Earnings Press Release Archive

July 23, 2008

 
Download the 2008 Q2 Financial Data

Sovereign Bancorp, Inc. ("Sovereign" or "the Company") (NYSE: SOV), parent company of Sovereign Bank ("Bank"), today reported net income for the quarter ended June 30, 2008 of $127.4 million or $.22 per diluted share as compared to $100.1 million or $.20 per diluted share in the first quarter of 2008 and $147.5 million or $.29 per diluted share in the second quarter of 2007. Net income for the six months ended June 30, 2008 was $227.6 million or $0.42 per diluted share compared to $195.5 million or $0.39 per diluted share for the six months ending June 30, 2007.

Highlights for the second quarter of 2008 were as follows:

• On May 16, 2008 the Company issued $1.39 billion of common stock which increased Sovereign’s tangible common equity ratio and tangible book value per share to 6.04% and $6.90 at June 30, 2008 compared to 3.81% and $6.20 at March 31, 2008.
• For the sixth consecutive quarter Sovereign’s net interest margin has expanded and now stands at 3.06%, an increase of 18 basis points from the first quarter of 2008 and 35 basis points from the similar quarter in 2007.
• Deposit growth and deposit mix continued to improve driven by retail and commercial deposit growth of $942 million offset by seasonal declines in government deposits and planned runoff in wholesale deposits in the first quarter of 2008.
• Loan balances at March 31, 2008 declined by 2.57% on a linked-quarter basis primarily due to the securitization of $780 million in residential mortgages and a 7.5% decline in auto loans.
• Sovereign's non-performing assets as a percentage of tangible equity and allowance for loan losses was 9.9% at June 30, 2008 compared to 12.2% at March 31, 2008 and 8.1% at June 30, 2007.

"Sovereign is on solid financial footing as we manage through the current uncertain economic climate," said Sovereign's President and CEO Joseph P. Campanelli. "Given the challenging operating environment, I am pleased with our results for the second quarter of 2008, which are consistent with our expectations. They reflect the prudent and proactive strategies we employed in the last year and demonstrate progress in reducing our risk profile, improving the quality of our earnings, and strengthening our operating metrics."

Net Interest Income and Margin
For the second quarter of 2008, Sovereign reported net interest income of $506 million as compared to $482 million in the first quarter of 2008 and $453 million in the similar quarter of 2007. The Company’s net interest margin expanded 35 basis points during the second quarter of 2008 to 3.06% from the similar quarter a year ago. The main drivers of this expansion have been a reduction in the cost of deposits and short-term borrowings resulting from lower short-term market interest rates coupled with a shift in deposit mix to lower-cost categories.

On a linked-quarter basis, average loan balances were relatively unchanged at $58.2 billion with growth in commercial loans of 2.9% and direct home equity loans of 2.8% which was offset by declines in residential mortgage loans of 5.1% and auto loans of 5.7%. During the second quarter, the Company completed a mortgage securitization which converted $780 million of residential real estate loans into investment securities. This securitization will reduce credit risk and required levels of risk based capital as well as enhance liquidity. Sovereign’s average loan balances increased $1.4 billion from the second quarter of 2007 primarily as a result of growth in commercial loans offset by declines in residential mortgage loans.

Sovereign's average deposits on a linked quarter basis declined by $1.1 billion which was primarily driven by decreases in costlier wholesale and government deposits of $1.2 billion. Sovereign's average retail and commercial deposits increased $285 million during the quarter due to growth in demand deposit accounts which was offset by declines in higher cost retail time deposits. Sovereign’s average deposits decreased $3.2 billion from the second quarter of 2007 as the Bank grew retail and commercial deposits $1.2 billion and reduced its reliance on wholesale deposit sources by $4.4 billion.

Non-Interest Income
Consumer and commercial banking fees were $134.7 million, an increase of $5.4 million or 4.2% from a year ago and $7.1 million on a linked quarter basis. The increase from the prior periods is primarily attributable to increased sales of annuity products from our investment services group and higher commercial and consumer deposit fees.

Mortgage banking revenues for the quarter were $37.9 million, compared to a loss of $5.1 million on a linked quarter basis and $26.5 million in the same quarter a year ago. The loss in the prior quarter was attributed to mortgage and multi-family servicing right impairments of $23.6 million which were driven primarily by lower interest rates and higher market prepayment speed assumptions. In the second quarter of 2008, $20.5 million of this impairment was reversed as a result of the normalization in market prepayment speed assumptions at June 30, 2008.

Capital markets revenues for the second quarter of 2008 were $7.2 million compared to $10.4 million in the first quarter of 2008 and $6.0 million in the second quarter of 2007. The decline in revenues on a linked quarter basis was driven by higher volumes of derivative sales to our customers related to the rapid reduction in interest rates earlier in the year by the Federal Reserve.

Net investment gains of $1.9 million in the second quarter of 2008 were due to a gain of $6.5 million related to the sale of MasterCard stock which was partially offset, by a write-down of $4.6 million in the Company’s residual interests in certain off-balance sheet home equity securitizations. Sovereign’s maximum risk of loss on the remaining retained interests for these home equity securitizations is $2 million. The first quarter of 2008 included a net investment gain of $14.1 million related to the mandatory partial redemption of the VISA IPO shares.

Non-Interest Expense
General and administrative expenses were $382 million for the second quarter of 2008, as compared to $359 million in the first quarter of 2008 and $337 million in the similar quarter a year ago. Included in the first quarter of 2008 was a reduction in legal expense of $6.4 million related to the release of reserves established for the VISA litigation. As compared to the first quarter of 2008, the second quarter of 2008 included higher compensation and benefits expenses of $7.6 million primarily due to severance charges and a full quarter of merit increases, higher loan workout/collection and other real estate owned expenses of $5.3 million, and increased marketing expense of $3.5 million.

The increase in general and administrative expenses of $45 million from the second quarter of 2007 was primarily due to increased compensation and benefits expense of $21.2 million, driven by the aforementioned severance charges and merit increases in the second quarter of 2008 as well as higher incentive compensation accruals as a result of changes in the incentive compensation structure for retail and corporate plans to be better aligned with the marketplace. In addition, the Company incurred higher deposit insurance premiums of $7.7 million, higher legal, loan and other real estate owned expenses of $11.1 million related to the challenging credit environment and increased marketing expense of $2.6 million.

Other expenses totaled $42.8 million in the second quarter of 2008 compared to $37.5 million in the first quarter of 2008 and $79.5 million a year ago. Second quarter 2008 results included a decline in the fair market value on one of the Company’s equity method investments of $6.4 million. The second quarter of 2007 results included restructuring charges of $32.7 million related to branch closings, freezing of the Company’s ESOP plan and severance charges.

Asset Quality
Sovereign's provision for credit losses was $132 million in the second quarter of 2008, compared to $135 million in the first quarter of 2008 and $51 million in the second quarter of 2007. Sovereign increased its allowance for credit losses to $843.5 million, a $45.1 million increase from March 31, 2008, primarily due to continued deterioration in asset quality for the commercial portfolios, particularly in the for-sale housing segment. Sovereign’s allowance for credit losses to total loans at June 30, 2008 increased to 1.47% up from 1.36% at March 31, 2008 and .92% at June 30, 2007.

Net charge-offs were $86.9 million this quarter versus $74.3 million in the prior quarter and $25.7 million in the similar quarter a year ago. Annualized net charge-offs were .60% of average loans for the current quarter, compared to .51% linked quarter and .18% a year ago. Approximately 34% of net charge-offs this quarter were attributable to run-off loan portfolios, net charge-offs related to the indirect auto portfolio outside the Company’s footprint and correspondent home equity loans were $23.3 million and $6.2 million, respectively. This compares to 43% in the first quarter of 2008 as charge-offs on these two portfolios were $28.3 million and $4.0 million, respectively.

Non-performing loans increased to $490.5 million at June 30, 2008 compared to $417.8 million at March 31, 2008 and $282.4 million at June 30, 2007. The increase in non-performing loans on a linked quarter basis was driven primarily by real estate related loan categories: for-sale housing, Alt-A residential and one multi-family loan. Non-performing loans to total loans increased 14 basis points to .85% at June 30, 2008 compared to .71% at March 31, 2008 and .52% at June 30, 2007.

Capital
Sovereign’s tangible equity to tangible assets including other comprehensive income ("OCI") was 6.29% at June 30, 2008 compared to 4.06% at March 31, 2008 and 4.69% a year ago. Tangible common equity to tangible assets including OCI was 6.04% at the end of the second quarter of 2008 compared to 3.81% on a linked quarter basis and 4.44% a year ago. Sovereign’s Tier 1 leverage ratio was 8.34% at June 30, 2008, as compared to 6.21% at March 31, 2008 and 6.40% a year ago. Sovereign Bank’s Tier 1 leverage ratio was 7.27% compared to 6.93% at June 30, 2007. The Bank’s total risk-based capital ratio was 11.41% at June 30, 2008 compared to 10.45% a year ago. The increase in various capital ratios was due to the common stock offering and subordinated debt issuance on May 16, 2008, increased retained earnings and smaller asset size.

Download the 2008 Q2 Financial Data

About Sovereign
Sovereign Bancorp, Inc., ("Sovereign") (NYSE: SOV), is the parent company of Sovereign Bank, a financial institution with principal markets in the Northeastern 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. 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 Second Quarter 2008 earnings call on Wednesday, July 23, 2008 beginning at 10:30 a.m. ET at Events and Webcasts. International parties are invited to dial into the conference call at 706-679-7706. The Webcast can be accessed at 10:30 a.m. ET on Wednesday, July 23, 2008. Questions may be submitted during the call via email accessible from Sovereign Bancorp's broadcast and Investor Relations sites. A Webcast replay will remain available via Sovereign’s Investor Relations site. A telephone replay will be accessible from 12:30 p.m. ET on Wednesday, July 23, 2008 through 12:00 a.m. ET (midnight) on Wednesday, July 30, 2008 by dialing 1-800-642-1687 in the U.S., international 706-645-9291, confirmation ID# 53252875.

Note:
This press release contains statements with respect to Sovereign's vision, mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business of Sovereign. These statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Sovereign believes that the expectations reflected in these forward-looking statements are reasonable, these statements are not guarantees of future performance and involve risks and uncertainties which are subject to change based on various important factors (some of which are beyond Sovereign’s control). Among the factors which would cause Sovereign’s financial performance to differ materially from that expressed in the forward-looking statements are: the strength of the United States economy in general and the strength of the regional and local economies in which Sovereign conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; adverse changes in the securities markets, including those related to the financial condition of significant issuers in our investment portfolio; the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles in the United States; changes in asset quality; and Sovereign's success in managing the risks involved in the foregoing. If one or more of the factors affecting Sovereign's forward-looking information and statements proves incorrect, then Sovereign’s actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Any forward-looking statements only speak as of the date hereof. Sovereign does not intend to update any forward-looking information and statements, whether written or oral, to reflect any change.

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
Kirk Walters
Office: 617-346-7346
kwalter1@sovereignbank.com

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

Media Contacts
Andrew Gully
Office: 617-757-5513
agully@sovereignbank.com

Ellen Molle
Office: 617-757-5573
emolle@sovereignbank.com