Sovereign Bancorp (NYSE: SOV) is a savings and loan bank that generates interest revenue by issuing consumer and commercial loans. In 2007, the company recorded a net loss of $1.35 billion, and for 3Q2008, the company recorded a loss of $982 million. Sovereign's primary business is that of the community bank with a network of local branches that hold deposits and originate a number of different types of small business, family, and mortgage loans. As of the end of 2007, the company held a $57.8 billion loan portfolio made up up 53.5% of commercial loans, 33.5% of consumer loans secured by real estate, and 12.7% consumer loans not secured by real estate.
The company has a history of expanding by acquisitions with 28 financial institutions acquired since 1990. In June 2006, Sovereign acquired Independence Community Bank; however, by early 2008, the company took a $1.6 billion write-down based on higher customer loan defaults from loans inherited from Independence. Sovereign originally paid $3.6 billion for Independence.
As of June 30, 2008, Sovereign held $622.6 million preferred shares from Fannie Mae (FNM) and Freddie Mac (FRE), but since the government bailout of the two organizations, these preferred shares are nearly worthless. Ties to these distressed entities have hurt every bank during the 2008 Financial Crisis and Sovereign is no different. On September 30, 2008, the company announced the appointment of a new CEO, Paul A. Perrault.
Sovereign Bancorp is the holding company for Sovereign Bank. Sovereign bank is largely a thrift bank, which means it takes on bank deposits in order to issue mortgage and other types of loans and doesn't engage in corporate banking, brokering, or underwriting. The company's 750 bank branches are largely located in the Northeast and Mid-Atlantic regions. Sovereign has developed its network of banks through a series of 28 acquisitions since 1990. Its most recent acquisition of Independence Community Bank in 2006 was funded thanks largely to the $2.4 billion equity offering to Banco Santander Central Hispano, S.A. (STD), which made Santander Sovereign's largest shareholder with a 25% stake in the bank.
While Sovereign has raised revenue each of the past 5 years, its net income plummeted in 2007 to a loss of $1.3 billion. The loss was largely attributed to a $1.6 billion write-down related to their Shared Services Consumer segment and Metro New York Banking Division, which comes directly from the company's Independence Bank acquisition. As a result of this and an effort to sell off many of its distressed assets, the company's total assets under management decreased from $89.6 billion in 2006 to $84.7 billion in 2007.
|Net Income from Operations |
|Net Interest Income||1,227.8||1,436.6||1,632.1||1,821.5||1,864.0|
|General and administrative expenses||852.4||942.7||1,089.2||1,290.0||1,345.8|
In 2007, commercial loans made up 43% of the loan portfolio with a $25.4 billion balance. The company's consumer loans backed by real estate made up 37% ($21.4 billion), auto loans made up 8% ($6.2 billion), and multifamily loans made up 8% ($4.7 billion) of the loan portfolio. Sovereign's residential real estate loans of $13.3 billion suffered losses of $7.5 million in 2007. Sovereign does not offer adjustable rate mortgage loans, which have low, teaser interest rates before a jump at the end of their introductory period; however, they do originate Alt-A loans, which require less pre-screening and paperwork in return for higher interest rates. These types of loans have been central to the Mortgage Market Meltdown.
Sovereign appears to have a stable deposit base despite any panic felt during the 2008 Financial Crisis. Sovereign's uninsured deposit ratio, which measures the percentage of accounts with more than $100K deposited compared to total liabilities, was estimated at 20.9% at 2Q2008. The industry average is 19.1%. One of its competitors, Washington Mutual (WM), lost 10% of its deposits before its liquidation and sale to J P Morgan Chase (JPM).
The company's segments are largely based on where their customers and branches are located. Each of their branches offers a combination of deposit types including money market accounts, savings accounts, certificates of deposits, and retirement plans.
In October 2005, Banco Santander Central Hispano, S.A. (STD) took a 25% stake in Sovereign with the option to buy the company outright for $40 a share. Banco Santander has a history of acquiring distressed banks.
If not Banco Santander Central Hispano, S.A. (STD), there are other banks eyeing Sovereign for a possible acquisition. Sovereign's stock price is down 58% since the beginning of 2008 and, with Wachovia (WB)'s purchase of Citigroup (C), investors are looking for other distressed assets at these prices.
On September 8th, Sovereign Bancorp officially declared it had held $622.6 million in preferred stock with Fannie Mae (FNM) and Freddie Mac (FRE); however, since the government's bailout of these two organizations, the stock is nearly worthless. The value of Fannie Mae (FNM) and Freddie Mac (FRE) preferred stock is still subject to fluctuation, and it is possible that Sovereign will sustain further losses due to their holdings. During the 2008 Financial Crisis, banks tied to these two companies have seen their stock prices hit hardest. Each day, more companies report their exposure to Fannie Mae (FNM) and Freddie Mac (FRE). To see the entire list, see the Wall Street Journal's "Daily List of Companies Reporting Fannie/Freddie Exposure".
Fannie Mae (FNM) and Freddie Mac (FRE) have been central to the subprime mortgage crisis. These two entities own or securitized 70% of all residential mortgage loans in the U.S. and have felt the brunt of defaults on subprime loans.
In the 3Q2008, Sovereign recorded a loss of $982 million due to the loss on its Freddie Mac (FRE) and Fannie Mae (FNM) investments and the sale of its entire portfolio of collateralized debt obligations. The firm took a $602 million loss related to the sale of this portion of its portfolio.
The percentage of U.S. commercial loans in default rose to a five-year high of 3.3% in August compared to .24% a year ago. For now, defaults in the U.S. have been concentrated in smaller loans with only 2% of the money lent. Sovereign's commercial loans represented 43% of its loan portfolio.
Sovereign competes both as a collector of deposits and as an originator of loans. The company competes strictly in its geographic areas for deposits where its ATMs and local bank branches are located. For loans, the company has gone outside its geographic footprint as seen with its auto loans in the Southeast and Southwest. As a result, the company's the company competes with some of the largest banks in the country as well as small regional banks offering similar services.
|Competitor Comparison||Sovereign||PNC Bank (PNC)||Northwest Bancorp (NWSB)||M&T Bank (MTB)||Bank of America (BAC)|
|Revenue||1.83 B||24.01 B||233.89 M||2.61 B||48.62 B|
|Net Income||-1.33 B||1.47 B||52.56 M||626.58 M||8.11 B|