$1.58 Billion in Non-cash Charges Reflecting Impairment of Goodwill and
Certain Securities; Other Increases to Loan Loss and Other Valuation
Reserves of $115 Million
Charges Primarily Non-Cash; Will Not Impact Liquidity
PHILADELPHIA, Jan. 14 /PRNewswire-FirstCall/ -- Sovereign Bancorp, Inc.
("Sovereign") (NYSE: SOV), parent company of Sovereign Bank ("Bank"),
announced today that continued volatility in the financial markets and
deterioration in the credit environment are expected to adversely impact
its fourth quarter 2007 financial results.
Charges in the fourth quarter of 2007 are expected to include:
-- Pre-tax, nonrecurring, non-cash charge of approximately $1.4 billion
caused by goodwill impairments;
-- Pre-tax, non-cash charge of $180 million related to impairment of
certain Fannie Mae ("FNMA") and Freddie Mac ("FHLMC") preferred stock
securities;
-- Provision for credit losses which bolsters the allowance for loan and
lease losses (ALLL) to $738 million from $650 million in the prior
quarter, and reflects an increase of $88.0 million of reserves in
excess of net charge-offs. This action raises Sovereign's ALLL as a
percentage of loans to 1.28% from 1.14% at September 30, 2007.
-- Pre-tax charges of approximately $27.0 million related to financings
Sovereign provided to two mortgage companies that have defaulted on
certain agreements.
"The majority of these charges do not impact cash flows, tangible or
regulatory capital or our liquidity. While certain of these charges
moderately impact our tangible capital, management believes based on our
forecasts that we can achieve our interim target of 4.5% tangible capital
by the end of the third quarter of 2008. After reaching this goal, we
anticipate growing tangible capital further," said Joseph P. Campanelli,
President and Chief Executive Officer of Sovereign. "Sovereign is a
fundamentally sound financial institution. Importantly, our capital exceeds
the levels defined as 'well capitalized' by our regulators. Our forecasts
indicate that Sovereign can maintain this designation even under a further
worsening of industry conditions."
Campanelli continued, "Management has conducted an extensive analysis,
modeling various credit market and industry scenarios. In light of this
analysis, we are confident that Sovereign can aggressively pursue its
strategic initiatives and operate its businesses without disruption under a
wide range of scenarios, including deterioration consistent with prior
economic recessions. During 2007 we increased our loss reserves by $252
million, from .88% of loans to 1.28% of loans, which brings our institution
near historical high reserve ratios.
"Moreover, given industry conditions, Sovereign is rigorously reviewing
its business lines to ensure their contributions to our profitability and
strategic goals," Campanelli continued. "As a result, we have discontinued
our automobile lending originations in the Southeast and Southwest. We do
not expect further actions within our core business and are comfortable
with the composition of our platform and franchise."
Non-cash Charge to Goodwill
Sovereign expects to record a non-cash goodwill impairment charge of
approximately $1.4 billion for the fourth quarter of 2007, approximately
$600 million of which relates to the Consumer segment and approximately
$800 million of which relates to the New York Metro Segment. As stated
above, the goodwill impairment charge will not impact Sovereign's tangible
capital levels or regulatory capital ratios, since goodwill is deducted
when computing those ratios.
Valuation metrics for banking companies decreased significantly in the
latter half of 2007. This impacted the Company's assessment of the fair
value of its Consumer and New York Metro segments.
A combination of a weakening consumer credit market, lower valuations
for banking companies, and Sovereign's decision to stop originating
automobile loans in the Southeast and Southwest resulted in the goodwill
impairment for the Consumer segment.
The New York Metro segment's goodwill relates primarily to Sovereign's
June 2006 acquisition of Independence Community Bancorp. Earnings for this
segment have been negatively impacted by the current operating environment.
Consequently, revenue and deposit growth have been less than expected.
Valuation Adjustment Related to Certain FNMA and FHLMC Preferred Stock
Securities
Due to widening credit market "spreads," Sovereign expects to record a
non-cash impairment charge before taxes of approximately $180 million
related to approximately $950 million book value of FNMA and FHLMC
preferred stock securities, which are rated AA- and Aa3 by S&P and Moody's,
respectively. Sovereign is recording this unrealized loss as an
other-than-temporary impairment in accordance with generally accepted
accounting principles (GAAP). Sovereign holds these investment grade, high
yielding, fixed-rate securities as part of its available-for-sale
investment portfolio. The Company cannot predict whether the market value
of these securities will recover in the near term from recent significant
value impairment, therefore an other-than- temporary impairment charge is
warranted.
Loan Loss Provision
Sovereign has increased its loan loss provision to reflect its view of
the continuing slowdown in the housing sector as well as general economic
conditions and their potential impact on Sovereign's loan portfolio. The
Company expects its provision for credit losses for the fourth quarter of
2007 will be approximately $148 million, as compared to $162.5 million in
the third quarter of 2007, which included $47.0 million of provision
associated with Sovereign's correspondent home equity portfolio. The
provision for credit losses exceeds net charge-offs for the fourth quarter
by approximately $88.0 million.
Charges Related to Loss on Financings
Sovereign expects to record pre-tax charges of approximately $27.0
million related to an estimated loss on financings that Sovereign provided
to two mortgage companies. 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 related exposure is
well contained and reserved against.
Ongoing Strategic and Financial Review and Analysis
"As part of our ongoing review of industry conditions and our markets,
we have conducted sensitivity analyses addressing capital levels, cash
flows, and potential credit losses," Campanelli continued. "This process
led to our decision to focus our automobile lending exclusively within our
core franchise footprint and gives us relevant data to support our loan
loss reserve and provision for loan loss levels. Of course, these levels
may require adjustment in future periods if conditions worsen, but we feel
confident we have the financial flexibility to address such conditions were
they to arise."
"With these issues addressed, we are executing on our strategic
initiatives to decrease overall business risk, increase profitability, and
leverage the earnings power of our franchise," added Campanelli. "For the
fourth quarter, we saw modest net interest margin expansion and solid fee
income in our commercial and consumer businesses as we continue to manage
expenses prudently. Consistent with our disciplined management approach, we
will continue to analyze credit risk and keep investors informed. While we
are cognizant of the challenging current environment, Sovereign is prepared
to take advantage of attractive opportunities that might arise."
Fourth Quarter 2007 Earnings Release Date
The date for Sovereign's fourth quarter 2007 earnings release is
January 23, 2008 at 4:00 p.m. Eastern time. A full discussion of financial
results will be provided via web-cast at 9:00 am Eastern time on January
24, 2008. Please refer to the investor relations website,
http://www.sovereignbank.com for full details.
About Sovereign
Sovereign Bancorp, Inc., ("Sovereign") (NYSE: SOV), is the parent
company of Sovereign Bank, a financial institution with $87 billion in
assets as of September 30, 2007 with principal markets in the Northeast
United States. Sovereign Bank has nearly 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 18th largest banking institution
in the United States. For more information on Sovereign Bank, visit
http://www.sovereignbank.com or call 1-877-SOV-BANK.
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 2005 and 2006 EPS purposes represent net income adjusted for
the after-tax effects of 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.
SOURCE Sovereign Bancorp, Inc.
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Related links:
http://www.sovereignbank.com/
CONTACT:
financial, Mark McCollom, +1-610-208-6426,
mmccollo@sovereignbank.com, or Stacey Weikel, +1-610-320-8428,
sweikel@sovereignbank.com, media, Ed Shultz, +1-610-378-6159,
eshultz1@sovereignbank.com, all of Sovereign Bancorp, Inc.
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