PHILADELPHIA, June 29 /PRNewswire-FirstCall/ -- Sovereign Bancorp, Inc.
("Sovereign") (NYSE: SOV), parent company of Sovereign Bank, announced
today that it has restructured its balance sheet and also intends to record
an other-than-temporary non-cash, non-operating impairment charge related
to certain Fannie Mae ("FNMA") and Freddie Mac ("FHLMC") preferred stock in
the second quarter of 2006.
Following its June 1, 2006 acquisition of Independence Community Bank
Corp. ("Independence"), Sovereign has been analyzing the appropriate steps
to take to optimize its overall interest rate risk position. As a part of
this analysis, Sovereign assessed the classification of its investments
between held-to-maturity and available-for-sale and came to the conclusion
that it should reclassify all of its investment securities classified as
held-to-maturity to available-for-sale. Sovereign also reduced its
post-acquisition investment portfolio by $3.85 billion. In addition to
Independence selling $350 million of Independence's investment portfolio
prior to closing that did not meet Sovereign's investment criteria,
Sovereign also sold $3.5 billion of its own investments with a yield of
approximately 4.40% and effective duration of 4.2 years. The loss on
investment securities recorded in the second quarter as a non-operating
restructuring charge was $155 million after-tax, or $.35 per diluted share.
"Given the fact that Independence was more liability sensitive than
Sovereign, we evaluated alternatives to restructure our balance sheet
following the acquisition in an effort to optimize our interest rate risk
position and capital of the combined company and came to the conclusion it
was most prudent to divest these investment securities," commented Mark R.
McCollom, Sovereign's Chief Financial Officer. "While a portion of the
proceeds may need to be reinvested for collateral and liquidity purposes,
our goal is to shrink our investment portfolio as much as possible to free
up capital for our core banking businesses. Our capital goals remain the
same with this transaction, hoping to achieve pre-deal announcement levels
of capital by the middle of 2007. In summary, the restructuring is NPV
positive for Sovereign, reduces interest rate risk and positions our
company well for the future," McCollom concluded.
Sovereign also intends to record a non-cash, non-operating impairment
charge of approximately $44 million after-tax, or $.10 per diluted share,
related to certain Fannie Mae ("FNMA") and Freddie Mac ("FHLMC") preferred
stock. 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; therefore, the unrealized losses have already been
recorded as a reduction in other comprehensive income and no additional
charges to capital are required. This write-down is being taken on
approximately $950 million of fixed-rate securities which have an effective
yield of approximately 8.10% and are rated AA- and Aa3 by S&P and Moody's.
In total, FNMA and FHLMC have in excess of $13 billion of outstanding
preferred securities, which are widely held by financial institutions and
other investors across the country.
McCollom commented, "We are recording this because we believe it is a
proper application of accounting literature, despite the fact that it does
not reflect the true long-term economic value of these instruments.
Sovereign has held FNMA and FHLMC investment grade preferred stock in its
investment portfolio for several years and has never sold any of these
securities at a loss. The financial condition of FNMA and FHLMC is much
stronger today than a year ago and we continue to believe that the market
value of these securities may improve in the future. However, we cannot say
with certainty that this recovery will occur in the near term; thus, an
other-than-temporary impairment charge is warranted at this time.
Sovereign Bancorp, Inc. ("Sovereign") (NYSE: SOV) is the parent company
of Sovereign Bank, an $83 billion financial institution with nearly 800
community banking offices, over 2,000 ATMs (after giving effect to the
recently announced branding agreement in which Sovereign ATMs will be
placed in CVS/pharmacy locations) and approximately 12,000 team members
with principal markets in the Northeast United States. 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/Cash 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, and certain non-cash charges. 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 future operating results for
2006 for Sovereign Bancorp, Inc., 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, or
mmccollo@sovereignbank.com, or Stacey Weikel, +1-610-208-6112, or
sweikel@sovereignbank.com; or MEDIA: Ed Shultz, +1-610-378-6159,
or eshultz1@sovereignbank.com, all of Sovereign Bancorp
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