Sovereign Announces Second Quarter 2000 Operating Earnings Per Share of $.29 -- Cash Earnings Up 30
PHILADELPHIA--(BUSINESS WIRE)--July 20, 2000--
-- Second quarter cash earnings increased 30% to $71.9 million up
from $55.3 million in 1999; Cash EPS was $.36; second quarter
operating earnings of $57.3 million, or $.29 per diluted share,
exceed consensus analyst estimates
-- Successfully completed second phase of merger integration for New
England acquisition ("SBNE"); customer retention ahead of
projected levels
-- Final phase of merger integration scheduled for July 21, 2000
-- Quarter over quarter core revenue growth of 36%
-- Commercial loans outstanding increased $225 million during the
quarter; excluding SBNE
-- Core deposits increased $186 million during the quarter,
excluding SBNE; 11% annualized growth rate
-- Repositioned balance sheet via sale of $1.0 billion of investment
securities; improves financial ratios and reduces interest rate
sensitivity
-- Asset quality continues to be strong
Sovereign Bancorp, Inc. ("Sovereign") (NASDAQ/NMS: SVRN), parent
company of Sovereign Bank, today reported cash earnings for the
quarter ended June 30, 2000 of $71.9 million, or $.36 per diluted
share, up from $55.3 million and $.35 per diluted share reported for
the same period in 1999. Cash return on tangible equity was 38.5% for
the quarter ended June 30, 2000. Sovereign's year-to-date cash
earnings increased to $132 million from $108 million for the same
period last year. On a per share basis, cash earnings were $.69 for
the six months ended June 30, 2000 up from $.67 per diluted share for
the same period last year.
Operating earnings for the quarter ended June 30, 2000 were $57.3
million, an increase of 17%, as compared to $48.8 million from the
quarter ended June 30, 1999. Operating EPS for the quarter ended June
30, 2000 was $.29, exceeding the consensus analyst estimate by $.02.
Operating earnings for the six months ended June 30, 2000 were $110
million, up from $94.1 million for the same period last year. For the
six months ended June 30, 2000 operating EPS was $.57.
Operating earnings exclude the following special charges for 2000:
merger-related, systems and integration charges related to recent
acquisitions, securities losses related to a balance sheet
restructuring, and the impact on net interest income and shares
outstanding from early issuance of certain debt and equity instruments
issued to finance Sovereign's pending New England retail banking and
middle market lending acquisition ("Sovereign Bank New England" or
"SBNE"). Special charges for the quarter ended June 30, 2000 were $106
million after tax and for six months ended June 30, 2000 were $121
million after tax. Cash earnings are operating earnings excluding
amortization of intangible assets and ESOP-related expenses.
In reporting second quarter operating results, Jay S. Sidhu,
Sovereign's President and Chief Executive Officer, said, "We are
pleased that our core operating fundamentals remained solid through
the second quarter while successfully converting the second phase of
our New England acquisition. Loan and deposit levels were very
encouraging, asset quality continued to be strong, and our exposure to
interest rate movements was reduced during the quarter and
prospectively. To accomplish these results in the midst of
integrating the largest acquisition in our history is a tribute to
the commitment and talent of our team members."
Sovereign's second quarter 2000 reported net income, which
includes the special charges and charges for restructuring noted
above, was a loss of $48.7 million, or $.22 per diluted share.
Successful Completion of Second Phase of Sovereign Bank New England
As previously announced, Sovereign successfully completed the
second phase of the SBNE conversion that occurred on June 16, 2000.
Included in this second phase were $3.8 billion of deposits, 82
community banking offices and 163 automated teller machines ("ATMs").
The third and final SBNE conversion is scheduled to close on July 21,
2000. In total, the transaction represents the largest branch
acquisition in banking history and will create the third largest bank
in New England with 281 community banking offices, over 550 ATMs and
approximately $12.0 billion of deposits and $8.1 billion of
commercial, consumer, and mortgage loans.
In the announcement, Sidhu said, "We are thrilled to finally have
Sovereign Bank New England offices in the Greater Boston area and now
customers can enjoy the services and products of a commercial bank
with a personal touch throughout the Greater Boston, Rhode Island &
Connecticut communities. We are pleased that our first and second
conversions were integrated seamlessly and anticipate equal success in
the final conversion for central Massachusetts and southern New
Hampshire scheduled for July 21, 2000."
"One of the critical success factors of the SBNE transaction lies
in our ability to retain our new customers, and we are very encouraged
by our progress to date," stated John P. Hamill Chairman and CEO of
Sovereign Bank New England. "In the first two weeks following the
conversion in the Boston area, we have experienced virtually no net
customer reductions, and our customer retention level for the first
conversion in Connecticut and Rhode Island is leveling off at the
96%-97% range. We are confident in our ability to successfully
integrate the last phase of the acquisition on July 21, and we are
hopeful that customer retention levels from that final phase will be
solid as well," Hamill concluded.
Additionally, loan balances transferred to Sovereign at June 16
approximated $3.3 billion, which included $840 million of commercial
loans and leases, $150 million of consumer loans and $2.3 billion of
residential mortgages.
Revenue and Loan Growth
For second quarter 2000, core revenue (operating net interest
income plus non-interest income, excluding securities transactions)
was $241 million, an increase of 36% from second quarter 1999 core
revenue of $177 million and up from first quarter 2000 core revenue of
$191 million.
Commercial originations generated internally for the second
quarter of 2000 were $484 million. At June 30, 2000, commercial loans
totaled $6.8 billion representing 32% of Sovereign's loan portfolio,
compared to $3.2 billion and 26% of the loan portfolio at June 30,
1999.
Consumer loans originated during the second quarter of 2000
totaled $626 million. The consumer loan portfolio (including home
equity loans and lines of credit, automobile loans, and other consumer
loans) totaled $6.2 billion at June 30, 2000, compared to $4.2 billion
at June 30, 1999. At June 30, 2000, consumer loans comprised 29% of
Sovereign's loan portfolio compared to 34% at June 30, 1999.
Residential mortgage loans increased $2.4 billion during the
quarter to $8.4 billion and now represent 39% of Sovereign's loan
portfolio as compared to 40% at June 30, 1999. The SBNE transaction on
June 16 accounted for virtually all of this net increase.
Deposit Growth
Sovereign's retail banking group in the mid-Atlantic region
continued to post solid sales results for the quarter. Core deposit
growth, excluding SBNE, was particularly strong, up $186 million on a
linked-quarter basis, an annualized growth rate in excess of 11%.
"Steady growth in business accounts coupled with a successful
marketing campaign for money market accounts fueled our core deposit
growth during the quarter," noted Sidhu.
As stated previously, deposit totals for SBNE are ahead of plan,
with customer retention levels at 96% and almost 100%, respectively,
for each of the first two phases of the SBNE acquisition.
Improving Core Business
On an operating basis, net interest margin was 2.94% for the
quarter, compared to 2.92% for the same period last year and 2.82% for
the first quarter of 2000. "The increase in the net interest margin is
the result of a full quarter impact of the March 24, 2000 phase one
conversion of SBNE, as well as the partial impact of the June 16
conversion, offset by strong competition for retail deposit products
and rising costs of wholesale borrowings. This gradual increase in
margins is expected to continue through year-end as wider net interest
spreads from the SBNE acquisition are recorded," stated Dennis S.
Marlo, Sovereign's Chief Financial Officer and Treasurer. The core
bank margin (total loan yield less cost of deposits) was 4.45% for the
second quarter of 2000, compared with 4.22% for the first quarter of
2000.
Additionally, Sovereign took steps during the quarter to
reposition its balance sheet as a result of the SBNE acquisition. The
repositioning involved the sale of approximately $1.0 billion of
investment securities classified as available-for-sale, with the
proceeds of the sale used to reduce wholesale borrowings. "The SBNE
acquisition has created an opportunity for Sovereign to reduce its
interest rate sensitivity and its reliance on wholesale funding,"
stated Marlo. "We expect the transaction to be accretive by a few
basis points to our capital ratios, while adding approximately five
basis points to our net interest margin prospectively." Sovereign
recorded securities losses for the quarter of $38.5 million net of
tax, which loss was reflected in total stockholders' equity at the end
of the first quarter of 2000.
Non-Interest Income
Non-interest income, excluding securities transactions for both
periods, grew by 56% to $46.5 million in the second quarter of 2000
from $29.9 million a year earlier. Retail banking fees approached $18
million for the quarter, up 66% from $10.8 million the same period a
year ago.
Operating Expenses/Taxes
General and administrative expenses for the second quarter 2000
were $208 million, compared to $86.2 million for the same period last
year. Included in general and administrative expenses for the quarter
were $90.1 million of merger-related, integration, and other charges
related to all of Sovereign's recent acquisitions. Excluding these
charges, general and administrative expenses were $118 million for the
quarter ended June 30, 2000, up from $102 million reported in the
first quarter on a consistent basis. "The increase in general and
administrative expenses on a linked quarter basis is attributable to
the full quarter impact of the Connecticut and Rhode Island portion of
the acquisition and the partial impact of the eastern Massachusetts
portion during the second quarter as compared to the first quarter,"
stated Marlo. "The high level of merger-related charges during the
quarter reflects the carve-out of incremental back-office expenses
incurred as a result of restructuring of the New England acquisition
from a single closing to three staggered closings over a four month
period, in addition to merger-related charges previously contemplated
and expenses related to a sale/leaseback and long-term leasing
arrangement," Marlo concluded.
On June 30, 2000, Sovereign executed a sale/leaseback transaction
involving a portion of its owned real estate and a long-term lease
arrangement for certain real estate to be used by SBNE. The total
transaction was valued at $308 million and included the sale and
leasing of 127 of its and former Fleet community banking offices and
other facilities. "This transaction is meaningfully accretive to our
capital levels and is consistent with our other recent initiatives to
raise capital which can be reinvested in our core franchise. The
off-balance sheet financing created by this structure will slightly
improve Sovereign's net interest margin and return on assets
prospectively," stated Marlo. The transaction is expected to be
neutral to Sovereign's future earnings. Total expenses related to the
transaction were approximately $16 million pre-tax and were
principally recorded as merger-related charges during the second
quarter, as discussed above.
Sovereign's effective tax rate for the second quarter of 2000 was
approximately 33.0%, in line with its rate the prior quarter.
Asset Quality
As evidenced by the attached statistics, Sovereign's credit
quality remained strong as of June 30, 2000. Sovereign established an
initial allowance for loan losses of $26 million relating to loans
acquired in the second phase of the SBNE acquisition. Non-performing
assets as a percentage of assets were .32%, consistent with last
quarter and an improvement from .36% a year ago. As a percentage of
loans, non-performing loans were .50%, down from .53% last quarter and
.66% a year earlier. Annualized net charge-off activity as a
percentage of average loans remained at low levels, totaling .23% for
the quarter, up slightly from .21% last quarter and down from .26% for
the second quarter of 1999 excluding charge-offs of $4.3 million
related to a June 1999 accelerated disposition of non-performing
residential loans. "Since a majority of our non-performing loans and
consumer and residential loans which are secured by real estate, and
our non-performing asset ratios are below industry averages, we are
comfortable with our asset quality and coverage ratios in this
environment," stated Marlo.
Looking Ahead
Sidhu stated "Our top three goals are clear and are as follows:
-- Following a very smooth systems integration in New England,
implement our high-touch customer service and sales-oriented
culture, building upon our significant market position
-- Restore equity and Tier one capital ratios at the holding company
level as soon as possible
-- Focus on achieving superior financial results striving to reach
annual earnings per share levels in the range of $1.90 to $2.00
by the end of 2003."
"We are focused on both the short and long-term, and we believe we
are well positioned to achieve the long-term results that will help us
recognize above average returns for our shareholders. Sovereign
insiders are among the largest group of shareholders at Sovereign,"
commented Richard E. Mohn, Chairman of Sovereign. |
