Earnings Press Release Archive

January 23, 2008

Download the 2007 Q4 and Year End Financial Data

Sovereign Bancorp, Inc. ("Sovereign") (NYSE: SOV), parent company of Sovereign Bank ("Bank"), today reported results for the fourth quarter and full year of 2007. As previously announced continued volatility in the financial markets and deterioration in the credit environment had an adverse impact on the fourth quarter of 2007 financial results. For the fourth quarter of 2007, Sovereign reported a net loss of $1.6 billion or $(3.34) per share, primarily driven by goodwill impairments. This compares to a net loss of $129 million or $(.28) per diluted share for the fourth quarter of 2006. For the full year 2007, Sovereign reported a net loss of $1.3 billion or $(2.85) per share as compared to net income of $137 million or $.30 per diluted share in 2006.

Commenting on results for the fourth quarter of 2007, Joseph P. Campanelli, Sovereign’s President and CEO, stated, "As previously announced, our fourth quarter results have been impacted significantly by disruption in the credit markets and continued weakness in the residential mortgage market. Although disappointing, we believe that the majority of the losses are non-cash charges that will not impact future performance or existing tangible capital levels."

"We continue to take the necessary steps to focus on our core businesses and markets and execute on our strategic initiatives. We recently made the decision to discontinue our automobile lending originations in the Southeast and Southwest as losses in these markets have been higher than forecasted and we will provide for losses in this portfolio as it runs off," continued Campanelli.

"Today we are discontinuing the Company’s quarterly common stock dividend to help bolster capital and mitigate risk during the ongoing challenges in the financial services industry. The Board will review this policy from time to time and expects to resume dividend payments when industry conditions normalize. Today’s banking environment dictates proactive measures to strengthen capital and mitigate risk. At the same time, these steps will help the company to prosper when more favorable conditions resume," commented Campanelli.

"Core operating results for the quarter were encouraging. Through disciplined balance sheet management, net interest margin expanded three basis points during the quarter. Fee income results were solid with consumer and commercial banking fees at historic highs. We continue to prudently manage our expenses, with our operating expenses staying roughly flat compared to the prior quarter and are continuing to search for additional ways to cut costs and operate more efficiently in 2008," concluded Campanelli.

Fourth Quarter Charges
As previously announced in our press release on January 14, 2008, results for the fourth quarter of 2007 were impacted by an impairment of goodwill and FNMA and FHLMC preferred securities. The final amount of these charges were as follows:

($ in millions)	Pre-tax amount	Net income	Earnings per share
Impairment of goodwill	$1,577	$1,577	$3.08
Impairment of FNMA and FHLMC preferred securities	180	117	.23

The increase in the impairment of goodwill from our release on January 14, 2008 is due to recent market-driven interest rate declines, which increased the value of fixed rate loans allocated to our Metro New York and Consumer segments. This had a corresponding decrease to goodwill which increased the impairment.

Additionally, Sovereign’s fourth quarter results were adversely impacted by a provision for loan losses that was in excess of net charge-offs by $88 million, as well as $27.4 million of losses on financial arrangements with two mortgage companies.

Operating earnings for EPS purposes were $539 million or $1.05 per diluted share in 2007 as compared to $692 million or $1.48 per diluted share in 2006. Operating earnings in 2007 excluded after-tax charges related to restructuring and cost reduction initiatives in addition to the above mentioned goodwill and preferred securities impairment charges. In 2006, operating earnings excluded after-tax charges related to mergers and acquisitions, restructuring charges and proxy and related professional fees.

For the quarter ended December 31, 2007, Sovereign’s operating earnings for EPS purposes were $94 million or $.18 per diluted share, excluding the above mentioned impairment charges, as compared to $167 million or $.33 per diluted share a year ago. Operating earnings for the fourth quarter of 2006 excluded charges related to restructuring and cost reduction initiatives. A reconciliation of net income to operating earnings, as well as the related earnings per share amounts, is included in a later section of this release.

Net Interest Income and Margin
For the fourth quarter of 2007, Sovereign reported net interest income of $466 million as compared to $457 million last quarter and $487 million in the fourth quarter of 2006. Sovereign’s average loan balances decreased by $5.9 billion over last year as a result of the balance sheet restructuring completed in the first quarter of 2007. Average loan balances increased $821 million on a linked quarter basis to $57.5 billion, reflecting growth in several commercial categories, direct home equity loans, and auto loans partially offset by planned runoff in residential mortgage.

Sovereign’s average deposits decreased $2.6 billion over the past year as Sovereign continued to reduce its reliance on wholesale deposit sources. These higher-cost government and wholesale deposit categories were reduced by $3.7 billion throughout 2007, resulting in $1.1 billion, or 2.7%, organic deposit growth in 2007. Linked quarter, average deposits increased $189 million to $50.2 billion driven by increases in money market and time deposit accounts. This growth was partially offset by reductions of $524 million in government and wholesale deposit categories during the quarter. Excluding planned wholesale run-off, deposit growth for the quarter was $713 million, or 7% annualized.

Sovereign’s deposit costs were reduced 11 basis points from the third quarter and borrowing costs were reduced 22 basis points. Net interest margin expanded 3 basis points during the fourth quarter to 2.77% as compared to 2.74% in the prior quarter and 2.60% a year ago. 

Non-Interest Income
Total fees and other income before security gains totaled $153 million for the fourth quarter of 2007 compared to $149 million a year ago and $141 million last quarter. Total fees and other income before security gains were adversely impacted this quarter as a result of $27.4 million of estimated losses recorded primarily on financings provided to two mortgage companies. The prior quarter was impacted by $19.4 million of similar losses, as well as $6.2 million of market value adjustment losses impacting commercial banking fees and $8.3 million of market value adjustment losses impacting mortgage banking revenues. Excluding these items total fees and other income before security gains increased 2.8% over last quarter.

Consumer and commercial banking fees increased $12.3 million or 10% from a year ago and $10.6 million or 8.6% linked quarter, excluding a $6.2 million lower of cost or market adjustment recorded in the prior quarter on Sovereign’s syndicated loan trading portfolio.

Mortgage banking revenues for the quarter were $9.2 million, compared to $3.8 million last quarter and a loss of $7.6 million in the same quarter a year ago. Due to changes in interest rates during the quarter, a $2.1 million impairment charge to increase the valuation reserve for mortgage servicing rights was recorded. Offsetting this impairment charge, were $12.1 million of gains on sale of mortgage loans; of this, $7.5 million relates to the sale of multi-family loans. Last quarter, mortgage banking revenues included a loss of $8.3 million related to the CMBS pipeline and servicing values.

Sovereign reported a loss of $18.3 million in capital markets revenues for the quarter as a result of the previously mentioned mortgage company financing losses. Liquidity at these companies has been impacted by adverse developments in the real estate market which have decreased investor demand for loans originated and sold by these mortgage companies. Sovereign has exited relationships and restructured other similar agreements in this sector and believes its remaining exposure is well-contained and reserved against.

Net securities losses of $179.2 million for the fourth quarter included the other-than-temporary impairment charge on FNMA and FHLMC preferred stock.

Non-Interest Expense
G&A expenses were $338 million for the fourth quarter of 2007, consistent with third quarter levels. G&A expenses to average assets were 1.63% for the quarter, compared to 1.66% in the third quarter and 1.56% a year ago.

Asset Quality
Sovereign has increased its allowance for credit losses by $88 million due primarily to a $50 million increase related to its indirect auto loan portfolio. Net credit losses related to indirect auto loans have increased in recent quarters and are expected to remain elevated through the first half of 2008. Although Sovereign’s residential and home equity portfolios have continued to perform well, the allowance for credit losses were increased for these portfolios given the continuing slowdown in the housing sector as well as general economic conditions and their potential impact on the loan portfolio. This raises Sovereign’s allowance for credit losses at year end to near historical high reserve ratios at 1.28% up from .88% a year ago and 1.14% last quarter.

Sovereign's provision for credit losses was $148 million this quarter, compared to $163 million in the third quarter and $366 million in the fourth quarter of 2006. The provision for credit losses in the fourth quarter of 2006 included a lower of cost or market adjustment on the correspondent home equity portfolio of $296 million.

Annualized net charge-offs were .42% of average loans for the third quarter, compared to .24% linked quarter and .29% a year ago, which excludes the lower of cost or market valuation adjustment recorded in the fourth quarter of last year related to correspondent home equity loans. In dollars, net charge-offs were $60.5 million this quarter versus $33.6 million in the prior quarter and $53.5 million a year ago.

Non-performing loans to total loans increased 4 basis points from third quarter levels to .53%. Non-performing loans increased by $21.9 million from last quarter to $304 million. The allowance for credit losses to non-performing loans was 242% at December 31, 2007, as compared to 230% at September 30 and 234% at December 31, 2006.

Capital
Over the past twelve months, Sovereign has taken the following steps to bolster its capital base in a weakening economic environment:

• Disposed of over $7.0 billion of non-core assets and businesses
• Recently elected to eliminate its auto originations in the Southeast and Southwest, which will further reduce assets in 2008
• Reduced annual operating expenses by over $100 million in 2007
• Elected to eliminate its common shareholder dividend which will conserve approximately $160 million of capital in 2008

Sovereign’s capital exceeds the levels defined as “well capitalized” by our regulators. Sovereign’s forecasts indicate that it can maintain this designation even under a further worsening of industry conditions.

Sovereign’s Tier 1 leverage ratio was 5.89% at December 31, 2007, as compared to 6.03% last quarter. Tangible equity to tangible assets, which includes preferred stock, was 3.95% as compared to 4.09% last quarter and 3.73% a year ago. Tangible common equity to tangible assets was 3.70%. The equity to assets ratio was 8.25% at December 31, 2007. Sovereign’s tangible capital ratios were negatively impacted by approximately 14 basis points during the quarter by a decrease in other comprehensive income of approximately $108 million.

Also impacting certain capital ratios downward by approximately 20 to 30 basis points for the quarter was the need to temporarily hold an additional $4.0 billion of cash and short-term investments over quarter-end to maintain compliance with a requirement relating to the ratio of commercial loans to total assets required under Sovereign’s charter. Sovereign believes that it can achieve its interim target of 4.50% tangible equity by the end of the third quarter of 2008, subject to resolution of this issue. The Company is working on measures to achieve compliance with the requirement without the need to temporarily hold short-term assets.

Sovereign Bank’s Tier 1 leverage ratio was 6.53% and the Bank’s total risk-based capital ratio was 10.40% at December 31, 2007.

Download the 2007 Q4 and Year End Financial Data

About Sovereign
Sovereign Bancorp, Inc., ("Sovereign") (NYSE: SOV), is the parent company of Sovereign Bank, a financial institution with $85 billion in assets as of December 31, 2007 with principal markets in the Northeast United States. Sovereign Bank has 750 community banking offices, over 2,300 ATMs and approximately 12,000 team members. Sovereign offers a broad array of financial services and products including retail banking, business and corporate banking, cash management, capital markets, wealth management and insurance. Sovereign is the 19th largest banking institution in the United States. For more information on Sovereign Bank, call 1-877-SOV-BANK.

Investors, analysts and other interested parties will have the opportunity to listen to a live Webcast of Sovereign's Fourth Quarter 2007 earnings call on Thursday, January 24, 2008 beginning at 9:00 a.m. ET. International parties are invited to dial into the conference call at 706-679-7706. The Webcast and replay can be accessed anytime from 9:00 a.m. ET on Thursday, January 24, 2008 through 12:00 a.m. ET on January 30, 2008. Questions may be submitted during the call via email accessible from Sovereign Bancorp’s broadcast and Investor Relations sites. A telephone replay will be accessible from 11:00 a.m. ET on Thursday, January 24, 2008 through 12:00 a.m. ET (midnight) on Monday, March 24, 2008 by dialing 1-800-642-1687 in the U.S., international 706-645-9291, confirmation ID #29612456.


Note:
This press release contains financial information determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). Sovereign's management uses the non-GAAP measure of Operating Earnings, and the related per share amount, in their analysis of the company's performance. This measure, as used by Sovereign, adjusts net income determined in accordance with GAAP to exclude the effects of special items, including significant gains or losses that are unusual in nature or are associated with acquiring and integrating businesses. Operating earnings for 2007 and 2006 EPS purposes represent net income adjusted for the after-tax effects of our goodwill impairment charge, merger-related and integration charges, certain restructuring charges, other-than-temporary impairment charges on Fannie Mae and Freddie Mac preferred equity securities and proxy and related professional fees. Since certain of these items and their impact on Sovereign's performance are difficult to predict, management believes presentations of financial measures excluding the impact of these items provide useful supplemental information in evaluating the operating results of Sovereign's core businesses. These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

This press release contains statements of Sovereign's strategies, plans, and objectives, as well as estimates of financial condition, operating and cash efficiencies and revenue generation. These statements and estimates constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; Sovereign’s ability in connection with any acquisition to complete such acquisition and to successfully integrate assets, liabilities, customers, systems and management personnel Sovereign acquires into its operations and to realize expected cost savings and revenue enhancements within expected time frame; the possibility that expected one time merger-related charges are materially greater than forecasted or that final purchase price allocations based on the fair value of acquired assets and liabilities and related adjustments to yield and/or amortization of the acquired assets and liabilities at any acquisition date are materially different from those forecasted; other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, integrations, pricing, products and services; and acts of God, including natural disasters.

Sovereign Bancorp is followed by several market analysts. Please note that any opinions, estimates, forecasts, or predictions regarding Sovereign Bancorp’s performance or recommendations regarding Sovereign’s securities made by these analysts are theirs alone and do not represent opinions, estimates, forecasts, predictions or recommendations of Sovereign Bancorp or its management. Sovereign Bancorp does not by its reference to any analyst opinions, estimates, forecasts regarding Sovereign’s performance or recommendations regarding Sovereign’s securities imply Sovereign’s endorsement of or concurrence with such information, conclusions or recommendations.

Financial Contacts
Mark McCollom
Office: 610-208-6426
mmccollo@sovereignbank.com

Stacey Weikel
Office: 610-320-8428
sweikel@sovereignbank.com

Media Contact
Ed Shultz
Office: 610-378-6159
eshultz1@sovereignbank.com