Transcript Sovereign Bancorp, Inc. Merrill Lynch Financial Services Conference November 15
Sovereign Bancorp, Inc.
Merrill Lynch Financial Services Conference
November 15, 2004
Forward Looking Statement
This presentation contains statements of Sovereign’s vision, mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions, financial condition, results of operation, 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; inflation; deposit flows; loan demand; real estate values; competition; changes in accounting principles, policies, or guidelines; integration of acquired assets, liabilities, customers, systems and management personnel into Sovereign’s operations and the ability to realize the related revenue synergies and cost savings within expected time frames; possibility that expected merger-related charges are materially greater than forecasted or that final purchase price allocations based on fair value of the acquired assets and liabilities at acquisition date and related adjustments to yield and/or amortization of the acquired assets and liabilities are materially different from those forecasted; deposit attrition, customer loss, revenue loss and business disruption following Sovereign’s acquisitions, including adverse effects on relationships with employees may be greater than expected; anticipated acquisitions may not close on the expected closing date or it may not close; the conditions to closing anticipated acquisitions, including stockholder and regulatory approvals, may not be satisfied; Sovereign’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers; the willingness of customers to substitute competitors’ products and services and vice versa; the ability of Sovereign and its third party processing and related systems on a timely and acceptable basis and within projected cost estimates; the impact of changes in financial services policies, laws and regulations, including laws, regulations, policies and practices concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles: technological changes; changes in consumer spending and saving habits; unanticipated regulatory or judicial proceedings; changes in asset quality; employee retention; reserve adequacy; changes in legislation or regulation or policy or the application thereof; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.
2
Additional Information About Waypoint Merger
Sovereign and Waypoint will be filing documents concerning the merger with the Securities and Exchange Commission, including a registration statement on Form S-4 containing a prospectus/proxy statement which will be distributed to shareholders of Waypoint. Investors are urged to read the registration statement and the proxy statement/prospectus regarding the proposed transaction when it becomes available and any other relevant documents filed with the SEC, as well as any amendments or supplements to those documents, because they will contain important information. Investors will be able to obtain a free copy of the proxy statement/prospectus, as well as other filings containing information about Sovereign and Waypoint, free of charge on the SEC's Internet site (http://www.sec.gov). In addition, documents filed by Sovereign with the SEC, including filings that will be incorporated by reference in the prospectus/proxy statement, can be obtained, without charge, by directing a request to Sovereign Bancorp, Inc., Investor Relations, 1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610 (Tel: 610-988 0300). In addition, documents filed by Waypoint with the SEC, including filings that will be incorporated by reference in the prospectus/proxy statement, can be obtained, without charge, by directing a request to Waypoint Financial Corp., 235 North Second Street, Harrisburg, Pennsylvania 17101, Attn: Richard C. Ruben, Executive Vice President and Corporate Secretary (Tel: 717-236-4041). Directors and executive officers of Waypoint may be deemed to be participants in the solicitation of proxies from the shareholders of Waypoint in connection with the merger. Information about the directors and executive officers of Waypoint and their ownership of Waypoint common stock is set forth in Waypoint’s proxy statement for its 2003 annual meeting of shareholders, as filed with the SEC on April 21, 2003. Additional information regarding the interests of those participants may be obtained by reading the prospectus/proxy statement regarding the proposed merger transaction when it becomes available. INVESTORS SHOULD READ THE PROSPECTUS/PROXY STATEMENT AND OTHER DOCUMENTS TO BE FILED WITH THE SEC CAREFULLY BEFORE MAKING A DECISION CONCERNING THE MERGER.
3
Non-GAAP Financial Measures
This report 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 and Cash Earnings, and the related per share amounts, in their analysis of the company's performance. These measures, as used by Sovereign, 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 or integrating businesses, and certain non-cash charges. Operating earnings represent net income adjusted for after tax effects of merger-related and integration charges and the loss on early extinguishment of debt. The forward-looking earnings guidance for 2004 excludes the anticipated impact of EITF 04-8, which will be effective in the fourth quarter of 2004. Cash earnings are operating earnings excluding the after-tax effect of amortization of intangible assets and stock-based compensation expense associated with stock options, restricted stock, bonus deferral plans and ESOP awards. 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.
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Reconciliation of Cash and Operating Earnings to GAAP Earnings
($ in thousands, all numbers shown net of tax) Net Income/(loss) as reported 2003 $ 401,851 Merger-related and integration costs Provision for Loan Loss Loss on Debt Extinguishment Loss on Securities due to Restructuring of Balance Sheet Restructuring Expenses Negative Carry in Escrowed Bond Proceeds Non-solicitation Expense Income/Expense from PIERS 18,838 Operating Earnings Amoritzation of Intangibles Stock Based Compensation Cash Earnings $ 420,689 50,100 10,819 481,608 2002 $ 341,985 10,316 3,900 356,201 54,121 14,953 $ 425,275
Year Ended December 31,
2001 2000 1999 $ 179,299 6,549 5,525 158,106 287,001 89,408 1,906 97,063 66,956 12,025 18,589 78,039 (2,549) 67,003 1,680 $ 308,564 20,576 3,123 (702) 202,296 26,968 2,203 $ 231,467 1998 $ 136,455 33,533 169,988 15,588 2,601 $ 188,177
Quarter Ended September 30,
2004 $ 82,542 2003 $ 109,233 18,162 42,605 143,309 14,578 3,671 $ 161,558 109,233 2,795 $ 124,415 Note: Further details are available on our web site at www.sovereignbank.com in our 2002 and 2003 Annual Reports to Shareholders 5
Reconciliation of Cash and Operating Earnings to GAAP Earnings
(Per Share) Net Income/(loss) as reported 2003 $ 1.38
Merger-related and integration costs Provision for Loan Loss Loss on Debt Extinguishment $ 0.07
Loss on Securities due to Restructuring of Balance Sheet Restructuring Expenses Negative Carry in Escrowed Bond Proceeds Non-solicitation Expense Income/Expense from PIERS Impact of Additional Shares Outstanding for 1999 Common Stock Offerings Operating Earnings Amoritzation of Intangibles Stock Based Compensation Cash Earnings $ $ $ $ 1.45
0.17
0.04
1.66
2002 $ 1.23
$ 0.04
$ 0.01
$ 1.28
$ 0.19
$ 0.05
$ 1.52
Year Ended December 31,
2001 $ 0.45
2000 $ (0.13) 1999 $ 1.01
$ 0.03
$ 0.02
$ 0.62
$ 1.12
$ 0.35
$ 0.01
$ 1.47
$ 0.46
$ 0.32
$ 0.06
$ 0.12
$ 0.09
$ 0.37
$ (0.01) $ 0.02
$ (0.01) $ 1.15
$ 0.32
$ 0.01
$ 1.48
$ 0.04
$ 1.18
$ 0.15
$ 0.01
$ 1.34
1998 $ 0.85
$ 0.21
$ 1.06
$ 0.10
$ 0.01
$ 1.17
Quarter Ended September 30,
2004 $ 0.24
2003 $ 0.37
$ 0.05
$ 0.13
$ 0.42
$ 0.04
$ 0.01
$ 0.47
$ 0.37
$ 0.04
$ 0.01
$ 0.42
Note: Further details are available on our web site at www.sovereignbank.com in our 2002 and 2003 Annual Reports to Shareholders 6
Overview of Sovereign
An Exceptional Franchise Serving from South of Philadelphia to Boston and Beyond…
•$60 billion bank
pro forma for Waypoint
•665 branches
pro forma & ~1,000 ATM’s
• 18th largest bank in
the U.S. pro forma all deals
•Top 20 Small
Business Lenders in the U.S.
Key: Sovereign Branches Waypoint Branches Market Share
Massachusetts #3 Rhode Island #3 New Hampshire #5 Pennsylvania #5 * New Jersey #6 Connecticut #10 Maryland #39 * Pro forma for Waypoint 8 Source: SNL DataSource
Sovereign’s Footprint
Demographics by State Ranked by Median Household Income Total Population 2003 (Actual) Projected Population Change 2003-2008 (%) Median HH Income 2003 ($) Projected HH Income Change 2003-2008 (%) Total 2003 Deposits ($ bil) State
1 New Jersey 2 Connecticut 3 Maryland 4 Massachusetts 5 Alaska 6 New Hampshire 7 Colorado 8 Hawaii 9 Minnesota 10 California 11 Delaware 12 Illinois 13 Virginia 14 Utah 15 Washington 16 Michigan 17 Wisconsin 18 Nevada 19 Georgia 20 New York United States 21 Indiana 22 Rhode Island 23 Oregon 24 Ohio 25 Arizona 8,648,219 3,478,428 5,511,566 6,451,860 649,745 1,287,879 4,573,452 1,256,844 5,051,203 35,526,692 815,222 12,659,502 7,364,402 2,343,691 6,126,602 10,084,694 5,466,418 2,231,241 8,681,578 19,214,548 290,647,163 6,183,547 1,076,739 3,555,010 11,442,741 5,564,438 4.50
3.51
6.49
2.46
6.35
6.57
9.53
6.38
4.09
7.64
6.47
3.14
6.46
7.86
6.27
2.30
3.12
17.25
9.30
1.99
5.25
2.68
4.43
6.37
1.29
13.05
61,179 59,302 58,672 56,120 55,217 54,650 54,475 53,650 53,448 52,417 52,362 52,104 51,923 51,268 51,248 49,626 48,947 48,715 47,818 47,659 46,868 46,383 46,159 45,818 45,728 45,580 11.28
10.55
11.20
12.47
7.49
12.28
18.22
9.08
16.08
12.75
12.63
14.84
14.40
16.40
15.75
15.43
15.46
13.10
15.92
11.23
13.57
13.85
10.03
13.92
13.30
14.56
196.3
69.6
77.9
172.4
5.7
29.6
61.1
21.2
97.4
614.7
96.8
281.8
129.7
85.0
81.5
137.1
95.9
31.9
124.9
580.7
5.1
80.3
17.8
37.3
211.0
56.0
Total Population 2003 (Actual) Projected Population Change 2003-2008 (%) Median HH Income 2003 ($) Projected HH Income Change 2003-2008 (%) Total 2003 Deposits ($ bil) State
26 Kansas 27 Vermont 28 Texas District of Columbia 29 Pennsylvania 30 Nebraska 31 North Carolina 32 Iowa 33 Florida 34 Missouri 35 Idaho 36 Wyoming 37 South Carolina 38 Tennessee 39 Maine 40 South Dakota 41 North Dakota 42 Alabama 43 Kentucky 44 New Mexico 45 Oklahoma 46 Montana 47 Louisiana 48 Arkansas 49 Mississippi 50 West Virginia 2,724,736 619,110 22,086,674 570,447 12,352,083 1,734,956 8,408,414 2,939,909 16,959,416 5,697,731 1,356,506 500,377 4,138,445 5,832,551 1,300,832 763,030 631,406 4,499,139 4,109,331 1,867,337 3,508,062 911,769 4,486,970 2,721,552 2,880,492 1,799,627 2.25
2.77
9.28
-0.47
1.00
2.32
7.00
0.75
9.72
2.99
7.61
2.74
5.13
4.07
3.39
1.76
-2.68
1.91
2.74
4.76
2.86
1.82
0.79
2.86
2.05
-0.62
45,339 45,074 44,909 44,718 44,237 44,133 43,979 43,815 43,216 42,558 42,409 42,131 41,575 41,018 40,990 39,970 38,836 38,109 37,989 37,889 37,232 36,817 36,225 35,800 34,737 32,854 13.64
11.06
14.04
11.33
10.89
13.36
13.47
11.95
11.99
12.56
13.08
12.01
12.80
13.83
10.63
15.04
13.66
13.08
14.39
12.11
12.63
12.87
12.41
13.26
13.65
12.20
44.9
8.8
297.3
15.6
208.0
31.5
147.0
52.1
268.2
91.6
12.6
7.8
44.9
86.7
16.1
15.7
11.0
60.3
56.1
16.7
44.3
11.3
52.6
37.7
32.9
22.3
9
Sovereign’s Footprint
We have the second most affluent footprint amongst all large banks: Banks & Thrifts with Market Cap over $5b 1 Ranked by W eighted Average 2003 Median Household Income
Company Name
1 Hudson City Bancorp
2 Sovereign Bancorp, Inc.
3 UnionBanCal Corporation 4 Banknorth Group, Inc.
5 Zions Bancorporation 6 Golden West Financial Corp 7 Comerica Incorporated 8 North Fork Bancorporation 9 Washington Mutual, Inc.
10 Wells Fargo & Company 11 Bank of America Corporation 12 PNC Financial Services Group 13 Northern Trust Corporation 14 Bank of New York Company 15 Mellon Financial Corporation 16 M&T Bank Corporation 17 Citigroup, Inc.
18 Marshall & Ilsley Corporation 19 New York Community Bancorp 20 U.S. Bancorp 21 Wachovia Corporation 22 J.P. Morgan Chase & Co.
23 Fifth Third Bancorp 24 SunTrust Banks, Inc.
25 KeyCorp 26 BB&T Corporation 27 National City Corporation 28 Huntington Bancshares Inc.
29 Synovus Financial Corp.
30 National Commerce Fina Corp 31 SouthTrust Corporation 32 Compass Bancshares, Inc.
33 Regions Financial Corporation 34 AmSouth Bancorporation
Ticker
HCBK
SOV
UB BNK ZION GDW CMA NFB WM WFC BAC PNC NTRS BK MEL MTB C MI NYB USB WB JPM FITB STI KEY BBT NCC HBAN SNV NCF SOTR CBSS RF ASO
Market Value ($B)
$6.72
7.87
8.31
5.69
5.49
16.53
9.78
6.57
35.26
98.91
171.69
15.41
9.45
23.10
12.49
10.91
244.87
8.92
5.63
53.33
62.65
78.72
31.25
18.51
12.56
20.52
21.67
5.16
7.71
6.61
11.22
5.09
8.33
8.79
Wtd Avg Population Growth
4.5%
3.0
7.6
3.7
9.6
8.2
5.4
2.5
7.2
7.2
6.6
2.4
5.8
2.2
2.6
2.6
3.8
4.2
2.1
4.4
6.2
4.2
2.1
8.0
2.7
6.1
1.9
1.5
7.3
5.9
6.8
7.2
4.7
4.4
Wtd Avg HH Income Growth
11.3%
11.5
11.2
14.3
12.7
13.0
14.1
13.4
13.2
13.6
13.5
13.8
14.5
13.7
13.4
13.7
13.6
13.1
12.8
11.7
14.6
13.4
14.2
11.2
13.0
13.9
12.8
11.4
14.0
11.2
11.6
11.6
11.8
15.2
1 Market Cap as of 06/11/2004. Sovereign's is Pro Forma for pending acquisitions.
2 Weighted average for each demographic indicator is weighted by the deposit contribution of each state to the bank's total deposit base.
WTD AVG HH Income 2003
$61,179
54,173
52,377 52,210 50,778 50,728 50,503 50,501 50,477 50,197 50,010 49,673 49,272 48,974 48,745 48,745 48,594 48,445 48,181 47,775 47,737 47,441 46,788 46,788 46,712 46,249 45,974 45,638 44,534 43,633 42,804 42,761 40,553 39,452 10
Sovereign’s Footprint:
We have strong market share in the more consolidated states, and are able to grow in the more fragmented states:
Deposit Market Share by State Ranked by Top 10 Fragmentation State
1 Alaska 2 Hawaii 3 Rhode Island District of Columbia 4 Delaware 5 Utah 6 New Hampshire 7 Arizona 8 Vermont 9 North Carolina 10 Nevada 11 Oregon 12 Maryland 13 Connecticut 14 Michigan 15 Virginia 16 New York 17 California 18 Washington 19 Idaho 20 South Carolina 21 Ohio 22 Alabama 23 Georgia 24 Maine 25 Massachusetts 5,710 21,200 17,813 15,637 96,808 84,963 29,650 55,966 8,797 146,965 31,867 37,337 77,851 69,643 137,104 129,719 580,745 612,919 81,516 12,577 44,881 210,982 60,279 124,882 16,079 172,378
State's Deposits ($ mil) Top 10 Deposits ($ mil)
5,710 21,200 17,345 14,812 90,601 77,637 25,965 48,317 7,579 125,715 26,894 31,367 59,904 53,305 104,389 97,039 430,723 453,139 60,043 9,252 32,210 149,356 42,563 84,299 10,840 116,056
Top 10 Market Share
76.5% 76.1% 74.8% 74.2% 73.9% 73.7% 73.6% 71.8% 70.8% 70.6% 67.5% 67.4% 67.3% 100.0% 100.0% 97.4% 94.7% 93.6% 91.4% 87.6% 86.3% 86.2% 85.5% 84.4% 84.0% 76.9% 11
State
26 Minnesota 27 West Virginia 28 Louisiana 29 Montana 30 Wyoming 31 New Mexico 32 New Jersey 33 Mississippi 34 Colorado 35 Florida 36 South Dakota 37 Tennessee 38 Pennsylvania 39 Texas 40 Missouri 41 Wisconsin 42 Nebraska 43 North Dakota 44 Indiana 45 Oklahoma 46 Arkansas 47 Kentucky 48 Illinois 49 Kansas 50 Iowa
State's Deposits ($ mil) Top 10 Deposits ($ mil)
97,374 22,345 52,626 11,293 7,793 16,744 196,309 32,906 61,139 268,174 15,716 86,691 208,049 297,300 91,631 95,909 31,548 10,986 80,342 44,324 37,700 56,076 281,785 44,901 52,087 64,907 14,753 34,742 7,436 5,131 10,991 128,534 21,508 39,371 171,996 9,974 54,617 121,649 172,973 53,098 55,050 17,292 6,020 42,098 22,089 18,645 27,654 135,736 17,599 19,361
Top 10 Market Share
58.2% 57.9% 57.4% 54.8% 54.8% 52.4% 49.8% 49.5% 49.3% 48.2% 39.2% 37.2% 66.7% 66.0% 66.0% 65.8% 65.8% 65.6% 65.5% 65.4% 64.4% 64.1% 63.5% 63.0% 58.5%
Northeastern US Banking Climate
Aside from New York money center banks, the Northeastern US market is controlled by 3 large out-of-market consolidators (Bank of America, Wachovia and Royal Bank of Scotland), and a handful of regional banks competing for market share
Top 25 Regional by Asset Size (1) Company Name State
1 PNC Financial Services Group, Inc. (The)PA 2 Sovereign Bancorp, Inc.
PA 3 North Fork Bancorporation, Inc.
NY 4 M&T Bank Corporation 5 Mellon Financial Corporation NY PA 6 Banknorth Group, Inc.
7 Commerce Bancorp, Inc.
8 GreenPoint Financial Corp.
9 New York Community Bancorp, Inc.
10 Astoria Financial Corporation 11 Hudson City Bancorp, Inc. (MHC) 12 Independence Community Bank Corp.
13 Webster Financial Corporation ME NJ NY NY NY NJ NY CT 14 Mercantile Bankshares Corporation 15 Investors Financial Services Corp.
16 People's Bank (MHC) 17 Fulton Financial Corporation 18 Valley National Bancorp 19 Wilmington Trust Corporation 20 Hudson United Bancorp 21 Susquehanna Bancshares, Inc.
22 Riggs National Corporation 23 Provident Bankshares Corporation 24 NewAlliance Bancshares, Inc.
MD MA CT PA NJ DE NJ PA DC MD CT
Total Assets ($000)
79,862,101 59,513,644 52,426,859 52,094,458 35,094,000 29,275,790 26,738,671 25,955,000 24,087,750 22,334,295 18,671,335 18,017,754 17,025,870 14,130,145 10,921,423 10,659,500 10,556,421 10,484,538 9,289,579 8,958,718 7,309,820 6,744,101 6,423,052 6,390,391 6,260,984 1) Excludes New York City – headquartered institutions. Data as of 06/30/2004.
Assets and Deposits are pro forma for all pending deals.
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Total Deposits ($000)
54,411,037 35,483,537 29,852,740 34,953,511 22,502,000 19,336,629 24,061,748 13,056,000 10,016,283 11,895,714 11,076,461 9,355,116 10,372,922 10,643,694 5,003,173 8,949,200 7,430,988 7,374,502 6,422,349 6,128,993 5,098,931 4,417,037 4,130,502 3,779,654 3,894,074
Market Value ($M)
15,135 7,624 7,380 11,240 12,317 5,877 4,174 5,926 5,824 2,795 6,556 3,370 2,640 3,802 3,079 3,212 2,596 2,557 2,455 1,663 1,121 680 1,055 1,571 952
Total US Banking Climate
1
Company Name State
2 Citigroup, Inc.
3 Bank of America Corporation 4 JPMorgan Chase & Co.
5 Wachovia Corporation 6 Wells Fargo & Company 7 Washington Mutual, Inc.
8 U.S. Bancorp 9 SunTrust Banks, Inc.
10 National City Corporation 11 Bank of New York Company, Inc.
12 BB&T Corporation 13 Fifth Third Bancorp OH NY NC OH 14 State Street Corporation MA 15 Golden West Financial CorporationCA 16 KeyCorp 17 Regions Financial Corporation OH AL NY NC NY NC CA WA MN GA 19 Sovereign Bancorp, Inc.
20 Comerica Incorporated 21 M&T Bank Corporation 22 AmSouth Bancorporation 23 UnionBanCal Corporation 24 Northern Trust Corporation 25 Popular, Inc.
Marshall & Ilsley Corporation
Top 25 U.S. by Asset Size (1)
PA MI NY AL CA IL PR WI
Total Assets ($000)
1,396,568,000 1,037,202,000 817,763,000 471,351,368 420,305,000 278,544,000 190,230,000 128,135,048 116,969,803 97,535,000 97,348,285 95,613,539 94,140,000 93,158,302 86,221,000 81,667,522 79,862,101 59,513,644 54,543,000 52,094,458 48,295,813 46,295,831 43,279,300 39,556,239 37,071,618
Total Deposits ($000)
524,400,000 575,413,000 346,539,000 280,180,174 268,125,000 162,466,000 119,927,000 85,528,703 73,036,089 61,060,000 66,662,890 57,907,454 55,347,000 48,611,353 52,423,000 57,583,145 54,411,037 35,483,537 43,911,000 34,953,511 32,139,244 39,367,911 27,879,100 19,227,576 25,225,286
~ Market Value ($M)
242,643 177,389 141,946 61,921 100,087 34,359 55,514 19,284 25,118 23,256 22,100 27,861 15,263 16,563 12,794 15,073 15,135 7,624 10,395 11,240 9,257 8,750 9,388 6,527 8,974 (1) All banks Assets and Deposits are Pro Forma for all pending acquisitions as of 06/30/2004 Conclusion: The northeastern United States has created an opportunity for a super-regional to emerge, similar to Fifth Third Bancorp in the Midwest and BB&T in the South 13
Core Deposits as Compared to Peers
Company Name
Sovereign Bancorp Webster Financial Corporation Banknorth Group, Inc.
BB&T Corporation AmSouth Bancorporation Huntington Bancshares Compass Bancshares, Inc.
New York Community Bancorp Fifth Third Bancorp TCF Financial Corporation
Core Deposits/ Tangible Premium/ Tangible Premium/ Total Deposits Core Deposits Total Deposits
77.1% 68.3% 75.7% 58.4% 71.2% 71.8% 78.0% 61.7% 84.7% 81.4% 24.1% 27.7% 30.5% 44.8% 39.1% 39.6% 41.3% 61.2% 54.5% 68.4% 18.6% 18.9% 23.1% 26.2% 27.9% 28.4% 32.2% 37.7% 46.1% 55.7% As of June 30, 2004 14
Strong Loan and Deposit Mix
Loan Mix:
Consumer
39% 23%
Residential
38%
9/04 Balance - $35.3 billion 9/04 Yield – 5.05%
Commercial
Deposit Mix:
Time Deposits
22% 42%
Checking
36%
9/04 Balance - $33.1 billion 9/04 Cost of Funds – 1.04%
Other Core
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Sovereign’s Historical Performance
Third Quarter 2004 Financial Highlights:
Net income of $83 million, including special debt redemption charge of $43 million and a merger and integration charge of $18 million; earnings per share of $.24, including charges of $.13 for debt redemption and $.05 for merger and integration Operating earnings of $143 million, up 31% from 2003; operating earnings per share of $.42, up 14% from 2003 Cash earnings of $162 million, up 30% from 2003; cash earnings per share of $.47, up 12% from 2003 Consumer and Commercial loans, excluding impact of acquisitions, increased 28% and 9%, respectively, from the third quarter of 2003 Consumer and Commercial fee revenues of $63 million and $32 million, respectively, each up 17% from a year earlier Core deposits up 21% from 2003 and 13% from the second quarter of 2004. Excluding acquisitions, core deposits up 6% from third quarter of 2003 Sovereign continues to be positioned to benefit from higher interest rates 17
Non-Financial Highlights:
Sovereign Bancorp was added to the S&P 500 index in June Named to The Forbes Platinum 400 Identified as one of the most admired financial industry companies in the nation by Fortune for the third consecutive year Obtained a major banking services contract with the state of Massachusetts, taking the business away from FleetBoston Received an “outstanding” CRA rating from the OTS Completed in February of 2004 the acquisition of First Essex Bancorp and in July of 2004 the acquisition of Seacoast Financial Services Corporation Announced in March 2004 the acquisition of Waypoint Financial Corp., expected to close in January 2005 18
Strengthened Balance Sheet
Sovereign Bancorp (BHC):
All high-cost debt now removed from structure – $500 million secured senior note at approximately 8.00% all-in redeemed in September 2004 – Replaced with $300 million unsecured senior note at 3-month LIBOR + 33 bps ~ $800 million TCE generation in 2005 provides additional flexibility Maintain double-leverage ratio at ~120% Strive for further rating agency upgrades
Sovereign Bank (Bank):
Maintain bank capital at $500+ million cushion to well capitalized guidelines Strive for further rating agency upgrades 19
Strong Earnings Growth
$700 $600 $500 $400 $300 $200 $100 $0 5 year Operating Earnings CAGR of 20% 5 year Cash Earnings CAGR of 21% 1998 1999 2000 2001 2002 2003 2004 Operating Earnings Cash Earnings Mgmt Goal
20
120%
1-Year Stock Price Performance
Sovereign S&P 500 Dow Jones S&P Banks 110%
% Appreciation 12.3% 10.9% 5.8% (2.0)%
100% 90% 80% Nov-2003 Jan-2004
11/05/04 closing price of $22.12
Mar-2004 May-2004 Jul-2004
Daily from 5-Nov-2003 to 5-Nov-2004
21 Sep-2004 Nov-2004
300%
3-Year Stock Price Performance
Sovereign S&P 500 Dow Jones S&P Banks 250%
% Appreciation 114.8%
200% 150%
36.1% 10.0% 5.7%
100% 50% Nov-2001 Mar-2002 Jul-2002 Nov-2002 Mar-2003 Jul-2003 Nov-2003
Daily from 5-Nov-2001 to 5-Nov-2004
Mar-2004 Jul-2004 Nov-2004
11/05/04 closing price of $22.12
22
320%
5-Year Stock Price Performance
Sovereign S&P 500 Dow Jones S&P Banks 270% 220%
% Appreciation 169.1%
170% 120% 70%
18.8% (3.0)% (14.9)%
20% Nov-1999 May-2000 Nov-2000 May-2001 Nov-2001 May-2002 Nov-2002 May-2003 Nov-2003 May-2004
Daily from 5-Nov-1999 to 5-Nov-2004
Nov-2004
11/05/04 closing price of $22.12
23
Achievements Over Last 5-Years
September of 2004 marked the five-year anniversary of Sovereign’s announcement of the Fleet/BankBoston branch acquisition. At that time Sovereign set out specific financial goals: Execute a smooth integration and build the franchise value of
the company. Since the third quarter of 2000, Sovereign’s commercial loans have grown 14% and consumer loans have grown 20% on average per year. Core deposits have grown 15% on average per year. Banking fees have increased 30% on average per year. Operating expenses have increased only 1.5% on average per year. Sovereign’s has reduced their efficiency ratio by more than 500 basis points.
Grow net income and earnings per share by 10% per year,
leading to $2.00 in cash earnings per share by 2005. Since Sovereign’s successful integration in the third quarter of 2000, the annual growth rate in operating earnings per share has been 10%, and since 2001, Sovereign’s operating net income annual growth rate has been 25%. Cash earnings per share goals for 2004 are $1.85 to $1.90, 2005 cash earnings per share should be well in excess of our goal of $2.00.
24
Achievements Over Last 5-Years
Restore Sovereign Bancorp’s capital ratios to Fed holding
company well-capitalized levels by 2005. Sovereign Bancorp reached these levels by early 2003, and today has a Tier 1 leverage ratio of 6.56%, or more than 150 basis points in excess of the well capitalized guideline.
Restore debt ratings to pre-Fleet acquisition levels by 2005.
Sovereign reached those levels by 2004, returning to investment grade status with credit ratings agencies.
Not deviate from our Critical Success Factors. Sovereign has remained committed to their four critical success factors of Superior Asset Quality, Superior Risk Management, Strong Sales and Service Culture and Superior Productivity.
Payoff all high-cost debt by the end of 2006. In September of 2004, Sovereign redeemed one of the last pieces of high-cost debt financing incurred in this transaction 25
Comparative Shareholder Returns
As of November 3, 2004 Returns Since:
Sovereign Bank Index (BKX) 10/4/2004 1 Month -0.23% 1.83% Commerce Bancorp PNC Financial Bank of America Wachovia Corp North Fork Bancorp New York Community 3.23% -2.99% 2.91% 5.27% 1.15% -9.59% 26 11/3/2003 1 Year -3.65% 5.90% 21.57% 2.86% 29.62% 14.46% 15.52% -28.91% 11/4/2002 2 Years 55.20% 29.57% 27.37% 39.18% 50.23% 52.16% 21.68% 25.19% 11/5/2001 3 Years 116.91% 25.02% 63.49% 6.40% 85.98% 80.92% 71.22% 50.12%
Sovereign’s Business Strategy
Sovereign’s Business Strategy
Combining the best of a large bank with the best of a smaller community bank.
Best of a Large Bank: –Products –Services –Technology –Brand –Delivery channels / distribution system –Talent –Diversification –Sophistication of risk management Best of a Small Bank: –Flatter structure –Divided into 10 geographic markets –Local decision making –Active community involvement culture –Cross functional lines to deliver bank to customer –Treat customers as “individuals” 28
Sovereign’s 10 Local Markets
Mid-Atlantic Division Jim Lynch, Chairman and CEO
New Jersey Market Central PA / Northern MD Market Philadelphia, Delaware and Chester counties / Southern NJ Market Northern PA Market Bucks / Montgomery counties Market
New England Division Joe Campanelli, Chairman and CEO
Massachusetts Market New Hampshire Market Rhode Island Market Connecticut / Western MA Market Islands – Nantucket / Martha’s Vineyard Market 10 Local Markets, each with a CEO responsible for meeting profitability and revenue goals 29
Sovereign’s Banking Structure
Commercial Real Estate Lenders Market CEO Commercial Lenders Cash Management Representatives Retail Branches Small Business Lenders Financial Consultants
30
Absolute Clarity Regarding Target Markets
Consumer
Middle Income Households
– We target mass market with average household income of about $75,000+ – We differentiate on the basis of relationship selling and service delivered with high-touch and supported by convenience of technology – Goal to become dominant in all micro markets – Goal to cross-sell 6+ services to every household to entrench relationship and dramatically improve Bank profits 31
Absolute Clarity Regarding Target Markets
Commercial/Business
Small to Middle Market
– We target in-market businesses with revenues of $1 - $100 million – We differentiate on the basis of quality of relationship managers, localized quick decision making, supported by superior products and technology – Goal to cross-sell 6+ services to entrench relationship and dramatically improve Bank profits 32
Strategy. With Clear Purpose and Direction.
There is nothing complicated about our strategy for moving forward We are clear about our strategy, as well as our values, mission and goals As we execute, we will remain committed to our critical success factors of: – Superior asset quality – Superior risk management – Strong sales and service culture that aligns team
member performance with a recognition and rewards system
– High level of productivity through revenue growth
and efficient expense control
33
Critical Success Factor – Superior Asset Quality
Superior Loan Quality
At September 30 th non-performing assets and net charge-offs levels were the lowest levels in more than four years
($ in millions) Non-Accruals Non-Accruals % of Loans 12/31/02 12/31/03 $231 1.00% $198 6/30/04 9/30/04 $151 $146 .76% .52% .42% NPA’s NPA’s % of Assets $257 .65% $220 .51% $176 $169 .36% .30% Classified and Internally Criticized Loans have shown improvement for 9 quarters 35
Credit Quality
All asset quality measures are pointing toward improved net charge-offs, continuing in 4Q of 2004 and into 2005 Recent Acquisition of Seacoast and pending acquisition of Waypoint both improve our credit risk profile Lower NCO’s forecasted and lower credit risk profile will reduce our need for annual loan loss provisioning in coming periods: – NCO’s anticipated to decrease to 40 basis point range for 2005 and beyond – Allowance as a % of loans will be dictated by credit quality and loan mix 36
Critical Success Factor – Superior Risk Management
Superior Risk Management
Sovereign continues to be well positioned for rising interest rates
Net Interest Income Sensitivity at 9/30/04 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00%
-6.6%
Down 100
1.7%
Up 100
4.5%
Up 200
4.8%
Up 300
38
Current A/L Position
Mildly asset sensitive Net interest income increases 4.5% in a +200 bp shock test* at 9/30/04 However, net interest income will expand faster than net interest margin – Reinvestment of cash flows still at lower yields than maturing assets – 100+ basis points of rate moves needed to meaningfully move our net interest margin, but net interest income increases immediately * Defined as the expected 12 month impact of an instantaneous 200bp parallel increase to all points of the existing Treasury curve 39
Why Are We Asset Sensitive? At September 30
th
…
$13.9 billion of assets tied to Prime,LIBOR, or CMT resets within 1 month following an increase or decrease in rates Only $11.6 billion of liabilities tied to short-term indices
Other Treasuries $2.7b
36% Investments 64% Residential Prime $6.5b
54% Commercial 46% Consumer Libor $4.7b
100% Commercial
40
Why Are We Asset Sensitive? Core Deposit Base…
$5.1 billion, or 15% of deposits at zero cost $17.8 billion, or 54% of total deposits at administered rates – on average, move at ~25% of interest rate movements in a rising rate scenario Growing equity base increases asset sensitive bias
CD’s 22% or $7.4 bn Interest Bearing DDA 26% or $8.6 bn Money Market 26% or $8.4 bn Non-Interest Bearing DDA 15% or $5.1 bn Savings 11% or $3.7 bn
41
Asset/Liability Management
2005 forecast assumes 3.00% Fed Funds rate by year end, with ~50 basis point additional flattening of the Treasury curve Recent debt redemption and new issuance will add ~ 5 to 6 basis points to net interest margin going forward Core deposit bias allows for “pricing lag” as rates rise – assumed to move at ~25% of overall rise in rates (on average – will vary by category) 42
Critical Success Factor – Strong Sales and Service
Strong Sales and Service Culture
6.50
Retail Accounts and Services per Household 6.00
5.50
5.00
4.50
4.00
3.50
3.00
4.98
5.13
5.20
5.25
5.24
5.29
1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 5.29
6.00
3Q04 Target '05
44
Red Carpet Service Guarantees
Red Carpet Service was unveiled in January 2002 as a unique program that differentiates Sovereign from the competition Six customer service guarantees were introduced at that time, and backed by $5 if Sovereign failed to uphold those guarantees Red Carpet Service Guarantees were recently expanded to include other business lines within the bank, over 24 guarantees now exist Guarantees exist within the following business units: – Community Banking – Consumer Lending – Mortgage Banking – ATM’s – Research/Records – Netbanking 45
Critical Success Factor – Productivity and Expense Control
Productivity and Expense Control
On track to improve the efficiency ratio* more than 100 basis points in 2004
55.00% Efficiency Ratio 53.23% 53.00% 52.02% 51.67% 51.00% 50.44% 49.22% 49.00% 47.00% 45.00% Dec-02 Dec-03 Mar-04 Jun-04
* Efficiency ratio equals G&A expenses as a percentage of total revenue, excluding securities gains 47
Sep-04
Operating Efficiency
Rate of growth in G&A and total expenses is far below revenue growth ($ in millions) Total Revenue Growth (%) G&A Growth (%) Total Expenses Growth (%) 2001 $1,468 2002 1,592 8.4% $777 820 5.5% $1,232 979 -20.5% 2003 1,728 YTD '04 1,359 8.5% 10.3% 864 685 5.4% 8.0% 1,011 891 3.3% 16.4% 1 1
Excluding merger and integration charges and debt extinguishment charges, total expense growth is 5.6%
48
Our Earnings Goals for 2004 through 2007
What to Expect for the Remainder of 2004…
Net income of $1.36 - $1.41 per fully diluted share Operating earnings of $1.65 to $1.70 per diluted share; 14%-17% implied growth (excludes $.12 of merger integration charges, $.13 of debt restructuring charges, and $.03 -.04 for EITF 04-8 ) Cash earnings of $1.85 to $1.90
Net interest margin should expand in the fourth quarter, should see net interest income increase Credit quality – net charge-offs in $25 million range, other credit metrics continue to improve Expect commercial loan and core deposit growth during the fourth quarter, after considering acquisition effects 100+ basis point improvement in efficiency ratio from 2003 50
Assumed Earnings Drivers: 2005 through 2007
Excess Capital Generation, + Improved Credit Quality, + Balanced Asset/Liability Profile with long-term asset sensitive bias, + Continued Operating Efficiency, + Continued Tax Efficiency, + Manageable levels of Balance Sheet growth for loans, deposits and fee revenue, = Potential for sustained, strong double-digit earnings growth 51
Excess Capital Generation
Sovereign produces strong organic capital growth in 2005 and beyond: ($ in millions) Mean '05 Street $1.91
plus: '05 CDI Amortization '05 Shares 406 = $ 775 75 850 50 (1) less: Shareholder Dividends less: 6% tangible capital on assumed B/S growth (2) equals: Excess Capital to deploy $ 560 While a wide range of uses for this excess capital may emerge, multiple scenarios produce EPS accretion of $.03 - $.05 for 2006 and $.06 - $.10 for 2007 (1) (2) Current dividend rate is assumed for illustrative purposes only Assumed $4.0 billion of balance sheet growth in 2006 on starting balance sheet of $60 billion, or 7% growth 52
Putting It All Together: Earnings Momentum 2005 - 2007
Continue to grow revenues at least twice as fast as the rate of operating expenses, or better Anticipated rate increases and balance sheet shift away from wholesale assets and liabilities widens net interest margin through 2007 Maintain neutral to mildly asset-sensitive balance sheet Effective tax rate held at ~30% Excess Capital deployment adds 2% - 4% to EPS each year, at a minimum 53
Earnings Goals 2004 through 2007
Management’s Operating Goal Actual/Street Mean Estimate Operating EPS Growth
2002 $1.25 - $1.30 $1.28 14% 2003 $1.40 - $1.45 $1.45
13% 2004 $1.65 - $1.70 $1.68
2005 $1.90 - $2.00 $1.88* 14% 15% 2006 $2.10 - $2.20 or higher N/A 2007 $2.40 or higher N/A 10% or higher 10% or higher * Management is comfortable with 2005 mean estimate of $1.91 operating EPS; management’s goal remains to strive for between $1.90 - $2.00 operating EPS in 2005 54
Sovereign’s Valuation Discount
Price to IBES Mean EPS Est - Next 12 Mos 18 16 14 12 10 8 6 4 11/4/99 5/25/00
Sovereign
12/14/00
LB Midcap Banks
7/5/01 5 Year Ave.
Price / NTM Earnings
9.87 x 13.50 x
1/24/02 SOV 8/15/02 Mid-Cap Bank Index 3/6/03 5 Year Ave.
Prem. / (Disc.) to LB Midcap Banks
(26.8%) -
Current Price / NTM Earnings
12.50 x 14.69 x
9/25/03 4/15/04 Current Prem. / (Disc.) to LB Midcap Banks
(14.9%) -
11/5/04
55
Sovereign Is Committed to the Following:
1.
We will stick with our discipline of blocking & tackling, as there are tremendous opportunities within our market for organic growth. We have a strong management team in place and our structure and strategy is organized as such to seize those opportunities.
2.
We will continue with our capital and M&A discipline. As always, any acquisition that we do must be accretive to earnings within the first year, not take us away materially from our capital goals, and must not be dilutive to our future growth prospects. Any acquisition opportunity, which requires capital allocation, will be analyzed against share repurchases or other uses of capital.
3.
We are committed to improving our operating fundamentals including net interest margin, return on assets, return on equity, and dividends 56
In Closing
Sovereign has consistently delivered on its promises: – On earnings – 21% compound annual growth rate in operating earnings since 2000 – On capital – $2.0 billion in TCE growth; 315 basis points of ratio improvement since 3Q00 – On its underlying business metrics- loan, deposit, fee income growth and efficiency ratio improvements The stage is set to deliver strong financial results for the next several years Sovereign’s franchise is very unique and cannot be duplicated Significant insider ownership SOV is currently trading at 11.6x ’05 operating EPS mean analyst estimate, 10.8x ’05 implied cash mean, and 154% of current book value as of November 3, 2004 57