savings Bank ("Northwest")
and the sale of its English Village branch office in North Wales,
Pennsylvania with related deposits of $12.4 million to Union
National Bank & Trust Company ("Union National"). As a result of
these transactions, Sovereign recognized a pre-tax gain of
$1.1 million and reduced goodwill by $568,000, respectively.
On April 21, 1995, Sovereign completed its sale of seven
southern New Jersey offices with related deposits totalling
$106.7 million to Collective Bancorp, Inc. ("Collective"). Six
of these offices had previously been purchased from Berkeley as
part of a transaction which occurred on January 1, 1995. In
addition, Sovereign acquired $7.0 million of deposits from
Collective's Wilmington, Delaware branch office. As a result of
this transaction, Sovereign recognized a pre-tax gain of
$1.5 million and reduced its existing core deposit intangible by
approximately $6.0 million.
On January 1, 1995, Sovereign acquired 23 branch offices
located in New Jersey and Delaware with $909.3 million of deposit
liabilities from Berkeley. In exchange for assuming the deposits
of the Berkeley offices, Sovereign acquired principally cash and
fixed assets, net of a deposit premium of $66.6 million which was
recorded as $7.6 million of core deposit intangible and
$59.0 million of goodwill. The balances of this core deposit
intangible and goodwill at December 31, 1995 were $4.5 million
and $52.0 million, respectively.
On November 1, 1994, Sovereign acquired Charter FSB Bancorp,
Inc. ("Charter"). Sovereign exchanged a total of 7.0 million new
shares (7.7 million shares as adjusted for all subsequent stock
dividends) of Sovereign common stock for all of the outstanding
shares of Charter common stock. The acquisition of Charter was
accounted for as a pooling-of-interests and accordingly, the
consolidated financial statements have been restated to include
the accounts of Charter for all periods presented. Charter's
fiscal year end was September 30, and accordingly, Sovereign's
consolidated results of operations for the years ended
December 31, 1993 and 1992 include Charter's results of
operations for the twelve-month period ended September 30, 1993
and 1992, respectively. Sovereign's consolidated results of
operations for the year ended December 31, 1994, include
Charter's results of operations for the twelve-month period ended
December 31, 1994. A net increase to Sovereign's stockholders'
equity of $636,000 has been made to reflect Charter's activity
for the three-month period ended December 31, 1993. That
activity consisted of proceeds from the exercise of stock options
of $11,000, net income of $1.0 million and dividends paid of
$397,000.
On September 16, 1994, Sovereign acquired the Chadds Ford,
Pennsylvania office and related deposits of Second National
Federal Savings Association ("Second National") from the
Resolution Trust Corporation ("RTC"), receiver for Second
National. Sovereign assumed approximately $14.4 million of
deposits from the Chadds Ford office for a premium of $675,000
which was recorded as a core deposit intangible. The balance of
this core deposit intangible was $472,000 at December 31, 1995.
On August 5, 1994, Sovereign acquired Shadow Lawn Savings
Bank ("Shadow Lawn") in a transaction accounted for as a
purchase. Sovereign acquired $787.5 million of assets consisting
principally of investment and mortgage-backed securities and
loans. Sovereign also assumed approximately $730.6 million of
deposit liabilities. Sovereign acquired Shadow Lawn in exchange
for an estimated purchase price of $78.4 million of cash. This
transaction added a core deposit intangible of $13.0 million and
goodwill of $26.7 million to Sovereign's balance sheet. The
balances of this core deposit intangible and goodwill at
December 31, 1995 were $9.4 million and $25.7 million,
respectively.
On November 5, 1993, Sovereign acquired Valley Federal
Savings and Loan Association ("Valley Federal"). At
September 30, 1993, Valley Federal had total assets, deposits and
stockholders' equity of $315.7 million, $256.4 million and
$18.6 million, respectively. Sovereign exchanged a total of
2.9 million new shares (3.5 million shares as adjusted for all
subsequent stock dividends) of Sovereign common stock with a
value of $32.3 million for all of the outstanding shares of
Valley Federal common stock.
The acquisition of Valley Federal was accounted for as a
pooling-of-interests and accordingly, the consolidated financial
statements have been restated to include the accounts of Valley
Federal for all periods presented. Valley Federal's fiscal year
end was September 30, and accordingly, Sovereign's consolidated
results of operations for the year ended December 31, 1992
include Valley Federal's results of operations for the
twelve-month period ended September 30, 1992. Sovereign's
consolidated results of operations for the year ended
December 31, 1993 include Valley's Federal's results of
operations for the twelve-month period ended December 31, 1993.
A net increase to Sovereign's stockholders' equity of $571,000
has been made to reflect Valley Federal's activity for the
three-month period ended December 31, 1992. That activity
consisted of proceeds from the exercise of stock options of
$56,000, net income of $603,000 and dividends paid of $88,000.
On August 27, 1993, Sovereign assumed $252.3 million of
deposit liabilities in exchange for $233.7 million in cash from
the RTC as receiver for Home Unity Federal Savings and Loan
Association ("Home Unity"). This transaction added a
$5.0 million core deposit intangible and $13.5 million of
goodwill to Sovereign's balance sheet. The balances of this core
deposit intangible and goodwill at December 31, 1995 were
$2.4 million and $10.6 million, respectively.
On January 15, 1993, Sovereign formally acquired Harmonia
Bancorp, Inc. ("Harmonia") in a transaction accounted for as a
purchase. Pursuant to Accounting Principles Board ("APB")
Opinion No. 16, the Harmonia acquisition was accounted for as
having been completed at the close of business on December
31, 1992 because control of Harmonia had been transferred to
Sovereign as of that date. Sovereign acquired total assets of
$621.0 million representing the historical amount of Harmonia's
assets, purchase accounting adjustments and the elimination of
intercompany accounts. The total assets acquired consisted
principally of cash and interest-earning deposits, federal funds
sold, investment and mortgage-backed securities, and performing
loans. Sovereign assumed liabilities consisting principally of
deposits. Sovereign acquired Harmonia in exchange for
$19.6 million in cash and 9.6 million new shares (11.6 million
shares as adjusted for all subsequent stock dividends) of
Sovereign common stock which were issued at a value of
$66.1 million. The transaction added a core deposit intangible
of $2.1 million to Sovereign's balance sheet. The balance of this
core deposit intangible at December 31, 1995 was $756,000. Since
the Harmonia acquisition was accounted for at the close of
business on December 31, 1992, Sovereign's consolidated balance
sheet at December 31, 1992 includes Harmonia. Sovereign's
consolidated results of operations include Harmonia's results of
operations from January 1, 1993 and thereafter.
On September 11, 1992, Sovereign acquired Jersey Shore
Savings and Loan Association ("Jersey Shore") in a transaction
accounted for as a purchase and supervised by the Office of
Thrift Supervision ("OTS"). Sovereign acquired total assets of
$505.4 million consisting principally of cash and
interest-earning deposits, investment and mortgage-backed
securities and performing loans. Sovereign assumed liabilities
consisting principally of deposits. Sovereign paid one thousand
dollars for Jersey Shore and the transaction added a $7.2 million
core deposit intangible to Sovereign's balance sheet. The
balance of this core deposit intangible at December 31, 1995 was
$3.3 million. Jersey Shore's results of operations from
September 11, 1992 and thereafter have been included in
Sovereign's consolidated results of operations.
On August 23, 1991, Sovereign assumed $153.6 million of
deposit liabilities from the RTC as receiver for Nassau Federal
Savings and Loan Association, Princeton, New Jersey. On
September 6, 1991, Sovereign assumed $169.7 million of deposit
liabilities from the RTC as receiver for United Savings and Loan
Association of Trenton, F.A., Lawrenceville, New Jersey. In
connection with these transactions, Sovereign received assets of
$320.2 million consisting almost entirely of cash. These
transactions added a $3.3 million core deposit intangible and
$135,000 of goodwill to Sovereign's balance sheet. The balances
of this core deposit intangible and goodwill at December 31, 1995
were $1.2 million and $96,000, respectively.
The pre-merger results of operations for Sovereign and
Charter (which was acquired pursuant to a transaction accounted
for as a pooling-of-interests) were as follows (in thousands):
SOVEREIGN CHARTER COMBINED
--------- ------- --------
Year ended December 31, 1993
Net interest income . . . . . . . . . . . . . . . . . . . $ 115,396 $14,076 $129,472
Provision for possible loan losses . . . . . . . . . . . . 8,050 600 8,650
Other income . . . . . . . . . . . . . . . . . . . . . . . 14,456 711 15,167
Non-interest expense . . . . . . . . . . . . . . . . . . . 70,734 6,643 77,377
Income tax provision . . . . . . . . . . . . . . . . . . . 20,470 2,528 22,998
Cumulative effect of change in accounting principle . . . . 4,800 -- 4,800
--------- ------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 35,398 $ 5,016 $ 40,414
========= ======= ========
Following are selected unaudited pro forma results of
operations for 1995, 1994 and 1993 as if the Colonial, Shadow
Lawn and Harmonia acquisitions (which were accounted for as
purchases) had occurred at the beginning of 1993 (in thousands,
except per share data):
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---- ---- ----
Total interest and non-interest income . . . . . . . . . . . . $ 522,160 $ 403,772 $ 358,638
Net interest income . . . . . . . . . . . . . . . . . . . . . . 176,016 171,531 154,828
Net income before cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . 56,602 47,313 39,783
Cumulative effect of change in accounting principle . . . . . -- -- 6,892
Net income after cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . 56,602 47,313 46,675
Earnings per share:
Before cumulative effect of change in accounting principle 1.00 .92 .78
After cumulative effect of change in accounting principle 1.00 .92 .92
On October 2, 1995, Sovereign executed an agreement to
acquire West Jersey Bancshares, Inc. ("West Jersey"), a
commercial bank headquartered in Fairfield, New Jersey. The
transaction will be accounted for as a pooling-of-interests and
is expected to close in the second quarter of 1996. Under the
terms of the agreement, Sovereign would exchange $8.40 in
Sovereign Common Stock (subject to adjustment) in exchange for
each share of West Jersey Common Stock. The transaction is
valued at approximately $17.2 million and Sovereign expects to
issue about 1.6 million new shares.
At December 31, 1995, West Jersey has assets, deposits and
stockholders' equity of $101.6 million, $92.3 million and
$8.5 million, respectively.
(3) RESTRICTIONS ON CASH AND AMOUNTS DUE FROM DEPOSITORY
INSTITUTIONS
Sovereign Bank is required to maintain certain average
reserve balances as established by the Federal Reserve Board.
The amounts of those reserve balances for the reserve computation
periods which included December 31, 1995 and 1994 were
$50.8 million and $34.8 million, respectively.
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of investment
and mortgage-backed securities are as follows (in thousands):
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
1995 1994
----------------------------------------------- ---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE COST APPRECIATION DEPRECIATION VALUE
---- ------------ ------------ ----- ---- ------------ ------------ -----
INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
Investment Securities:
U.S. Treasury and
government agency
securities . . . . . . . . $ 4,993 $ 37 $ -- $ 5,030 $ 159,353 $ 17 $ 12,675 $ 146,695
Corporate securities . . . . 1,010 60 -- 1,070 4,025 -- 43 3,982
Other securities . . . . . . 482 -- -- 482 420 -- 4 416
Mortgage-backed Securities:
FHLMC . . . . . . . . . . . . 168,713 1,730 1,274 169,169 336,556 396 26,506 310,446
FNMA . . . . . . . . . . . . 221,046 1,240 2,026 220,260 316,968 17 26,390 290,595
GNMA . . . . . . . . . . . . 170,064 6,548 80 176,532 237,308 147 2,877 234,578
RTC . . . . . . . . . . . . . 28,954 -- 4,456 24,498 33,976 -- 5,227 28,749
Private issues . . . . . . . 284,640 622 2,626 282,636 272,833 10 20,502 252,341
Collateralized mortgage
obligations . . . . . . . 1,197,310 10,556 187 1,207,679 455,401 6,801 28,861 433,341
---------- --------- -------- ----------- ---------- -------- --------- -----------
Total investment and
mortgage-backed securities
held-to-maturity . . . . . . $2,077,212 $ 20,793 $ 10,649 $ 2,087,356 $1,816,840 $ 7,388 $ 123,085 $ 1,701,143
========== ========= ======== =========== ========== ======== ========= ===========
INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE:
Investment Securities:
U.S. Treasury and government
agency securities . . . . . $ 150,242 $ 131 $ 1,264 $ 149,109 $ -- $ -- $ -- $ --
Equity Securities . . . . . . 135,494 1,166 89 136,571 88,583 366 1,821 87,128
Mortgage-backed Securities:
FHLMC . . . . . . . . . . . . 156,123 763 1,357 155,529 -- -- -- --
FNMA . . . . . . . . . . . . 136,861 2,241 657 138,445 -- -- -- --
GNMA . . . . . . . . . . . . 59,215 2,697 -- 61,912 -- -- -- --
Collateralized mortgage
obligations . . . . . . . 245,037 3,568 662 247,943 -- -- -- --
---------- -------- -------- ----------- ---------- -------- --------- -----------
Total investment and
mortgage-backed securities
available-for-sale . . . . . $ 882,972 $ 10,566 $ 4,029 $ 889,509 $ 88,583 $ 366 $ 1,821 $ 87,128
========== ======== ======== =========== ========== ======== ========= ===========
The amortized cost and estimated fair value of investment
and mortgage-backed securities at December 31, 1995 by
contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties (in thousands):
AMORTIZED FAIR
COST VALUE
---- -----
INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,192 $ 5,194
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,174 88,689
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . 39,180 39,622
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,945,666 1,953,851
----------- -----------
Total investment and mortgage-backed securities held-to-maturity . . . . . . . . . . . . . $ 2,077,212 $ 2,087,356
=========== ===========
AMORTIZED FAIR
COST VALUE
---- -----
INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,001 $ 11,934
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,728 196,895
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . 201,231 200,119
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,518 343,990
No stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,494 136,571
--------- ---------
Total investment and mortgage-backed securities available-for-sale . . . . . . . . . . . . $ 882,972 $ 889,509
========= =========
Proceeds from sales of investment and mortgage-backed
securities and the realized gross gains and losses from those
sales are as follows (in thousands):
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------------- ---------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------- ---------------------------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
Proceeds from sales . . . . . . . . $ -- $ -- $ 45,366 $ 37,393 $ 750,441 $ --
====== ======= ======== ======== ========= ======
Gross realized gains . . . . . . . . $ -- $ -- $ 231 $ 326 $ 2,377 $ --
Gross realized losses . . . . . . . . -- -- 16 7 840 --
------ ------- -------- -------- --------- ------
Net realized gains . . . . . . . . . $ -- $ -- $ 215 $ 319 $ 1,537 $ --
====== ======= ======== ======== ========= ======
Included in investment securities held-to-maturity at
December 31, 1993 was a portfolio of $6.5 million of marketable
equity securities which was carried at fair value. Sovereign
recognized a gain of $1.6 million for the year ended December 31,
1993 from appreciation of this portfolio.
Investment and mortgage-backed securities with an estimated
fair value of $578.3 million and $707.9 million were pledged as
collateral for borrowings, interest rate agreements and public
deposits at December 31, 1995 and 1994, respectively.
In May 1993, the FASB issued SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No.
115 requires management to classify investments in equity
securities that have readily determinable fair values and all
investments in debt securities as either held-to-maturity and
reported at amortized cost, available-for-sale and reported at
fair value with unrealized gains and losses reported in a
separate component of stockholders' equity, or trading securities
and reported at fair value with unrealized gains and losses
included in earnings. Effective January 1, 1994, Sovereign
adopted SFAS No. 115 and classified $1.29 billion of securities
as held-to-maturity, $391.0 million of securities as
available-for-sale and $6.5 million of securities as trading
securities. The adoption of SFAS No. 115 resulted in an $836,000
increase to stockholders' equity accounted for as the cumulative
effect of a change in accounting principle in 1994.
On November 15, 1995, the FASB issued a Special Report, "A
Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities". On
December 7, 1995, in accordance with provisions in that Special
Report, Sovereign reclassified $750.2 million of securities from
held-to-maturity to available-for-sale. This reclassification
resulted in a $1.7 million unrealized gain, net of tax, which is
included in Sovereign's stockholders' equity at December 31,
1995.
(5) LOANS
A summary of loans included in the consolidated balance
sheets follows (in thousands):
AT DECEMBER 31,
----------------------------
1995 1994
---- ----
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . $ 3,998,048 $ 3,710,150
Real estate construction loans:
Residential (net of loans in process of $23,365 and $33,095,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,151 49,094
Residential development (net of loans in process of $736 and
$1,382, respectively) . . . . . . . . . . . . . . . . . . . . . . . . 1,676 3,226
Multi-family loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,218 95,216
Home equity loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456,922 413,037
----------- -----------
Total Residential Loans . . . . . . . . . . . . . . . . . . . . . . . 4,570,015 4,270,723
Commercial real estate loans . . . . . . . . . . . . . . . . . . . . . . . 47,177 39,717
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,831 5,730
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,341 34,728
----------- -----------
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,674,364 $ 4,350,898
----------- -----------
Total Loans with:
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,134,542 $ 1,097,469
Adjustable rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,539,822 3,253,429
----------- -----------
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,674,364 $ 4,350,898
=========== ===========
As a result of Sovereign's use of interest rate swaps,
$426.1 million of variable rate mortgage loans have been
effectively converted to fixed rate mortgage loans. Also,
$295.7 million of intermediate variable rate mortgage loans
(loans with a five-year fixed rate period) have effectively been
converted to a variable rate over the fixed rate period.
The majority of all loans are located in Sovereign's
marketplace (eastern Pennsylvania, New Jersey and northern
Delaware). This is Sovereign's only significant geographic
concentration.
The total amount of loans being serviced for the benefit of
others was $947.1 million and $1.11 billion at December 31, 1995
and 1994, respectively. During 1995, Sovereign recognized a gain
of $3.6 million on the sale of servicing rights related to
$238.5 million of residential mortgage loans. At December 31,
1995 and 1994, Sovereign had capitalized excess servicing assets
of $2.3 million and $4.5 million, respectively and no purchased
servicing assets.
Effective July 1, 1995, Sovereign prospectively adopted SFAS
No. 122 "Accounting for Mortgage Servicing Rights". SFAS No.
122 requires that management recognize as separate assets, rights
to service mortgage loans for others, however those servicing
rights are acquired. Management should allocate the total cost
of mortgage loans, either purchased or originated, to the loans
and the mortgage servicing rights based on their relative fair
value. The Statement also requires that management assess its
capitalized mortgage servicing rights for impairment based on the
fair value of those rights, and that this impairment be
recognized through a valuation allowance. The adoption of SFAS
No. 122 will not have a material effect on Sovereign's
operations.
The activity in the allowance for possible loan losses is as
follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
---- ---- ----
Balance, beginning of period . . . . . . . . . . . . . . . $ 36,289 $ 33,099 $ 26,562
Acquired reserves and other additions . . . . . . . . . . 485 4,712 44
Provision for possible loan losses . . . . . . . . . . . . 1,000 4,100 8,650
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . 3,580 6,428 2,264
Recoveries . . . . . . . . . . . . . . . . . . . . . . . 662 806 107
-------- -------- --------
Balance, end of period . . . . . . . . . . . . . . . . . . $ 34,856 $ 36,289 $ 33,099
======== ======== ========
In May 1993, the FASB issued SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 requires that
certain impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if
the loan is collateral dependent. In October 1994, the FASB
issued SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures", that amends SFAS
No. 114 and eliminates its provisions regarding how a creditor
should report income on an impaired loan. Originally, SFAS
No. 114 would have required creditors to apply one of two
allowable methods. As a result of the amendment, creditors may
now continue to use existing methods for recognizing income on
impaired loans, including methods that are required by certain
industry regulators. SFAS No. 118 also clarified SFAS No. 114's
disclosure requirements. SFAS No. 114 and SFAS No. 118 were
adopted by Sovereign beginning January 1, 1995. The effect of
SFAS No. 114 and SFAS No. 118 on Sovereign was not significant.
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment, less accumulated
depreciation and amortization, follows (in thousands):
AT DECEMBER 31,
---------------------------
1995 1994
---- ----
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,067 $ 9,934
Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,133 36,697
Furniture, fixtures, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,681 36,995
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,937 3,161
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 914 758
-------- --------
100,732 87,545
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,781) (39,449)
-------- --------
$ 56,951 $ 48,096
======== ========
Sovereign is committed under various non-cancelable
operating leases relating to branch facilities having initial or
remaining terms in excess of one year. The minimum annual rental
commitments under these leases at December 31, 1995, are
summarized as follows (in thousands):
1996 $ 2,340
1997 1,733
1998 1,496
1999 995
2000 756
Thereafter 3,473
--------
$ 10,793
========
Total rental expense for all leases for the years ended
December 31, 1995, 1994 and 1993 was $2.7 million, $2.1 million,
and $1.6 million, respectively.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in
thousands):
AT DECEMBER 31,
---------------------------
1995 1994
---- ----
Accrued interest receivable on:
Investment and mortgage-backed securities . . . . . . . . . . . . . . . . . $ 17,106 $ 10,721
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,679 19,648
-------- --------
$ 42,785 $ 30,369
======== ========
Accrued interest receivable is stated net of an allowance
for potentially uncollected interest (for loans on non-accrual
and for loans that have been restructured). If these non-accruing
and restructured loans had been current in accordance with their
original terms and had been outstanding throughout the period,
gross interest income for the years ended December 31,1995, 1994
and 1993 would have increased by approximately $2.5 million,
$1.7 million and $2.3 million, respectively. Interest income
which was recorded on these loans for the years ended
December 31, 1995, 1994 and 1993 was $1.1 million, $1.1 million
and $545,000, respectively.
(8) DEPOSITS
Deposits are summarized as follows (in thousands):
AT DECEMBER 31,
------------------------------------------------------------------------------------
1995 1994
----------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
TYPE OF ACCOUNT BALANCE PERCENT AVERAGE RATE BALANCE PERCENT AVERAGE RATE
--------------- ------- ------- ------------ ------- ------- ------------
Retail certificates . . . . . . . . . . $ 2,731,009 54% 5.48% $ 2,207,531 55% 4.75%
Jumbo certificates . . . . . . . . . . . 112,063 2 5.70 78,794 2 4.86
Savings accounts . . . . . . . . . . . . 925,842 19 2.31 925,667 23 2.34
Demand deposit accounts . . . . . . . . . 168,757 3 -- 118,346 3 --
NOW accounts . . . . . . . . . . . . . . 380,475 8 1.26 308,202 8 1.82
Money market accounts . . . . . . . . . . 720,997 14 4.36 388,579 9 2.44
----------- --- ---- ----------- --- -----
$ 5,039,143 100% 4.24% $ 4,027,119 100% 3.61%
=========== === ==== =========== === =====
While certificate accounts frequently are renewed at
maturity rather than paid out, they were scheduled to mature
contractually at December 31, 1995 as follows (in thousands):
WITHIN SIX MOS. - ONE - THREE - FIVE - OVER
SIX MOS. ONE YR. THREE YRS. FIVE YRS. TEN YRS. TEN YRS. TOTAL
----------- ---------- ---------- --------- -------- -------- -----
Certificate accounts
by rate:
2.001 -- 4.000% . . . . . . . . $ 75,982 $ 9,532 $ 2,279 $ 948 $ 241 $ 13 $ 88,995
4.001 -- 6.000% . . . . . . . . 933,899 740,019 312,146 51,496 5,202 80 2,042,832
6.001 -- 8.000% . . . . . . . . 552,435 36,087 42,187 24,039 32,792 3,403 690,943
8.001 -- 10.000% . . . . . . . 5,990 1,146 4,706 2,914 741 747 16,244
Above 10.000% . . . . . . . . . 347 690 483 832 1,706 -- 4,058
----------- -------- -------- ------- ------- ------ ----------
Total certificate
accounts . . . . . . . . . . $ 1,568,643 $787,474 $361,801 $80,229 $40,682 $4,243 $2,843,072
=========== ======== ======== ======= ======= ====== ==========
Interest expense on deposits is summarized as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
Certificates of deposit . . . . . . . . . . . . . . . . . . . . $ 157,208 $ 85,135 $ 69,702
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . 23,158 24,267 24,209
NOW and money market accounts . . . . . . . . . . . . . . . . . . 29,901 12,410 14,159
--------- --------- --------
$ 210,267 $ 121,812 $108,070
========= ========= ========
Sovereign Bank is insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") and pays insurance fees equal to $.23 per
$100.00 (23 basis points) of insured deposits annually, the
lowest rate permitted. The average SAIF premium is 24 basis
points. Colonial Bank is insured by the Bank Insurance Fund
("BIF") of the FDIC. During recent years, the FDIC's BIF, which
insures commercial banks and certain savings banks, has also
charged an average premium to its members of 24 basis points, and
a minimum assessment of 23 basis points.
Effective September 30, 1995, the average BIF premium was
reduced from 24 basis points to 4.4 basis points, with the
minimum assessment being reduced from 23 basis points to 4 basis
points. Subsequently, the minimum BIF assessment was reduced to
0 basis points effective January 1, 1996, subject to the minimum
FDIC annual assessment of $1,000. The average and minimum SAIF
premiums remain at 24 and 23 basis points, respectively, until
the SAIF reserves reach $1.25 per $100.00 in insured deposits.
In order to accelerate the recapitalization of the SAIF, it
has been proposed that SAIF-insured institutions such as
Sovereign Bank be assessed a one-time charge of between 85 and
90 basis points of their insured deposits as of March 31, 1995.
If enacted, this assessment would result in a pre-tax charge to
Sovereign Bank's earnings of approximately $36.0 million to
$38.1 million. This charge would have a significant negative
impact on earnings in the period enacted. In accordance with
FASB guidance on this specific issue, no liability or charge for
this assessment is included in the 1995 audited financial
statements.
While it cannot be determined at this time what the outcome
of these events and proposals will be, Sovereign Bank has been
placed at a significant competitive disadvantage which will
remain until the BIF and SAIF insurance premiums are again made
equal.
(9) SHORT-TERM AND LONG-TERM BORROWINGS
Short-term Borrowings. Short-term borrowings included in
the consolidated balance sheets are as follows (in thousands):
AT DECEMBER 31,
---------------------------
1995 1994
---- ----
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . $ 382,279 $ 608,810
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . 1,128,886 1,113,916
Amortizing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,555 --
----------- -----------
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,512,720 $ 1,722,726
=========== ===========
Included in short-term borrowings are sales of securities
under repurchase agreements. Securities underlying these
repurchase agreements consisted of mortgage-backed securities
which had a book value of $387.2 million and $335.3 million and a
market value of $392.6 million and $321.7 million at December 31,
1995 and 1994, respectively.
At December 31, 1995, short-term borrowings include an
11.60% amortizing loan with principal of $714,000 which is
collateralized by 15% of the outstanding shares of common stock
of Sovereign Bank (all of the outstanding shares of Sovereign
Bank are owned by Sovereign Bancorp).
Qualifying repurchase agreements are treated as financings
and the obligations to repurchase securities sold are reflected
as a liability in the balance sheet. The dollar amount of
securities underlying the agreements remains in the asset
accounts, although the securities underlying the agreements are
delivered to the brokers who arranged the transactions. In
certain instances, the broker may have sold, loaned, or disposed
of the securities to other parties in the normal course of their
operations, and have agreed to resell to Sovereign substantially
similar securities at the maturity of the agreements. The
broker/dealers who participate with Sovereign in these agreements
are primary broker/dealers reporting to the Federal Reserve Bank
of New York. The following table summarizes information
regarding securities sold under repurchase agreements (in
thousands):
Securities Sold Under Repurchase Agreements
DECEMBER 31,
------------------------------------------
1995 1994 1993
---- ---- ----
Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 382,279 $ 608,810 $ 315,616
Weighted average interest rate . . . . . . . . . . . . . . . . . 6.38% 5.72% 3.40%
Maximum amount outstanding at any month-end
during the period . . . . . . . . . . . . . . . . . . . . . . . $ 630,077 $ 608,810 $ 315,616
Average amount outstanding during the period . . . . . . . . . . $ 477,195 $ 427,509 $ 140,968
Weighted average interest rate during the period . . . . . . . . 6.01% 4.49% 3.61%
The following table summarizes information regarding
short-term FHLB advances (in thousands):
Federal Home Loan Bank Advances
DECEMBER 31,
---------------------------------------------
1995 1994 1993
---- ---- ----
Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,128,886 $ 1,113,916 $ 314,941
Weighted average interest rate . . . . . . . . . . . . . . . . . 5.65% 5.33% 4.16%
Maximum amount outstanding at any month-end
during the period . . . . . . . . . . . . . . . . . . . . . . . $ 1,128,886 $ 1,113,916 $ 434,901
Average amount outstanding during the period . . . . . . . . . . $ 792,450 $ 616,869 $ 350,866
Weighted average interest rate during the period . . . . . . . . 5.54% 4.57% 3.94%
Long-term Borrowings. Long-term FHLB advances had weighted
average interest rates of 5.88% and 4.96% at December 31, 1995
and 1994, respectively. Long-term borrowings are as follows (in
thousands):
AT DECEMBER 31,
----------------------------
1995 1994
---- ----
FHLB advances, maturing January 1997 to May 1998 . . . . . . . . . . . . . . $ 850,665 $ 320,165
Amortizing loan at 11.60%, maturing March 1996 . . . . . . . . . . . . . . . -- 2,143
6.75% subordinated debentures, due 2000 . . . . . . . . . . . . . . . . . . . 98,851 49,359
8.50% subordinated debentures, due 2002 . . . . . . . . . . . . . . . . . . . 19,471 19,392
8.00% subordinated debentures, due 2003 . . . . . . . . . . . . . . . . . . . 48,949 48,802
----------- ---------
$ 1,017,936 $ 439,861
=========== =========
The 6.75% debentures are non-amortizing and are not
redeemable prior to maturity. The 6.75% debentures have, through
the use of an interest rate swap, been effectively converted from
a fixed rate obligation to a variable rate obligation tied to the
3-month LIBOR plus 140.5 basis points. The 8.50% debentures are
non-amortizing and are redeemable at the option of Sovereign in
whole or in part at any time on or after September 15, 1999. The
8.00% debentures are non-amortizing and are not redeemable prior
to maturity.
(10) STOCKHOLDERS' EQUITY
In conformity with the OTS regulations, a "liquidation
account" was established for Sovereign Bank and acquired banks at
the time of their conversion to the stock form of ownership. In
the unlikely event of a complete liquidation of Sovereign Bank,
holders of savings accounts with qualifying deposits, who
continue to maintain their savings accounts, would be entitled to
a distribution from the "liquidation account" in an amount equal
to their then current adjusted savings account balance before any
liquidation distribution could be made with respect to capital
stock. The balance in the "liquidation account" was
$11.1 million at December 31, 1995, for Sovereign Bank. This
amount may not be utilized for the payment of cash dividends to
the holding company.
The Financial Institutions Reform, Recovery and Enforcement
Act ("FIRREA") requires institutions regulated by the OTS to have
minimum regulatory tangible capital equal to 1.5% of total
tangible assets, a minimum leverage capital ratio equal to 3% of
tangible assets and 4% of risk-adjusted assets and a risk-based
capital ratio equal to 8%. Sovereign Bank was in compliance with
all of these capital requirements as of December 31, 1995. The
following schedule summarizes the actual capital balances of
Sovereign Bank and Colonial Bank at December 31, 1995 (in
thousands):
RISK-BASED
LEVERAGE CAPITAL TO CAPITAL TO
TANGIBLE CAPITAL TO LEVERAGE CAPITAL TO RISK-ADJUSTED RISK-ADJUSTED
SOVEREIGN BANK TANGIBLE ASSETS TANGIBLE ASSETS ASSETS ASSETS
- -------------- ------------------- ------------------- -------------------- -------------
Regulatory capital . . . . . . . . . . . . . $ 404,470 $ 404,470 $ 404,470 $433,211
Minimum capital requirement . . . . . . . . . 118,586 237,172 137,075 274,151
--------- --------- --------- --------
Excess . . . . . . . . . . . . . . . . . . $ 285,884 $ 167,298 $ 267,395 $159,060
========= ========= ========= ========
Capital ratio . . . . . . . . . . . . . . . . 5.12% 5.12% 11.80% 12.64%
COLONIAL BANK
- -------------
Regulatory capital . . . . . . . . . . . . . $ 2,855 $ 2,855 $ 2,855 $ 3,210
Minimum capital requirement . . . . . . . . . 684 1,369 1,237 2,474
--------- --------- --------- --------
Excess . . . . . . . . . . . . . . . . . . $ 2,171 $ 1,486 $ 1,618 $ 736
========= ========= ========= ========
Capital ratio . . . . . . . . . . . . . . . . 6.26% 6.26% 9.23% 10.38%
OTS capital regulations do not apply to holding companies.
The following schedule summarizes actual capital balances of
Sovereign Bancorp as if those regulations did apply to Sovereign
Bancorp (in thousands):
RISK-BASED
LEVERAGE CAPITAL TO CAPITAL TO
TANGIBLE CAPITAL TO LEVERAGE CAPITAL TO RISK-ADJUSTED RISK-ADJUSTED
SOVEREIGN BANCORP TANGIBLE ASSETS TANGIBLE ASSETS ASSETS ASSETS
- ----------------- ------------------- ------------------- ------------------- -------------
Regulatory capital . . . . . . . . . . . . . $295,397 $295,397 $295,397 $494,493
Minimum capital requirement . . . . . . . . . 116,989 233,979 138,600 277,200
-------- -------- -------- --------
Excess . . . . . . . . . . . . . . . . . . . $178,408 $ 61,418 $156,797 $217,293
======== ======== ======== ========
Capital ratio . . . . . . . . . . . . . . . . 3.79% 3.79% 8.53% 14.27%
The Federal Deposit Insurance Corporation Improvement Act
("FDICIA") established five capital tiers: well capitalized,
adequately capitalized, under capitalized, significantly under
capitalized and critically under capitalized. A depository
institution's capital tier depends upon its capital levels in
relation to various relevant capital measures, which include
leverage and risk-based capital measures and certain other
factors. Depository institutions that are not classified as well
capitalized or adequately capitalized are subject to various
restrictions regarding capital distributions, payment of
management fees, acceptance of brokered deposits and other
operating activities. At December 31, 1995, Sovereign Bank was
classified as well capitalized.
For income tax return purposes, Sovereign Bank is permitted
a special bad debt deduction limited generally to a percentage of
otherwise taxable income and subject to certain limitations based
on aggregate loans and savings account balances at the end of the
year. If these reserves, created from taxable deductions, are
subsequently used for purposes other than to absorb loan losses,
the amount used will be subject to federal income tax at the then
prevailing corporate tax rate. It is not contemplated that the
accumulated reserves will be used in a manner that will create
income tax liabilities. Retained earnings at December 31, 1995
includes $47.9 million representing such bad debt deduction
reserves, for which no provision for federal income taxes has
been made.
Sovereign maintains a Dividend Reinvestment and Stock
Purchase Plan which permits holders of record of Sovereign common
stock to purchase additional shares of common stock directly from
Sovereign via reinvestment of cash dividends and optional cash
purchases. At December 31, 1995, purchases of common stock with
reinvested dividends are made at a 5% discount from current
market price as defined and optional cash purchases are limited
to a maximum of $5,000 per quarter.
Sovereign maintains a Stockholder Rights Plan (the "Rights
Plan"). The Rights Plan is designed to protect stockholders from
attempts to acquire control of Sovereign at an inadequate price.
Under the Rights Plan, Sovereign distributed a dividend of one
right to purchase a unit of preferred stock on each outstanding
share of Sovereign's common stock. The rights are not currently
exercisable or transferable and no separate certificates
evidencing such rights will be distributed, unless certain events
occur. The rights attach to shares of common stock outstanding
on October 2, 1989, and will expire on September 27, 2004 as
stated in the amendment to the Rights Plan dated September 27,
1995. The rights will entitle the holders to purchase either
Sovereign's common stock or the common stock of the potential
acquirer at a substantially reduced price.
On November 21, 1994, Sovereign's Board of Directors
authorized an amendment to Sovereign's tax-qualified Employee
Stock Ownership Plan ("ESOP") to add a leverage feature to
purchase up to 4.2 million shares of Sovereign's outstanding
common stock in the open market or in negotiated transactions.
On May 17, 1995, Sovereign completed the sale of 2.0 million
shares of Convertible Preferred Stock, raising $96.7 million in
capital. The 6 1/4%, non-voting, Cumulative Convertible
Preferred Stock is convertible at the option of the holder at any
time, unless previously redeemed, at a conversion rate of
4.989 shares of common stock for each share of preferred stock,
equivalent to a conversion price of $10.022 per share of common
stock. The preferred stock may not be redeemed prior to May 15,
1998. Thereafter, the preferred stock is redeemable at the
option of Sovereign, in whole or in part, at $52.188 per share
during the twelve months beginning May 15, 1998, and thereafter
at prices declining ratably to par on and after May 15, 2005.
(11) STOCK OPTION PLANS
Sovereign grants stock options for a fixed number of shares
to key officers and directors with an exercise price equal to the
fair value of the shares at the date of grant. Sovereign
accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and
accordingly, recognizes no compensation expense for the stock
option grants. There are 4.0 million shares of common stock
reserved for issuance under the plans. These shares, along with
the per share data in the following summary of option
transactions, have been adjusted to reflect all stock dividends
and stock splits.
1986 PLAN 1988 PLAN 1990 PLAN 1993 PLAN
------------ --------- --------- ---------------------
OPTION PRICE $1.38-$10.00 $1.82 $1.87 $5.80 $6.30 TOTAL
------------ --------- --------- ------- ------- ---------
Options outstanding
December 31, 1993 . . . . . . 1,280,051 182,957 513,360 -- 630,433 2,606,801
------------ ------- -------- ------- ------- ---------
Granted . . . . . . . . . . . -- -- -- 184,616 -- 184,616
Exercised . . . . . . . . . . (292,591) (96,662) (150,878) (69,912) -- (610,043)
Forfeited . . . . . . . . . . -- -- -- -- (29,688) (29,688)
------------ ------- -------- ------- ------- ---------
Options outstanding
December 31, 1994 . . . . . . 987,460 86,295 362,482 114,704 600,745 2,151,686
------------ ------- -------- ------- ------- ---------
Granted . . . . . . . . . . . 7,350 -- -- -- -- 7,350
Exercised . . . . . . . . . . (146,887) (86,295) (134,820) (34,298) -- (402,300)
Forfeited . . . . . . . . . . -- -- -- (1,499) (96,050) (97,549)
------------ ------- -------- ------- ------- ---------
Options outstanding
December 31, 1995 . . . . . . 847,923 -- 227,662 78,907 504,695 1,659,187
------------ ------- -------- ------- ------- ---------
Options exercisable
December 31, 1995 . . . . . . 840,573 -- 227,662 78,907 -- 1,147,142
============ ======= ======== ======= ======= =========
In October 1995, the FASB issued SFAS No. 123 "Accounting
for Stock-Based Compensation" which provides companies with a
choice either to expense the fair value of employee stock options
over the vesting period (recognition method) or to continue the
previous practice but disclose the pro forma effects on net
income and earnings per share had the fair value method been used
(disclosure only method). Companies electing the disclosure only
method will be required to include the pro forma effects of all
awards granted in fiscal years beginning after December 15, 1994.
Sovereign plans to adopt the disclosure only method during 1996.
(12) EMPLOYEE BENEFIT PLANS
Sovereign sponsors a non-contributory defined benefit
pension plan which covers substantially all employees who have
attained the age of 21 and completed one year of service.
Benefits under the plan are based upon years of service and the
employees' average compensation computed based upon the five
consecutive plan years of highest pay during the ten years
preceding retirement or termination.
It is Sovereign's policy to fund the minimum contribution as
determined by an actuarial valuation. The net periodic pension
costs for this plan for 1995, 1994 and 1993 were $526,000,
$929,000 and $841,000, respectively, and are comprised of the
following components (in thousands):
1995 1994 1993
---- ---- ----
Service cost benefits earned during the period . . . . . . . . . . . . . . . . . . . $ 851 $ 1,082 $ 1,111
Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . 1,378 1,333 1,215
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,656) 181 (1,496)
Amortization of unrecognized net assets and other deferred amounts, net . . . . . . . 2,953 (1,667) 11
------- ------- -------
Net periodic pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 526 $ 929 $ 841
======= ======= =======
The following table sets forth the pension plan's funded
status at December 31, 1995 and 1994 (in thousands):
1995 1994
---- ----
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,225 $ 18,613
======== ========
Projected benefit obligation:
Vested benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,800 $ 16,435
Non-vested benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 233
Effect of projected future salary increases . . . . . . . . . . . . . . . . . 1,701 2,165
-------- --------
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,836 $ 18,833
======== ========
Plan assets in excess of (less than) the projected benefit obligation . . . . . . $ 1,389 $ (220)
Unrecognized net (asset) liability existing at transition date . . . . . . . . . . (205) 34
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,720 2,446
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . (112) (103)
-------- --------
Net pension asset included in balance sheet . . . . . . . . . . . . . . . . . . $ 2,792 $ 2,157
======== ========
In determining the projected benefit obligation, the assumed
discount rates at December 31, 1995, 1994 and 1993 were 7.00%,
8.00% and 7.00%, respectively. The weighted average rate of
salary increase was 5.00% for 1995, 4.75% for 1994 and 5.00% for
1993. The expected long-term rate of return on assets used in
determining net periodic pension expense was 9.00% for all three
years.
The pension plan's assets consist primarily of common stock,
fixed income securities such as corporate bonds and U.S. Treasury
securities and units of certain common trust funds.
Sovereign also maintains a 401(k) savings plan.
Substantially all employees of Sovereign are eligible to
participate in the 401(k) savings plan on the January 1 and
July 1 following their completion of one year of service and
attaining age 21. Sovereign's contributions to this plan were
$109,000, $111,000 and $114,000 during 1995, 1994 and 1993,
respectively. Pursuant to this plan, employees can contribute up
to 10% of their compensation to the plan. Sovereign contributes
50% of the employee contribution up to 6% of compensation in the
form of Sovereign common stock.
Sovereign maintains an ESOP. Substantially all employees of
Sovereign are eligible to participate in the ESOP on the
January 1 or July 1 following their completion of one year of
service and attaining age 21. The ESOP is a deferred
contribution plan which provides retirement benefits for
participants and beneficiaries by purchasing Sovereign common
stock in the open market. The amount of annual contributions to
the ESOP by Sovereign is determined by the Board of Directors
based upon the financial performance of Sovereign each year.
Sovereign contributed and recognized as expense $1.5 million and
$1.1 million to the ESOP during 1994 and 1993, respectively.
On November 21, 1994, Sovereign's Board of Directors
authorized an amendment to Sovereign's ESOP to add a leverage
feature to purchase up to 4.2 million shares of Sovereign's
outstanding common stock in the open market or in negotiated
transactions. The ESOP is funded through direct loans from
Sovereign totalling $30.0 million in 1995. The proceeds from
these loans were used to purchase outstanding shares of
Sovereign's common stock. As the debt on these loans is repaid,
shares of Sovereign common stock are released and become eligible
for allocation to employee accounts. In addition, dividends are
paid on all shares of Sovereign common stock, including
unallocated shares held by the ESOP. Dividends on the
unallocated shares are allocated on a pro-rata basis when
purchased shares are released. Compensation expense is
recognized based on the fair value of the shares committed to be
released to employees and the shares then become outstanding for
earnings per share computations. Compensation expense of
$1.6 million was recognized in 1995. Sovereign has committed to
make contributions sufficient to provide for the ESOP debt
requirements. At December 31, 1995, the ESOP held 3.1 million
shares of which 157,000 shares are allocated to employee
accounts. The outstanding loan balances of $28.8 million are
presented as a reduction of stockholders' equity in the
consolidated financial statements. At December 31, 1995, the
fair value of the unallocated shares held by the ESOP was
$30.1 million.
Sovereign's Compensation Committee administers the ESOP.
Under the ESOP, the trustees are directed to vote all shares held
in the ESOP in accordance with the instructions of the
participants to whom the shares have been allocated. In
addition, the trustees shall vote in their discretion any shares
in the unallocated suspense account.
In 1992, Sovereign implemented the Employee Stock Purchase
Plan which permits eligible employees to purchase Sovereign
common stock directly from Sovereign. Purchases of common stock
are limited to 15% of a participant's compensation. During 1995,
1994 and 1993, participants purchased Sovereign common stock at a
price equal to 92.5% of the fair value of Sovereign common stock
on the offering date. Compensation expense for this plan for the
year ended December 31, 1995, 1994 and 1993 was $31,000, $31,000
and $21,000, respectively.
(13) INCOME TAXES
Effective January 1, 1993, Sovereign adopted SFAS No. 109
"Accounting for Income Taxes". SFAS 109 requires a change from
the deferred method of accounting for income taxes to the asset
and liability method which recognizes deferred tax assets and
liabilities for the temporary differences between the financial
statement carrying amounts of assets and liabilities and their
respective tax bases. Sovereign has reported the cumulative
effect of that change in the method of accounting for income
taxes in the 1993 consolidated statement of operations. The
cumulative effect of this change of $4.8 million was determined
as of January 1, 1993, and is reported separately in the
consolidated statement of operations for the year ended
December 31, 1993.
The provision for income taxes in the consolidated statement
of operations consists of the following components (in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---- ---- ----
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . $ 23,251 $ 12,986 $ 20,133
State . . . . . . . . . . . . . . . . . . . . . . . 2,931 3,155 3,063
-------- -------- --------
26,182 16,141 23,196
Deferred . . . . . . . . . . . . . . . . . . . . . . . 3,357 12,326 (198)
-------- -------- --------
Total income tax expense . . . . . . . . . . . . . . . $ 29,539 $ 28,467 $ 22,998
======== ======== ========
The following is a reconciliation of the actual tax
provisions with taxes computed at the federal statutory rate of
35% for 1995, 1994 and 1993:
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
---- ---- ----
Federal income tax at statutory rate . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . (.3) (.4) (.4)
State income taxes, net of federal tax benefit . . . . . . . . . . . . . . 2.2 2.8 3.5
Amortization of intangible assets and other
purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . 2.4 1.7 1.5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.9) (1.1) (.4)
----- ----- ----
34.4% 38.0% 39.2%
===== ===== ====
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---- ---- ----
Deferred tax assets:
Allowance for possible loan losses . . . . . . . . . . . . . . . . . . . . $ 13,937 $ 14,106 $ 12,203
Merger related liabilities . . . . . . . . . . . . . . . . . . . . . . . . 785 392 163
Purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . . . 3,538 7,846 6,229
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 411
Unrealized loss on available-for-sale
portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 567 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,003 1,374 479
--------- --------- --------
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . 19,263 24,285 19,485
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . (900) (900) (900)
--------- --------- --------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,363 $ 23,385 $ 18,585
--------- --------- --------
Deferred tax liabilities:
Purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . . . $ (8,559) $ (9,038) $ (1,581)
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,952) (2,088) --
Unrealized gain on available-for-sale
portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,708) -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,684) (183) (491)
--------- --------- --------
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . $ (19,903) $ (11,309) $ (2,072)
--------- --------- --------
Net deferred tax (liability) asset . . . . . . . . . . . . . . . . . . . . $ (1,540) $ 12,076 $ 16,513
========= ========= ========
The valuation for deferred tax assets is unchanged from the
balance at January 1, 1993, and is primarily related to state
deductible temporary differences resulting from the Harmonia
acquisition.
Sovereign has determined that it is not required to
establish any additional valuation reserve for deferred tax
assets since it is more likely than not that deferred tax assets
(other than those for which the valuation allowance has been
established) will be principally realized through carry back to
taxable income in prior years. Sovereign's conclusion that it is
"more likely than not" that the deferred tax assets will be
realized is based on a history of growth in earnings and the
prospects for continued growth including an analysis of potential
uncertainties that may affect future operating results.
Sovereign will continue to review the criteria related to the
recognition of deferred tax assets on a quarterly basis.
(14) COMMITMENTS AND CONTINGENCIES
Financial Instruments
Sovereign is a party to financial instruments with
off-balance sheet risk in the normal course of business to meet
the financing needs of its customers and to manage its own
exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters
of credit, loans sold with recourse, forward contracts and
interest rate swaps, caps and floors. These financial
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheet. The contract or notional amounts of
these financial instruments reflect the extent of involvement
Sovereign has in particular classes of financial instruments.
Sovereign's exposure to credit loss in the event of
non-performance by the other party to the financial instrument
for commitments to extend credit, standby letters of credit and
loans sold with recourse is represented by the contractual
notional amount of those instruments. Sovereign uses the same
credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. For interest rate
swaps, caps and floors and forward contracts, the contract or
notional amounts do not represent exposure to credit loss.
Sovereign controls the credit risk of its interest rate swaps,
caps and floors, and forward contracts through credit approvals,
limits and monitoring procedures. Unless noted otherwise,
Sovereign does not require and is not required to pledge
collateral or other security to support financial instruments
with credit risk.
The following schedule summarizes Sovereign's off-balance
sheet financial instruments (in thousands):
CONTRACT OR
NOTIONAL AMOUNT
AT DECEMBER 31,
--------------------------
1995 1994
---- ----
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . $ 420,763 $ 474,621
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 648 510
Loans sold with recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,193 73,880
Financial instruments whose notional or contract amounts exceed the amount
of credit risk:
Forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,250 9,600
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,211,130 1,335,645
Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,446,000 450,000
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Sovereign
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained upon extension of
credit is based on management's credit evaluation of the
counterparty. Collateral held usually consists of real estate
but may include securities, accounts receivable, inventory and
property, plant and equipment.
Standby letters of credit are conditional commitments issued
by Sovereign to guarantee the performance of a customer to a
third party. The guarantees are primarily issued to support
public and private borrowing arrangements. One guarantee for
$17,000 expires in June 1996, one guarantee for $10,000 expires
in August 1996, three guarantees totaling $79,000 expire in
September 1996, one guarantee for $10,000 expires in October
1996, one guarantee for $75,000 expires in August 1997, and one
guarantee for $457,000 expires in September 2000. The credit
risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Sovereign holds various collateral to support the commitments.
The extent of collateral held for the commitments at December 31,
1995 and December 31, 1994 varies from 100% to 120%; the average
amount collateralized is 115%.
Loans sold with recourse primarily represent residential
loans that were originated and sold by Jersey Shore and acquired
by Sovereign as part of the Jersey Shore acquisition.
The forward contracts used by Sovereign in its mortgage
banking activities are contracts for delayed delivery of
securities in which Sovereign agrees to make delivery of a
specified instrument, at a specified future date, at a specified
price or yield. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from
movements in securities' values and interest rates.
Interest rate swaps, caps and floors enable Sovereign to
transfer, modify or reduce its interest rate risk and are used as
part of asset and liability management. Sovereign may become a
principal in the exchange of interest payments with another party
and therefore, is exposed to loss should one of the other parties
default. Sovereign minimizes this risk by performing credit
reviews on counterparties. Notional principal amounts often are
used to express the volume of these transactions, but the amounts
potentially subject to credit risk are much smaller.
Litigation
At December 31, 1995, Sovereign was party to a number of
lawsuits. While any litigation has an element of uncertainty,
management, after reviewing these actions with legal counsel is
of the opinion that the liability, if any, resulting from these
actions will not have a material effect on the financial
condition or results of operations of Sovereign.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents disclosures about fair value of
financial instruments. These fair values are presented based
upon subjective estimates of relevant market conditions at a
specific point in time and information about each financial
instrument. In cases where quoted market prices are not
available, fair values are based on estimates using present value
or other valuation techniques. These techniques involve
uncertainties resulting in variability in estimates affected by
changes in assumptions and risks of the financial instruments at
a certain point in time. Therefore, the derived fair value
estimates cannot be substantiated by comparison to independent
markets. In addition, the fair values do not reflect any premium
or discount that could result from offering for sale at one time
an entity's entire holdings of a particular financial instrument
nor does it reflect potential taxes and the expenses that would
be incurred in an actual sale or settlement. Accordingly, the
aggregate fair value amounts presented do not represent the
underlying value of Sovereign (in thousands):
AT DECEMBER 31,
------------------------------------------------------
1995 1994
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---- ----- ----- -----
Financial Assets:
Cash and amounts due from depository institutions . . . . $ 130,841 $ 130,841 $ 110,270 $ 110,270
Interest-earning deposits . . . . . . . . . . . . . . . 16,930 16,930 29,131 29,131
Loans held for resale . . . . . . . . . . . . . . . . . . 70,512 71,297 7,666 7,666
Investment and mortgage-backed securities available-
for-sale . . . . . . . . . . . . . . . . . . . . . . 889,509 889,509 87,128 87,128
Investment and mortgage-backed securities
held-to-maturity . . . . . . . . . . . . . . . . . . 2,077,212 2,087,356 1,816,840 1,701,143
Loans, net . . . . . . . . . . . . . . . . . . . . . . . 4,639,508 4,669,233 4,314,609 4,198,886
Excess servicing . . . . . . . . . . . . . . . . . . . . 2,328 7,330 4,459 8,678
Originated mortgage servicing rights . . . . . . . . . . 1,894 2,840 -- --
Financial Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . 5,039,143 5,050,523 4,027,119 3,985,208
Borrowings(1) . . . . . . . . . . . . . . . . . . . . . . 2,542,465 2,557,990 2,162,587 2,131,250
Unrecognized Financial Instruments:(2)
Commitments to extend credit . . . . . . . . . . . . . . 930 869 687 481
Standby letters of credit . . . . . . . . . . . . . . . . 4 6 4 5
Loans sold with recourse . . . . . . . . . . . . . . . . 391 156 369 236
Interest rate swaps, caps and floors . . . . . . . . . . 12,777 (9,873) 2,310 (77,685)
- ----------------
(1) Borrowings are shown without unamortized cap premiums, as
cap premiums are reflected separately below in "Interest
rate swaps, caps and floors".
(2) The amounts shown under "carrying value" represent accruals
or deferred income (cost) arising from those unrecognized
financial instruments.
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
Cash and amounts due from depository institutions and
interest-earning deposits. For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Loans held for resale. Fair values are estimated using
quoted rates based upon secondary market sources for securities
backed by similar loans. Fair value estimates include
consideration of all open positions (including forward
contracts), outstanding commitments and related fees paid.
Investment and mortgage-backed securities
available-for-sale. The fair value of investment and
mortgage-backed securities available-for-sale are based on quoted
market prices as of the balance sheet date.
Investment and mortgage-backed securities held-to-maturity.
The carrying amounts for short-term investment and
mortgage-backed securities held-to-maturity approximate fair
value because of the short maturity of these instruments and they
do not present unanticipated credit concerns. The fair value of
long-term investments and mortgage-backed securities
held-to-maturity is estimated based upon bid quotations received
from securities dealers and an independent pricing servicing
bureau.
Loans. Fair value is estimated by discounting cash flows
using estimated market discount rates at which similar loans
would be made to borrowers and reflect similar credit ratings and
interest rate risk for the same remaining maturities.
Excess servicing and originated mortgage servicing rights.
The fair value of excess servicing is estimated using quoted
rates based upon secondary market sources. The estimated fair
value approximates the amount for which the servicing could
currently be sold.
Deposits. The fair value of deposits with no stated
maturity, such as non-interest bearing demand deposits, NOW
accounts, savings accounts and certain money market accounts, is
equal to the amount payable on demand as of December 31, 1995.
The fair value of fixed-maturity certificates of deposit is
estimated by discounting cash flows using currently offered rates
for deposits of similar remaining maturities.
Borrowings. Fair value is estimated by discounting cash
flows using rates currently available to Sovereign for other
borrowings with similar terms and remaining maturities.
Commitments to extend credit. The fair value of commitments
to extend credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates.
Standby letters of credit. The fair value of letters of
credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties.
Loans sold with recourse. The fair value of loans sold with
recourse is estimated based upon the cost to terminate
Sovereign's obligations under the recourse provisions.
Interest rate swaps, caps and floors. The fair value of
interest rate swaps, caps and floors which represent the
estimated amount Sovereign would receive or pay to terminate the
contracts or agreements, taking into account current interest
rates and when appropriate, the current creditworthiness of the
counterparties are obtained from dealer quotes.
(16) INTEREST RATE EXCHANGE AGREEMENTS
Amortizing and non-amortizing interest rate swaps are
generally used to convert fixed rate assets and liabilities to
variable rate assets and liabilities and vice versa. Interest
rate caps are generally used to limit the exposure from the
repricing and maturity of liabilities. Interest rate floors are
generally used to limit the exposure from repricing and maturity
of assets. Interest rate caps and floors are also used to limit
the exposure created by other interest rate swaps. In certain
cases, interest rate caps or floors are simultaneously bought and
sold to create a range of protection against changing interest
rates while limiting the cost of that protection. The following
table presents information regarding interest rate exchange
agreements at the dates indicated (in thousands):
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
----------------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NOTIONAL BOOK ESTIMATED MATURITY NOTIONAL BOOK ESTIMATED MATURITY
AMOUNT VALUE FAIR VALUE IN YEARS AMOUNT VALUE FAIR VALUE IN YEARS
------ ----- ---------- -------- ------ ----- ---------- --------
Amortizing interest rate swaps:
Pay variable-receive
fixed(1) . . . . . . . . . . $ 585,429 $ -- $ (4,066) 4.2 $ 1,085,645 $ -- $ (84,349) 3.9
Pay fixed-receive
variable(2) . . . . . . . . . 295,701 -- (3,653) 3.3 -- -- -- ---
Non-amortizing interest rate swaps:
Pay variable-receive
fixed(3) . . . . . . . . . . . 50,000 -- (837) 4.6 250,000 -- (7,931) 1.5
Pay fixed-receive
variable (4) . . . . . . . . . 280,000 -- (2,780) 1.8 -- -- -- ---
Interest rate caps(5) . . . . . . . 1,446,000 12,777 1,463 1.6 450,000 2,310 14,595 1.6
--------- ------- -------- ----------- ------- ---------
$2,657,130 $12,777 $ (9,873) $ 1,785,645 $ 2,310 $ (77,685)
========== ======= ======== =========== ======= =========
(1) The weighted average pay rate was 5.56% and 6.28% and the
weighted average receive rate was 5.61% and 5.91% at
December 31, 1995 and 1994, respectively.
(2) The weighted average pay rate was 6.87% and the weighted
average receive rate was 6.92%.
(3) The weighted average pay rate was 7.28% and 6.59% and the
weighted average receive rate was 6.75% and 5.73% at
December 31, 1995 and 1994, respectively.
(4) The weighted average pay rate was 5.91% and the weighted
average receive rate was 5.89%.
(5) The weighted average contract rate was 6.36% and 5.50% at
December 31, 1995 and 1994, respectively.
The following table summarizes by notional amounts the
activity of Sovereign's interest rate exchange agreements (in
thousands):
AMORTIZING INTEREST NON-AMORTIZING INTEREST INTEREST RATE
RATE SWAPS RATE SWAPS CAPS
---------- ---------- ----
Balance, December 31, 1992 . . . . . . . . . . . . . . . $ -- $ -- $ 50,000
---------- --------- -----------
Additions . . . . . . . . . . . . . . . . . . . . . 655,166 50,000 250,000
Maturities/Amortization . . . . . . . . . . . . . . 34,232 -- --
Terminations . . . . . . . . . . . . . . . . . . . -- -- --
---------- --------- -----------
Balance, December 31, 1993 . . . . . . . . . . . . . . . 620,934 50,000 300,000
---------- --------- -----------
Additions . . . . . . . . . . . . . . . . . . . . . 591,800 200,000 980,000
Maturities/Amortization . . . . . . . . . . . . . . 127,089 -- 50,000
Terminations . . . . . . . . . . . . . . . . . . . -- -- 780,000
---------- --------- -----------
Balance, December 31, 1994 . . . . . . . . . . . . . . . 1,085,645 250,000 450,000
---------- --------- -----------
Additions . . . . . . . . . . . . . . . . . . . . . 300,000 280,000 996,000
Maturities/Amortization . . . . . . . . . . . . . . 326,795 200,000 --
Terminations . . . . . . . . . . . . . . . . . . . 177,720 -- --
---------- --------- -----------
Balance, December 31, 1995 . . . . . . . . . . . . . . . $ 881,130 $ 330,000 $ 1,446,000
========== ========= ===========
At December 31, 1993, Sovereign's balance sheet included a
net deferred gain of $132,000 related to interest rate exchange
agreements terminated in November, 1994 and December, 1995 which
were originally accounted for as hedges. Of this net deferred
gain, $152,000 will amortize into interest income in 1996 and
$20,000 will amortize into interest expense in 1997.
Net interest income includes $(1.9) million in 1995,
$8.0 million in 1994 and $2.0 million in 1993 of income (expense)
resulting from interest rate exchange agreements.
(17) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Sovereign Bancorp, Inc.
is as follows (in thousands):
BALANCE SHEETS
-------------------------------
AT DECEMBER 31,
-------------------------------
1995 1994
---- ----
Assets
Interest-earning deposits . . . . . . . . . . . . . . $ 280 $ 1,041
Investment securities . . . . . . . . . . . . . . . . . 9,129 9,634
Investment in subsidiaries . . . . . . . . . . . . . . 542,869 412,858
Other assets . . . . . . . . . . . . . . . . . . . . . 46,342 1,065
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . $ 598,620 $ 424,598
========= =========
Liabilities and Stockholders' Equity
Short-term borrowings . . . . . . . . . . . . . . . . . $ 714 $ --
Long-term borrowings . . . . . . . . . . . . . . . . . 167,271 119,696
Other liabilities . . . . . . . . . . . . . . . . . . . 3,610 1,002
Stockholders' equity . . . . . . . . . . . . . . . . . 427,025 303,900
--------- ---------
Total Liabilities and Stockholders' Equity . . . . . . . . $ 598,620 $ 424,598
========= =========
STATEMENTS OF OPERATIONS
---------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
---- ---- ----
Interest income . . . . . . . . . . . . . . . . . . . . $ 4,308 $ 192 $ 1,426
Other income . . . . . . . . . . . . . . . . . . . . . 2,791 13,008 7,607
-------- -------- --------
Total income . . . . . . . . . . . . . . . . . . . . . 7,099 13,200 9,033
-------- -------- --------
Interest expense . . . . . . . . . . . . . . . . . . . 11,758 9,341 6,116
Other expense . . . . . . . . . . . . . . . . . . . . . 4,532 3,858 2,846
-------- -------- --------
Total expense . . . . . . . . . . . . . . . . . . . . . 16,290 13,199 8,962
-------- -------- --------
Income before taxes, dividends and equity in
undistributed earnings of subsidiaries . . . . . . . (9,191) 1 71
Income taxes . . . . . . . . . . . . . . . . . . . . . (4,181) -- 64
-------- -------- --------
Income before earnings of subsidiaries . . . . . . . . (5,010) 1 7
Distributed earnings from subsidiaries . . . . . . . . 19,544 18,246 2,564
Undistributed earnings of subsidiaries . . . . . . . . 41,874 28,151 37,843
-------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414
======== ======== ========
STATEMENTS OF CASH FLOWS
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 56,408 $ 46,398 $ 40,414
Adjustments to reconcile net income to net cash
provided by operating activities:
Dividends received from subsidiaries . . . . . . 19,544 18,246 2,564
Earnings from subsidiaries . . . . . . . . . . . (61,418) (46,397) (40,407)
Change in other assets . . . . . . . . . . . . . (45,277) 10,439 (8,629)
Change in other liabilities . . . . . . . . . . . 2,608 (3,168) (16,906)
-------- -------- --------
Net cash (used) provided by operating activities . . . (28,135) 25,518 (22,964)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries . . . . . . . . . . . . . (88,137) (17,140) (91,876)
Maturity and repayments of investment
securities . . . . . . . . . . . . . . . . . . . 505 5,319 3,567
Purchase of investment securities . . . . . . . . . -- (10,096) (4,857)
Other, net . . . . . . . . . . . . . . . . . . . . . 4,875 (251) (635)
-------- -------- --------
Net cash used by investing activities . . . . . . . . . (82,757) (22,168) (93,801)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to stockholders . . . . . . . . (8,633) (5,252) (4,570)
Net cash received from debt offering . . . . . . . . 49,379 -- 97,985
Net proceeds from issuance of common stock . . . . . 2,801 3,884 2,287
Net proceeds from issuance of preferred stock . . . 96,446 -- --
Purchase of ESOP shares . . . . . . . . . . . . . . (30,286) -- --
Allocation of ESOP shares . . . . . . . . . . . . . 1,514 -- --
Repayment of long-term debt borrowings . . . . . . . (376) (1,092) (1,429)
Net change in short-term borrowings . . . . . . . . (714) -- --
-------- -------- --------
Net cash provided (used) by financing activities . . . 110,131 (2,460) 94,273
-------- -------- --------
Increase (decrease) in cash and cash equivalents . . . (761) 890 (22,492)
Cash and cash equivalents at beginning of period . . . 1,041 151 22,643
-------- -------- --------
Cash and cash equivalents at end of period . . . . . . $ 280 $ 1,041 $ 151
======== ======== ========
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to executive officers of Sovereign
is included under Item 4A in Part I hereof. The information
required by this item relating to directors of Sovereign is
incorporated herein by reference to (i) that portion of the
section captioned "Election of Directors" located on pages 5
through 8 of the definitive Proxy Statement to be used in
connection with Sovereign's 1996 Annual Meeting of Shareholders
(the "Proxy Statement"). The information required by this item
relating to compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference to the
section captioned "Additional Information Regarding Directors and
Officers" on page 15 of the Proxy Statement.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein
by reference to (i) the sections captioned "Compensation Paid to
Directors" through "Indemnification" on pages 8 through 15 of the
Proxy Statement and (ii) the section captioned "Performance
Graph" on page 16 of the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is incorporated herein
by reference to (i) the section captioned "Principal
Shareholders" on page 17 of the Proxy Statement and (ii) that
portion of the section captioned "Election of Directors" located
on pages 5 through 8 of the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein
by reference to the sections captioned "Indebtedness of
Management" on page 15 of the Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
The following consolidated financial statements
are included by reference in Part II, Item 8
hereof:
Sovereign Bancorp, Inc. and Subsidiaries.
Independent Auditors' Report
Consolidated Balance Sheets.
Consolidated Statements of Operations.
Consolidated Statements of Stockholders'
Equity.
Consolidated Statements of Cash Flows.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Financial statement schedules are omitted because
the required information is either not applicable,
not required or is shown in the respective
financial statements or in the notes thereto.
3. Exhibits.
(3.1) Articles of Incorporation, as amended and restated,
of Sovereign Bancorp, Inc.
(3.2) By-Laws of Sovereign Bancorp, Inc.
(Incorporated by reference to Exhibit 3.2
to Sovereign's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993.)
(4.1) Sovereign Bancorp, Inc. has certain
long-term debt outstanding. None of the
instruments evidencing such debt authorizes
an amount of securities in excess of 10% of
the total assets of Sovereign Bancorp, Inc.
and its subsidiaries on a consolidated basis;
therefore, copies of such instruments are not
included as exhibits to this Annual Report on
Form 10-K. Sovereign Bancorp, Inc. agrees to
furnish copies of such instruments to the
Commission on request.
(10.1) Sovereign Bancorp, Inc. Stock Option Plan.
(Incorporated by reference to Exhibit 10.1
to Sovereign's Annual Report on Form 10-K
for the fiscal year ended December 32 1994.)
(10.2) Sovereign Bancorp, Inc. Employee Stock
Purchase Plan. (Incorporated by reference
to Exhibit 4.1 to Sovereign's Registration
Statement No. 33-44108 on Form S-8.)
(10.3) Agreement dated as of September 15, 1992,
between Sovereign Bancorp, Inc., Sovereign
Bank, a Federal Savings Bank, and Jay S.
Sidhu. (Incorporated by reference to
Exhibit 10.3 to Sovereign's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1992.)
(10.4) Agreement dated as of September 15, 1992,
between Sovereign Bank, a Federal Savings
Bank and Karl D. Gerhart. (Incorporated by
reference to Exhibit 10.4 to Sovereign's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.)
(10.5) Agreement dated as of September 15, 1992,
between Sovereign Bank, a Federal Savings
Bank and Lawrence M. Thompson, Jr.
(Incorporated by reference to Exhibit 10.5
to Sovereign's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992.)
(10.6) Penn Savings Bank Senior Officer Incentive
Plan. (Incorporated by reference to
Exhibit 10.6 to Sovereign's Annual Report
on Form 10-K for the year ended December
31, 1994.)
(10.11) Rights Agreement dated September 19, 1989,
between Sovereign Bancorp, Inc. and Harris
Trust Company of New York. (Incorporated by
reference to Exhibit 4.3 to Sovereign's
Registration Statement No. 33-89586 on
Form S-8).
(10.12) Sovereign Bancorp, Inc. Non-Employee Director
Incentive Compensation Plan. (Incorporated by
reference to Exhibit 10.12 to Sovereign's
Registration Statement No. 33-43195 on Form
S-1).
(10.14) 1993 Sovereign Bancorp, Inc. Stock Option Plan.
(Incorporated by reference to Exhibit 10.23 to
Sovereign's Annual Report on Form 10-K for the
year ended December 31, 1992).
(10.15) Indemnification Agreement dated December 21,
1993, between Sovereign Bank and Jay S. Sidhu.
(Incorporated by reference to Exhibit 10.25 to
Sovereign's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.)
(10.16) Agreement and Plan of Merger, dated
June 16, 1994, by and between Sovereign
Bancorp, Inc. and Charter FSB Bancorp, Inc.
(Incorporated by reference to Exhibit 2.1 to
Sovereign's Registration Statement No. 33-82846
on Form S-4.)
(10.17) Branch Purchase and Deposit Assumption
Agreement, dated September 19, 1994, between
Berkeley Federal Bank & Trust FSB and Sovereign
Bank, a Federal Savings Bank. (Incorporated by
reference to Exhibit 2.1 to Sovereign's Current
Report on Form 8-K dated September 16, 1994.)
(10.18) Employment Agreement dated as of August 8,
1988, between Charter Federal Savings Bank
and Patrick J. Petrone. (Incorporated by
reference to Exhibit 10.23 to Sovereign's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.)
(10.19) Amendment to Employment Agreement between
Patrick J. Petrone and Charter Federal
Savings Bank, dated October 17, 1994.
(Incorporated by reference to Exhibit 10.24
to Sovereign's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.)
(10.20) Charter One Bancorp, Inc. Stock Incentive
Plan. (Incorporated by reference to
Exhibit 4.1 to Registration Statement No.
33-36895 of Charter FSB Bancorp, Inc. on
Form S-8).
(10.21) Amendments to Charter FSB Bancorp, Inc.
Stock Incentive Plan. (Incorporated herein
by reference to Exhibit 4.2 to Registration
Statement No. 33-36895 of Charter FSB Bancorp,
Inc. on Form S-8.)
(10.22) Charter One Bancorp, Inc. Stock Option Plan
for Non-Employee Directors. (Incorporated by
reference to Exhibit 4.1 to Registration
Statement No. 33-36896 of Charter FSB Bancorp,
Inc. Form S-8.)
(10.23) Amendments to Charter FSB Bancorp, Inc. Stock
Option Plan for Non-Employee Directors.
(Incorporated herein by reference to
Exhibit 4.2 to Registration Statement No.
33-36896 of Charter FSB Bancorp, Inc. on
Form S-8).
(10.24) Amendment to Rights Agreement, dated as of
September 27, 1995, between Sovereign Bancorp,
Inc. and Chemical Bank, as successor to Harris
Trust Company of New York, as Rights Agent.
(Incorporated by reference to Exhibit 2.2 of
Amendment No. 1 of Sovereign's Registration
Statement on Form 8-A.)
(10.25) Agreement and Plan of Merger, dated March 23,
1995, by and between Sovereign Bancorp, Inc.
and Colonial State Bank.
(10.26) Agreement and Plan of Merger, dated
September 29, 1995, between Sovereign
Bancorp, Inc. and West Jersey Bancshares,
Inc. (Incorporated by reference to
Exhibit 2.1 to Sovereign's Registration
Statement 33-64807 on Form S-4.)
(11.1) Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23.1) Consent of Ernst & Young LLP, Independent
Auditors.
(23.2) Consent of BDO Seidman, LLP, Independent Auditors.
(27) Financial Data Schedule.
(99.1) Report of BDO Seidman, LLP, Independent Auditors.
(b) Reports on Form 8-K.
1. Report on Form 8-K, dated
October 23, 1995 (date of earliest
event reported - October 18, 1995)
re: Sovereign's Press Release,
dated October 18, 1995, announcing,
among other things, earnings for
the third quarter of 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOVEREIGN BANCORP, INC.
(Registrant)
March 27, 1996 By /s/ Jay S. Sidhu
Jay S. Sidhu, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title
/s/ Howard D. Mackey Director March 27, 1996
Howard D. Mackey
/s/ Richard E. Mohn Chairman of March 27, 1996
Richard E. Mohn Board and
Director
/s/ Rhoda S. Oberholtzer Director March 27, 1996
Rhoda S. Oberholtzer
/s/ Patrick J. Petrone Director March 27, 1996
Patrick J. Petrone
/s/ Daniel K. Rothermel Director March 27, 1996
Daniel K. Rothermel
/s/ Jay S. Sidhu Director, March 27, 1996
Jay S. Sidhu President and
Chief Executive
Officer (Principal
Executive Officer)
/s/ G. Arthur Weaver Director March 27, 1996
G. Arthur Weaver
/s/Samuel R. Willard, Jr. Director March 27, 1996
Samuel R. Willard, Jr.
/s/ Theodore Ziaylek, Jr. Director March 27, 1996
Theodore Ziaylek, Jr.
/s/ Karl D. Gerhart Chief Financial March 27, 1996
Karl D. Gerhart Officer (Principal
Financial Officer
and Principal
Accounting Officer)
EXHIBIT INDEX
Page number in
manually signed
original
(3.1) Articles of Incorporation, as
amended and restated, of
Sovereign Bancorp, Inc.
(10.25) Agreement and Plan of Merger, dated
March 23, 1995, by and between
Sovereign Bancorp, Inc. and
Colonial State Bank.
(11.1) Computation of Per Share Earnings.
(21) Subsidiaries of the Registrant.
(23.1) Consent of Ernst & Young LLP, Independent
Auditors.
(23.2) Consent of BDO Seidman, LLP, Independent
Auditors.
(27) Financial Data Schedule.
(99.1) Report of BDO Seidman, LLP, Independent
Auditors.