Post on 31-Dec-2015
Sovereign Bancorp, Inc.
Merrill Lynch Banking and Financial Services Conference
November 13, 2007
2
Forward-Looking Statements
This presentation contains statements of Sovereign Bancorp, Inc.’s (the “Company”) strategies, plans and objectives, estimates of future operating results for Sovereign Bancorp, Inc. as well as estimates of financial condition, operating efficiencies, revenue creation and shareholder value
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; and other economic, competitive, governmental, regulatory, and other technological factors affecting the Company’s operations, pricing, products and services
We refer you to our reports filed unto the SEC under the Securities Exchange Act of 1934 for a more detailed explanation of the factors and the risks facing our business
Overview of Sovereign
4
An Exceptional Franchise Serving the Northeastern United States 19th largest bank in
U.S. with $87 billion in assets at September
30, 2007
750 offices& over 2,300 ATM’s
Approx. 12,000 team members
Source: SNL DataSource. Market share as of June 2007.
5 Largest MSA’s in Northeast U.S.No. of SOV Mkt SOVOffices Share Rank
New York 208 1.95% 11
Philadelphia 82 6.90% 6
Boston 165 8.58% 3
Providence 56 10.57% 3
Hartford 26 4.68% 6
5
$72.5$58.3
$48.3$43.5
$38.1$35.8
$23.3$25.1$16.7$12.6$15.2
$17.1
$5.4$6.2
$(0.0)$1.5
$(0.3)
$1.5$5.3
$5.1$0.1
$10.2
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Organic assets Net change in assets from acquisitions/(sales)
Sovereign’s Growth – A Combination of Organic Growth and Acquisitions
Deposits ($ in billions)
Assets ($ in billions)
$8.6 $7.3 $8.5 $11.5 $12.9$23.7
$25.6$27.4
$28.4
$35.1$41.4
$11.6
$0.1 $2.2 $3.9 $0.5
$(0.3)$1.3 $(0.0)
$4.2
$2.9
$11.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Organic deposits Net change in deposits from acquisitions/(sales)
$9.5$8.7
$12.0
$24.5 $23.3$26.9
$27.3$32.6
$38.0
$52.4
$12.3
$15.3$17.7
$21.9$26.6
$33.5$35.5
$39.6$43.5
$54.5$63.7
$89.6
Organic CAGR 5.7%CAGR 19.7%
Organic CAGR 9.4%CAGR 19.3%
Source: Wall Street Research, Company data
6
Sovereign’s Vision and Strategy
VisionTo be recognized by customers and prospects as a customer-centric local community bank with large bank capabilities
StrategyTo acquire and retain customers by: Demonstrating convenience through our locations,
technology and business approach Offering innovative and easy-to-use products and services Providing high-quality customer service that is both
responsive and flexible
7
America’s Neighborhood Banksm
8
Sovereign’s Business Model
Increased emphasis on core commercial and consumer, franchise based businesses; Sovereign does not have any lending units whose principal focus is on sub-prime lending
Core Commercial: Commercial Real Estate Mini Perm Conduit C&I Lending Business Banking
• Branch Business Banking• SBA
Centralized strategy with a de-centralized delivery structure Community Banking delivery model, each with a Market CEO Local decision making by experienced commercial/retail bankers
Core Consumer (within footprint): Home Equity Lending Residential Mortgage Retail Banking
9
Specialty Businesses – Regional and National
Auto Finance Dealer Floor Plan Indirect Auto
Aviation Finance
Multi-Family/CRE
Health Care/Not-For-Profit
Asset Based Lending Business Alliance
Capital Corp.
Franchise Finance
Capital Markets
Cash Management
Equipment Finance/Leasing
Trade Finance
Retail Finance
Sports Lending
10
Strategic Alliances
CVS/Cardtronics Over 1,100 ATMs installed to date Over 500,000 transactions monthly
First Data Corp. Sovereign Merchant Services Dedicated sales force in excess of 100 44,000 processing merchants
ADP Sovereign Payroll Services Dedicated sales force of approximately 225
American Express – OPEN Customer Rewards Program Official card issuer
11
Improve productivity and expense management
Improve the capital position and quality of earnings
Improve the customer experience
Improve communications with all stakeholders
-
Objectives for 2007
Execute on four key initiatives to deliver improved quality of earnings, provide greater transparency and understanding of Sovereign’s businesses and strategy, and better position Sovereign for sustainable growth
Progress to date on four initiatives:
+
Improving Productivity and Expense Management
13
Expense Reduction Initiative
Primary focus on: Functional redundancies and operating inefficiencies Products/business lines not meeting profit or
strategic goals Leverage economies of scale with vendor supply
and service contracts Capacity utilization and expenses associated with
facilities Consolidation of departments Optimization of retail delivery channels
While minimizing impact on customer facing activities and organic revenue generation~$100 million of expense reductions reflected in 3Q07 G&A expense run rate partially offset by
reinvestment in the core franchise
~$100 million of expense reductions reflected in 3Q07 G&A expense run rate partially offset by
reinvestment in the core franchise
14
Capital Re-investment in Core Businesses to Continue Sovereign will continue to invest in core commercial and
consumer businesses as well as targeted specialty businesses
Sovereign will continue to make investments to improve the customer experience Comprehensive review of all bank information systems recently
completed Improvements being made on front-end systems to reduce
account opening time More incentives focused on sales and service Revitalization of Community Banking Offices
Sovereign intends to direct greater marketing resources toward deposit products in 2007 and 2008
Sovereign plans to open/relocate up to 40 new community banking offices in more desirable demographics over the next 2 years – 17 in 2007 and up to 20 in 2008
Improving Capital Position and Quality of Earnings
16
Commercial Real Estate
21%
C&I22%Multi-family
9%Other
Commercial1%
Home Equity11%
Auto10%
OtherConsumer
1%
Residential Mortgages
25%
Commercial Real Estate
18%
C&I20%
Multi-family9%
Residential Mortgages
28%
Home Equity15%
Auto8%
Other Commercial
1%
Other Consumer
1%
Improved Loan Mix – Result of Balance Sheet Restructuring
Period-end balances
December 31, 2006
1Q07 Loan Sales:$3.3 billion correspondent home equity loans$2.5 billion purchased residential mortgages
$1.3 billion multi-family loans
Total Commercial Loans 48.7%Total Consumer Loans 51.3%
Total Commercial Loans 52.3%Total Consumer Loans 47.7%
September 30, 2007
17
DDA13%
NOW11%
Repo5%
Savings8% Money
Market20%
CD's24%
Wholesale 19%
DDA13%
NOW12%
Repo4%
Savings9% Money
Market17%
CD's22%
Wholesale 24%
Period-end balances
December 31, 2006 September 30, 2007
Improved Deposit Mix – Less Reliance on Wholesale Deposits
Total Deposits $52.4 bn @ 3.14%Excluding Wholesale $40.0 bn @ 2.50%
Total Deposits $50.0 bn @ 3.21%Excluding Wholesale $40.6 bn @ 2.78%
18
6.48% 6.68% 6.74%
5.69% 5.82% 5.73%
6.29% 6.40%6.03%
4.54%
4.73% 4.81%3.49%
3.78% 3.73%
4.20% 4.33%4.09%
4.54%
4.73% 4.81%
3.25%3.55% 3.50%
3.95% 4.07% 3.85%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07
Tier 1 Leverage Tangible Equity/Tangible Assets Tangible Common Equity/Tangible Assets
Restoring Capital LevelsSovereign Bancorp, Inc.
* Capital ratios were negatively impacted due to the need to temporarily hold an additional $4.5 billion of cash and investments over quarter-end to maintain compliance with a regulatory guideline. Tangible ratios negatively impacted by 22 bps and Tier 1 leverage by 35 bps as a result of this requirement.
*
19
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
0%
5%
10%
15%
20%
25%
30%
35%
40%
Wh
ole
sale
Assets
/To
tal A
ssets
Wholesale Assets Total Assets Wholesale Assets/Total Assets
Less Reliance on Wholesale Assets
Wholesale assets includes investments and purchased loans. 3Q07 excludes $4.5 billion of cash and investments temporarily held over quarter end to maintain compliance with a regulatory guideline.
$ in millions
20
Benefits of Restructuring
Repositioned Sovereign for sustainable growth in core earnings long-term
Improved risk profile of balance sheet
Improved capital levels
Provided investment capital to support organic growth
Reduced reliance on purchased assets and wholesale funding, improved quality of balance sheet and income statement
Enabled management to fully focus attention on building core competencies
Improving The Customer Experience
22
Tactical Plans to Improve Customer Experience
Rationalize product set Rolled out customer switching services across franchise Upgraded commercial online banking system Streamlined retail product set by half in first quarter – 10 checking
products to 5 Converted over 400,000 grandfathered accounts to increase balance
retention
Optimize sales process During the fourth quarter of 2007, rolled out pilot program focused on:
• Measurable improvement in sales productivity and sales management practices• Increasing customer acquisition, development and retention
Implement coordinated, aggressive balance-building campaigns Align advertising, incentives, and communication in support of core deposit
growth goals Optimize effectiveness of the advertising spend by re-allocating across
geographies
Centralized strategy for product development, pricing, etc. with decentralized delivery model
Improving Communications with all Stakeholders
24
Improving Communication
Management’s responsibility is to share with all key constituents information that is timely, accurate, consistent and concise
Key constituents include: Team Members Shareholders Analysts Customers
Changes to date – Financial Disclosures: Operating earnings definition Capital ratios streamlined More credit quality detail (C&I, CRE) More deposit detail (wholesale vs. core)
Community leaders Advisory groups Regulators Rating agencies
25
Residential Mortgages – As of September 30, 2007
Total Residential Mortgages
Outstanding Balance $14.0 billion
Weighted Average FICO 736
Weighted Average LTV 53.3%
Fixed RateAdjustable Rate
69%31%
>91% 5%
80% to 90% 6%
51% to 79% 72%
<50% 17%
>741 44%
681 to 740 36%
621 to 680 17%
<620 3%
LTVDistribution
FICODistribution
Alt – A Mortgages
Outstanding Balance $2.8 billion
Weighted Average FICO 721
Weighted Average LTV 66.7%
Fixed RateAdjustable Rate
33%67%
>91% 2%
80% to 90% 9%
51% to 79% 76%
<50% 13%
>741 41%
681 to 740 45%
621 to 680 14%
<620 0%
LTVDistribution
FICODistribution
1
1
1
1
1 Statistics based on original loan amount and are as of time of origination for those loans that data were available.
26
Retained Correspondent HMEQ
Outstanding Balance $517 million
Reserves/Discount $102 million
Balance, net $415 million
Weighted Average FICO 647
Weighted Average CLTV 83%
First LienSecond Lien
71%29%
>91% 33%
80% to 90% 31%
51% to 79% 32%
<50% 4%
>741 23%
681 to 740 18%
621 to 680 20%
<620 39%
Home Equity Lending – As of September 30, 2007Direct Home Equity
Outstanding Balance $5.4 billion
Weighted Average FICO 784
Weighted Average CLTV 61.0%
Fixed Rate LoansLines of Credit
68%32%
First LienSecond Lien
38%62%
>91% 4%
80% to 90% 22%
51% to 79% 44%
<50% 30%
>741 61%
681 to 740 27%
621 to 680 10%
<620 2%
CLTVDistribution
FICODistribution
CLTVDistribution
FICODistribution
1
1 Statistics based on original loan amount and are as of time of origination for those loans that data were available. 2 Statistics based on current FICO for those loans that data were available. 3 In reaction to projected declines in housing values, increased delinquency and charge-off rates, reserves were increased on this portfolio by $47 million in the third quarter of 2007.
1
2
1
3
27
Indirect Auto – As of September 30, 2007
Indirect Auto
Outstanding Balance $6.9 billion
Weighted Average FICO New Used
727739715
NewUsed
55%45%
In-footprintOut of Footprint
64%36%
>741 32%
681 to 740 41%
621 to 680 24%
<620 2%
FICODistribution
1
1 Statistics based on original loan amount and are as of time of origination for those loans that data were available.
28
Indirect Auto Expansion
Began originating in expansion markets in June of 2006
Experienced professionals managing markets
Currently 36% of indirect auto loan outstandings
Recently terminated relationships withapproximately 90 auto dealers; thesedealers representeda disproportionatepercentage of defaults
Increased allowanceby $37 million in 3Q07
Potential to cross-sellinto Dealer Floor Plan
VA
CA
AZ
UTNV
RI
MANH
CTNJ
ME
MD
DE
PA
NY
VT
FL
GA
NC
SC
Sovereign Footprint
Expansion Markets
29
Indirect Auto Underwriting
Average FICO
660680700720740
1Q05 3Q05 1Q06 3Q06 1Q07 3Q07
New Used
Debt-to-Income
30%
40%
50%
1Q05 3Q05 1Q06 3Q06 1Q07 3Q07
New Used
Rate
5%6%7%8%9%
10%
1Q05 3Q05 1Q06 3Q06 1Q07 3Q07
New Used
30
Indirect Loss Mitigation Initiatives
Increase Tier 1 originations More than 70% of new volumes
are now in Tier 1 compared to 60% in the beginning of the year
Increase new vs. used mix
Increase spread on Tiers 3 to 5
Reduce expansion market volumes
Increase collections to sales communication
Increase default resolution
Origination Mix
FICO Historic Current
Tier 1 700-729 60% 74%
Tier 2 675-699 18% 12%
Tier 3 650-674 13% 9%
Tier 4 620-649 8% 4%
Tier 5 590-619 1% 1%
31
Credit Quality Trends
0.37% 0.35%0.43%
0.49%0.42%
3Q06 4Q06 1Q07 2Q07 3Q07
Non-Performing Loans toLoans Held for Investment
0.23%0.29%
0.16%
0.24%0.18%
3Q06 4Q06 1Q07 2Q07 3Q07
Annualized Net Charge-offsto Average Loans
* 4Q06 net charge-offs exclude credit charges related to balance sheet restructuring of $390 million
*
32
0.37%
0.55%
0.20%
0.59%
0.42%
0.56% 0.57%
0.89%
0.00%0.10%0.20%0.30%0.40%0.50%0.60%0.70%0.80%0.90%1.00%
Commercial Real Estate C&I and Other Residential Mortgages Home Equity
9/30/06
9/30/07
0.03%
0.21%
0.01%
0.76%0.66%
0.06%
0.25%
0.05% 0.06%
1.18%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
Commercial Real Estate C&I and Other Residential Mortgages Home Equity Auto
3Q06
3Q07Annualized Net Charge-offs/
Average Loans
Non-Performing Loans and Net Charge-offsNon-Performing Loans/
Total Loans Held for Investment
33
Strengthening Reserves
0.88% 0.88% 0.90%1.14%
0.92%
3Q06 4Q06 1Q07 2Q07 3Q07
Allowance to Total Loans
3.9
2.6
5.2 4.85.1
3Q06 4Q06 1Q07 2Q07 3Q07
Allowance to Net Charge-offs
240.0% 251.0%208.0% 230.0%217.0%
3Q06 4Q06 1Q07 2Q07 3Q07
Allowance toNon-Performing Loans
* 4Q06 net charge-offs exclude credit charges related to balance sheet restructuring of $390 million
*
x
x
x x x
34
What to Expect Going Forward
Disciplined and focused approach to increasing the value of our core franchise Increase the rate of household and enterprise acquisition Increase the rate of cross selling and share of wallet
Disciplined credit risk management practices
Continued formation of a solid capital position
Company-wide program to improve our sales culture
Continued focus on operational excellence Better, faster and cheaper
Continue to increase communications and transparency Both internally and externally
Appendix
36
Operating Earnings Per Share
This presentation 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 measures of Operating Earnings in its analysis of the company’s performance. These measures typically adjust 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, and certain non-cash charges
Since certain of these excluded 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, which may be presented by other companies
37
One Non-GAAP Financial Measure
Sovereign’s management uses Operating Earnings, a non-GAAP measure, and the related per share amounts, in their analysis of the company. Management believes that Operating Earnings, as calculated by Sovereign: Provides greater financial transparency
Provides useful supplemental information when evaluating Sovereign’s core businesses
Is consistent with the SEC’s publicly stated desire for fewer non-GAAP disclosures
Operating Earnings represent net income adjusted for after-tax effects of merger-related and integration charges and any other non-recurring charges
38
Reconciliation of Operating Earnings to Reported GAAP Earnings
($ in thousands) Year Ended December 31,
2006 2005 2004 2003 2002Net Income as reported 136,911$ 676,160$ 453,552$ 401,851$ 341,985$ Dividends on preferred stock (7,908) - - - - Net Income available to common shareholders 129,003$ 676,160$ 453,552$ 401,851$ 341,985$
Net Income available to common shareholders 129,003 Contingently convertible trust preferred interest expense, net of tax 25,360 25,427 21,212
Net Income for EPS purposes 154,363$ 0.30$ 701,587$ 1.69$ 474,764$ 1.29 401,851$ 1.32 341,985$ 1.17
Net income for Operating earnings EPS purposes 154,363$ 0.33$ 701,587$ 1.69$ 453,552$ 1.31 401,851$ 1.32 341,985$ 1.17 Merger-related and integration costs 27,574 0.06 8,284 0.02 30,134 0.09 10,316 0.04 Provision for loan loss 200,499 0.43 3,900 0.01 3,900 0.01 Loss on economic hedge 7,402 0.02 Restructuring of balance sheet 197,799 0.42 42,605 0.12 18,838 0.06 Restructuring charges 51,134 0.11 2,589 0.01 Impairment charge for FNMA and FHLMC preferred stock 43,875 0.09 20,891 0.06 Proxy and professional fees 9,319 0.02 3,788 0.01 Non-solicitation expenseOperating earnings for EPS purposes 691,965$ 1.48$ 716,248$ 1.72$ 551,082$ 1.59$ 420,689$ 1.38$ 356,201$ 1.22$
Weighted average diluted shares for GAAP EPS 433,908 415,996 367,811 305,001 292,991 Add back of diluted shares for Operating EPS not factored into GAAP diluted shares due to antidilution 33,840 - (22,823) - - Adjusted weighted average diluted shares for Operating EPS 467,748 415,996 344,988 305,001 292,991
39
Reconciliation of Operating Earnings to Reported GAAP Earnings
($ in thousands)
Quarter Ended
Total dollars Per shareSept. 30 Sept. 30 Sept. 30 Sept. 30
2007 2006 2007 2006
Net income/ (loss) as reported 58,210$ 184,009$
Dividends on preferred stock (3,650) (1,825)
Net income available to common shareholders 54,560 182,184
Contingently convertible trust preferred interest expense, net of tax - 6,344 Net income/ (loss) for EPS purposes 54,560$ 188,528$ 0.11$ 0.37$
Non GAAP adjustments to adjust antidilutive EPS
Net income available to common shareholders 54,560$
Trust IV expense, net of tax 6,423
Antidilutive net income/ (loss) for operating EPS calculation 60,983$
Reconciliation to Operating earnings EPS
Net income/ (loss) for Operating earnings EPS purposes 60,983$ 188,528$ 0.12$ 0.37$
Merger related and integration costs - 18,463 - 0.04
Provision for credit losses 30,550 - 0.06 - Loss on restructuring, other employee severance and debt repurchase charges 3,919 - 0.01 -
Operating earnings for EPS purposes 95,452$ 206,991$ 0.19$ 0.41$
Weighted average diluted shares for GAAP EPS 480,171 506,135 Add back of diluted shares for operating EPS not factored into GAAP diluted shares due to antidilution (1) 32,480 - Adjusted weighted average diluted shares for Operating EPS 512,651 506,135
Sovereign Bancorp, Inc.