Sovereign Bank reports Q2 loss on mergers, restructuring

Sovereign Bancorp., the Philadelphia, Pa.-based parent corporation of Sovereign Bank, posted a loss of nearly $52 million for the second quarter of 2006 ending June 30.

Earnings per diluted share were also recorded at a net loss of 11 cents as compared to a 45-cent net earning on a net income of $183 million in the same quarter a year ago.

The financial institution pointed to the acquisition of Independence Community Bank Corp., of Brooklyn, N.Y., which was finalized on June 1, as well as $155 million in restructuring costs as the main reasons for the net loss.

The company said it also recorded a reversal of $5.5 million in merger and acquisition charges.

Sovereign also paid out a non-cash, non-operating impairment charge on $43.9 million of Fannie Mae and Freddie Mac preferred stocks and a $305 million loss on other investment securities.

Sovereign’s other performance indicators appeared solid. Average deposits grew 21 percent to $43.9 million in the second quarter of 2006 from the second quarter of 2005. Average loans grew by almost the same percentage to $50.6 billion from a year ago.

The bank also reported an operating income (for EPS purposes) of $178.9 million, down from $196.5 million in the second quarter of 2005, but up from $166.4 million in the first quarter of 2006.

In addition, Sovereign received upgrades on Moody’s and Standard and Poor’s registers.

The highlight of the quarter may be Sovereign’s sale of 88 million shares of Sovereign common stock, completed June 1, to Banco Santander Central Hispano, S.A., of Madrid, Spain, for $2.4 billion, making it a major shareholder in Sovereign.

Santander is the ninth largest bank in the world.

“The past quarter results have been mixed. We closed on our acquisition of Independence, we also closed on our equity offering to Santander, and we restructured our balance sheet to better balance our interest rate risk position going forward,” said Jay S. Sidhu, Sovereign’s chairman and CEO, commenting on the second quarter of 2006. “Our operating expenses were well contained, credit quality continues to be in check and fee-based revenues in most categories saw solid increases. The Independence acquisition improves our critical success factors and sets the company up well for future periods; however, near-term yield curve pressures continued to hinder our net interest income growth and impacts our balance sheet growth.”

Sovereign Bancorp. decided to restructure its balance sheet late last month after the $3.6 billion Independence acquisition by selling $3.5 billion of its own investments. In addition, prior to closing Independence sold $350 million of its investment portfolio.

“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,” said Mark R. McCollom, Sovereign’s chief financial officer, in a press release. “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.” —CINDY KIBBE

Categories: News