Title: Sovereign Bancorp, Inc' Merrill Lynch Financial Services Conference November 15, 2004
1Sovereign Bancorp Inc.Merrill Lynch
Financial Services ConferenceNovember 15
2004
2Forward Looking Statement
- This presentation contains statements of
Sovereigns vision mission strategies goals
beliefs plans objectives expectations
anticipations estimates intentions financial
condition results of operation estimates of
future operating results for Sovereign Bancorp
Inc. as well as estimates of financial condition
operating efficiencies revenue creation and
shareholder value. - 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 inflation
deposit flows loan demand real estate values
competition changes in accounting principles
policies or guidelines integration of acquired
assets liabilities customers systems and
management personnel into Sovereigns operations
and the ability to realize the related revenue
synergies and cost savings within expected time
frames possibility that expected merger-related
charges are materially greater than forecasted or
that final purchase price allocations based on
fair value of the acquired assets and liabilities
at acquisition date and related adjustments to
yield and/or amortization of the acquired assets
and liabilities are materially different from
those forecasted deposit attrition customer
loss revenue loss and business disruption
following Sovereigns acquisitions including
adverse effects on relationships with employees
may be greater than expected anticipated
acquisitions may not close on the expected
closing date or it may not close the conditions
to closing anticipated acquisitions including
stockholder and regulatory approvals may not be
satisfied Sovereigns timely development of
competitive new products and services in a
changing environment and the acceptance of such
products and services by customers the
willingness of customers to substitute
competitors products and services and vice
versa the ability of Sovereign and its third
party processing and related systems on a timely
and acceptable basis and within projected cost
estimates the impact of changes in financial
services policies laws and regulations
including laws regulations policies and
practices concerning taxes banking capital
liquidity proper accounting treatment
securities and insurance and the application
thereof by regulatory bodies and the impact of
changes in and interpretation of generally
accepted accounting principles technological
changes changes in consumer spending and saving
habits unanticipated regulatory or judicial
proceedings changes in asset quality employee
retention reserve adequacy changes in
legislation or regulation or policy or the
application thereof and other economic
competitive governmental regulatory and
technological factors affecting the Companys
operations pricing products and services.
3Additional Information About Waypoint Merger
- Sovereign and Waypoint will be filing documents
concerning the merger with the Securities and
Exchange Commission including a registration
statement on Form S-4 containing a
prospectus/proxy statement which will be
distributed to shareholders of Waypoint.
Investors are urged to read the registration
statement and the proxy statement/prospectus
regarding the proposed transaction when it
becomes available and any other relevant
documents filed with the SEC as well as any
amendments or supplements to those documents
because they will contain important information.
Investors will be able to obtain a free copy of
the proxy statement/prospectus as well as other
filings containing information about Sovereign
and Waypoint free of charge on the SECs
Internet site (http//www.sec.gov). In addition
documents filed by Sovereign with the SEC
including filings that will be incorporated by
reference in the prospectus/proxy statement can
be obtained without charge by directing a
request to Sovereign Bancorp Inc. Investor
Relations 1130 Berkshire Boulevard Wyomissing
Pennsylvania 19610 (Tel 610-988-0300). In
addition documents filed by Waypoint with the
SEC including filings that will be incorporated
by reference in the prospectus/proxy statement
can be obtained without charge by directing a
request to Waypoint Financial Corp. 235 North
Second Street Harrisburg Pennsylvania 17101
Attn Richard C. Ruben Executive Vice President
and Corporate Secretary (Tel 717-236-4041).
Directors and executive officers of Waypoint may
be deemed to be participants in the solicitation
of proxies from the shareholders of Waypoint in
connection with the merger. Information about
the directors and executive officers of Waypoint
and their ownership of Waypoint common stock is
set forth in Waypoints proxy statement for its
2003 annual meeting of shareholders as filed
with the SEC on April 21 2003. Additional
information regarding the interests of those
participants may be obtained by reading the
prospectus/proxy statement regarding the proposed
merger transaction when it becomes available.
INVESTORS SHOULD READ THE PROSPECTUS/PROXY
STATEMENT AND OTHER DOCUMENTS TO BE FILED WITH
THE SEC CAREFULLY BEFORE MAKING A DECISION
CONCERNING THE MERGER.
4Non-GAAP Financial Measures
- This report contains Financial information
determined by methods other than in accordance
with U.S. Generally Accepted Accounting
Principles (GAAP). Sovereigns management uses
the non-GAAP measures of Operating Earnings and
Cash Earnings and the related per share amounts
in their analysis of the companys performance.
These measures as used by Sovereign adjust 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 or
integrating businesses and certain non-cash
charges. Operating earnings represent net income
adjusted for after tax effects of merger-related
and integration charges and the loss on early
extinguishment of debt. The forward-looking
earnings guidance for 2004 excludes the
anticipated impact of EITF 04-8 which will be
effective in the fourth quarter of 2004. Cash
earnings are operating earnings excluding the
after-tax effect of amortization of intangible
assets and stock-based compensation expense
associated with stock options restricted stock
bonus deferral plans and ESOP awards. Since
certain of these items and their impact on
Sovereigns 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 Sovereigns
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.
5Reconciliation of Cash and Operating Earnings to
GAAP Earnings
( in thousands all numbers shown net of tax)
6Reconciliation of Cash and Operating Earnings to
GAAP Earnings
(Per Share)
7Overview of Sovereign
8An Exceptional Franchise Serving from South of
Philadelphia to Boston and Beyond
- 60 billion bank
- pro forma for Waypoint
- 665 branches
- pro forma 1000 ATMs
- 18th largest bank in the U.S. pro forma all
deals - Top 20 Small Business Lenders in the U.S.
Market Share Massachusetts 3 Rhode
Island 3 New Hampshire 5
Pennsylvania 5 New Jersey
6 Connecticut 10
Maryland 39 Pro forma for
Waypoint
Key Sovereign Branches
Waypoint Branches
Source SNL DataSource
9Sovereigns Footprint
10Sovereigns Footprint
- We have the second most affluent footprint
amongst all large banks
11Sovereigns Footprint
- We have strong market share in the more
consolidated states and are able to grow in the
more fragmented states
12Northeastern US Banking Climate
- Aside from New York money center banks the
Northeastern US market is controlled by 3 large
out-of-market consolidators (Bank of America
Wachovia and Royal Bank of Scotland) and a
handful of regional banks competing for market
share
1) Excludes New York City headquartered
institutions. Data as of 06/30/2004. Assets and
Deposits are pro forma for all pending deals.
13Total US Banking Climate
- Conclusion The northeastern United States has
created an opportunity for a super-regional to
emerge similar to Fifth Third Bancorp in the
Midwest and BBT in the South
14Core Deposits as Compared to Peers
As of June 30 2004
15Strong Loan and Deposit Mix
Loan Mix
23
39
- 9/04 Balance - 35.3 billion
- 9/04 Yield 5.05
38
Deposit Mix
22
9/04 Balance - 33.1 billion 9/04 Cost of Funds
1.04
42
36
16Sovereigns Historical Performance
17Third Quarter 2004 Financial Highlights
- Net income of 83 million including special debt
redemption charge of 43 million and a merger and
integration charge of 18 million earnings per
share of .24 including charges of .13 for debt
redemption and .05 for merger and integration - Operating earnings of 143 million up 31 from
2003 operating earnings per share of .42 up
14 from 2003 - Cash earnings of 162 million up 30 from 2003
cash earnings per share of .47 up 12 from 2003 - Consumer and Commercial loans excluding impact
of acquisitions increased 28 and 9
respectively from the third quarter of 2003 - Consumer and Commercial fee revenues of 63
million and 32 million respectively each up
17 from a year earlier - Core deposits up 21 from 2003 and 13 from the
second quarter of 2004. Excluding acquisitions
core deposits up 6 from third quarter of 2003 - Sovereign continues to be positioned to benefit
from higher interest rates
18Non-Financial Highlights
- Sovereign Bancorp was added to the SP 500 index
in June - Named to The Forbes Platinum 400
- Identified as one of the most admired financial
industry companies in the nation by Fortune for
the third consecutive year - Obtained a major banking services contract with
the state of Massachusetts taking the business
away from FleetBoston - Received an outstanding CRA rating from the OTS
- Completed in February of 2004 the acquisition of
First Essex Bancorp and in July of 2004 the
acquisition of Seacoast Financial Services
Corporation - Announced in March 2004 the acquisition of
Waypoint Financial Corp. expected to close in
January 2005
19 Strengthened Balance Sheet
- Sovereign Bancorp (BHC)
- All high-cost debt now removed from structure
- 500 million secured senior note at approximately
8.00 all-in redeemed in September 2004 - Replaced with 300 million unsecured senior note
at 3-month LIBOR 33 bps - 800 million TCE generation in 2005 provides
additional flexibility - Maintain double-leverage ratio at 120
- Strive for further rating agency upgrades
- Sovereign Bank (Bank)
- Maintain bank capital at 500 million cushion to
well-capitalized guidelines - Strive for further rating agency upgrades
20Strong Earnings Growth
5 year Operating Earnings CAGR of 20
5 year Cash Earnings CAGR of 21
211-Year Stock Price Performance
11/05/04 closing price of 22.12
223-Year Stock Price Performance
11/05/04 closing price of 22.12
235-Year Stock Price Performance
11/05/04 closing price of 22.12
24Achievements Over Last 5-Years
September of 2004 marked the five-year
anniversary of Sovereigns announcement of the
Fleet/BankBoston branch acquisition. At that
time Sovereign set out specific financial goals
- Execute a smooth integration and build the
franchise value of the company. Since the third
quarter of 2000 Sovereigns commercial loans
have grown 14 and consumer loans have grown 20
on average per year. Core deposits have grown 15
on average per year. Banking fees have increased
30 on average per year. Operating expenses have
increased only 1.5 on average per year.
Sovereigns has reduced their efficiency ratio by
more than 500 basis points. - Grow net income and earnings per share by 10 per
year leading to 2.00 in cash earnings per share
by 2005. Since Sovereigns successful
integration in the third quarter of 2000 the
annual growth rate in operating earnings per
share has been 10 and since 2001 Sovereigns
operating net income annual growth rate has been
25. Cash earnings per share goals for 2004 are
1.85 to 1.90 2005 cash earnings per share
should be well in excess of our goal of 2.00.
25Achievements Over Last 5-Years
- Restore Sovereign Bancorps capital ratios to Fed
holding company well-capitalized levels by 2005.
Sovereign Bancorp reached these levels by early
2003 and today has a Tier 1 leverage ratio of
6.56 or more than 150 basis points in excess of
the well-capitalized guideline. - Restore debt ratings to pre-Fleet acquisition
levels by 2005. Sovereign reached those levels
by 2004 returning to investment grade status
with credit ratings agencies. - Not deviate from our Critical Success Factors.
Sovereign has remained committed to their four
critical success factors of Superior Asset
Quality Superior Risk Management Strong Sales
and Service Culture and Superior Productivity. - Payoff all high-cost debt by the end of 2006. In
September of 2004 Sovereign redeemed one of the
last pieces of high-cost debt financing incurred
in this transaction
26Comparative Shareholder Returns
27Sovereigns Business Strategy
28Sovereigns Business Strategy
- Combining the best of a large bank with the best
of a smaller community bank.
- Best of a Large Bank
- Products
- Services
- Technology
- Brand
- Delivery channels / distribution system
- Talent
- Diversification
- Sophistication of risk management
- Best of a Small Bank
- Flatter structure
- Divided into 10 geographic markets
- Local decision making
- Active community involvement culture
- Cross functional lines to deliver bank to
customer - Treat customers as individuals
29Sovereigns 10 Local Markets
Mid-Atlantic Division Jim Lynch Chairman and CEO
New England Division Joe Campanelli Chairman
and CEO
- New Jersey Market
- Central PA / Northern MD Market
- Philadelphia Delaware and Chester counties /
Southern NJ Market - Northern PA Market
- Bucks / Montgomery counties Market
- Massachusetts Market
- New Hampshire Market
- Rhode Island Market
- Connecticut / Western MA Market
- Islands Nantucket / Marthas Vineyard Market
10 Local Markets each with a CEO responsible for
meeting profitability and revenue goals
30Sovereigns Banking Structure
Market CEO
Commercial Real Estate Lenders
Commercial Lenders
Small Business Lenders
Cash Management Representatives
Financial Consultants
Retail Branches
31Absolute Clarity Regarding Target Markets
- Consumer Middle Income Households
- We target mass market with average household
income of about 75000 - We differentiate on the basis of relationship
selling and service delivered with high-touch and
supported by convenience of technology - Goal to become dominant in all micro markets
- Goal to cross-sell 6 services to every household
to entrench relationship and dramatically improve
Bank profits
32 Absolute Clarity Regarding Target Markets
- Commercial/Business Small to Middle Market
- We target in-market businesses with revenues of
1 - 100 million - We differentiate on the basis of quality of
relationship managers localized quick decision
making supported by superior products and
technology - Goal to cross-sell 6 services to entrench
relationship and dramatically improve Bank profits
33 Strategy. With Clear Purpose and Direction.
- There is nothing complicated about our strategy
for moving forward - We are clear about our strategy as well as our
values mission and goals - As we execute we will remain committed to our
critical success factors of - Superior asset quality
- Superior risk management
- Strong sales and service culture that aligns team
member performance with a recognition and rewards
system - High level of productivity through revenue growth
and efficient expense control
34Critical Success Factor Superior Asset Quality
35Superior Loan Quality
At September 30th non-performing assets and net
charge-offs levels were the lowest levels in more
than four years
- Classified and Internally Criticized Loans have
shown improvement for 9 quarters
( in millions) 12/31/02 12/31/03
6/30/04 9/30/04 Non-Accruals 231
198 151 146 Non-Accruals of
Loans 1.00 .76 .52
.42 NPAs 257 220 176
169 NPAs of Assets .65 .51
.36 .30
36 Credit Quality
- All asset quality measures are pointing toward
improved net charge-offs continuing in 4Q of
2004 and into 2005 - Recent Acquisition of Seacoast and pending
acquisition of Waypoint both improve our credit
risk profile - Lower NCOs forecasted and lower credit risk
profile will reduce our need for annual loan loss
provisioning in coming periods - NCOs anticipated to decrease to 40 basis point
range for 2005 and beyond - Allowance as a of loans will be dictated by
credit quality and loan mix
37Critical Success Factor Superior Risk Management
38Net Interest Income Sensitivity at 9/30/04
Superior Risk Management
Sovereign continues to be well positioned for
rising interest rates
4.8
4.5
1.7
-6.6
39 Current A/L Position
- Mildly asset sensitive
- Net interest income increases 4.5 in a 200 bp
shock test at 9/30/04 - However net interest income will expand faster
than net interest margin - Reinvestment of cash flows still at lower yields
than maturing assets - 100 basis points of rate moves needed to
meaningfully move our net interest margin but
net interest income increases immediately - Defined as the expected 12 month impact of an
instantaneous 200bp parallel increase to all
points of the existing Treasury curve
40 Why Are We Asset Sensitive At September 30th
- 13.9 billion of assets tied to PrimeLIBOR or
CMT resets within 1 month following an increase
or decrease in rates - Only 11.6 billion of liabilities tied to
short-term indices
Other
Treasuries 2.7b 36 Investments 64 Residential
Prime 6.5b 54 Commercial 46 Consumer
Libor 4.7b 100 Commercial
41 Why Are We Asset Sensitive Core Deposit Base
- 5.1 billion or 15 of deposits at zero cost
- 17.8 billion or 54 of total deposits at
administered rates on average move at 25 of
interest rate movements in a rising rate scenario - Growing equity base increases asset sensitive bias
CDs 22 or 7.4 bn
Interest Bearing DDA 26 or 8.6 bn
Non-Interest Bearing DDA 15 or 5.1 bn
Money Market 26 or 8.4 bn
Savings 11 or 3.7 bn
42 Asset/Liability Management
- 2005 forecast assumes 3.00 Fed Funds rate by
year-end with 50 basis point additional
flattening of the Treasury curve - Recent debt redemption and new issuance will add
5 to 6 basis points to net interest margin
going forward - Core deposit bias allows for pricing lag as
rates rise assumed to move at 25 of overall
rise in rates (on average will vary by category)
43Critical Success Factor Strong Sales and Service
44Strong Sales and Service Culture
Retail Accounts and Services per Household
45Red Carpet Service Guarantees
- Red Carpet Service was unveiled in January 2002
as a unique program that differentiates Sovereign
from the competition - Six customer service guarantees were introduced
at that time and backed by 5 if Sovereign
failed to uphold those guarantees - Red Carpet Service Guarantees were recently
expanded to include other business lines within
the bank over 24 guarantees now exist - Guarantees exist within the following business
units - Community Banking
- Consumer Lending
- Mortgage Banking
- ATMs
- Research/Records
- Netbanking
46Critical Success Factor Productivity
andExpense Control
47Productivity and Expense Control
On track to improve the efficiency ratio more
than 100 basis points in 2004
Efficiency Ratio
Efficiency ratio equals GA expenses as a
percentage of total revenue excluding securities
gains
48 Operating Efficiency
- Rate of growth in GA and total expenses is far
below revenue growth
( in millions)
1
1 Excluding merger and integration charges and
debt extinguishment charges total expense growth
is 5.6
49Our Earnings Goals for 2004 through 2007
50 What to Expect for the Remainder of 2004
- Net income of 1.36 - 1.41 per fully diluted
share - Operating earnings of 1.65 to 1.70 per diluted
share 14-17 implied growth (excludes .12 of
merger integration charges .13 of debt
restructuring charges and .03 -.04 for EITF
04-8 ) - Cash earnings of 1.85 to 1.90
- Net interest margin should expand in the fourth
quarter should see net interest income increase - Credit quality net charge-offs in 25 million
range other credit metrics continue to improve - Expect commercial loan and core deposit growth
during the fourth quarter after considering
acquisition effects - 100 basis point improvement in efficiency ratio
from 2003
51 Assumed Earnings Drivers 2005 through 2007
- Excess Capital Generation
- Improved Credit Quality
- Balanced Asset/Liability Profile with long-term
asset sensitive bias - Continued Operating Efficiency
- Continued Tax Efficiency
- Manageable levels of Balance Sheet growth for
loans deposits and fee revenue - Potential for sustained strong double-digit
earnings growth
52 Excess Capital Generation
- Sovereign produces strong organic capital growth
in 2005 and beyond - While a wide range of uses for this excess
capital may emerge multiple scenarios produce
EPS accretion of .03 - .05 for 2006 and .06 -
.10 for 2007 - Current dividend rate is assumed for illustrative
purposes only - Assumed 4.0 billion of balance sheet growth in
2006 on starting balance sheet of 60 billion or
7 growth
( in millions)
53 Putting It All Together Earnings Momentum 2005
- 2007
- Continue to grow revenues at least twice as fast
as the rate of operating expenses or better - Anticipated rate increases and balance sheet
shift away from wholesale assets and liabilities
widens net interest margin through 2007 - Maintain neutral to mildly asset-sensitive
balance sheet - Effective tax rate held at 30
- Excess Capital deployment adds 2 - 4 to EPS
each year at a minimum
54 Earnings Goals 2004 through 2007
Managements Operating Goal
Actual/Street Mean Estimate
Operating EPS Growth
-
- 2002 1.25 - 1.30
1.28 14 - 2003 1.40 - 1.45
1.45 13 - 2004 1.65 - 1.70
1.68 14 - 2005 1.90 - 2.00
1.88 15 - 2006 2.10 - 2.20 or higher
N/A 10 or higher - 2007 2.40 or higher
N/A 10 or higher
Management is comfortable with 2005 mean
estimate of 1.91 operating EPS managements
goal remains to strive for between 1.90 - 2.00
operating EPS in 2005
55 Sovereigns Valuation Discount
5 Year Ave.
5 Year Ave.
Current
Price / NTM
Prem. / (Disc.) to
Current Price /
Prem. / (Disc.) to
Earnings
LB Midcap Banks
NTM Earnings
LB Midcap Banks
Sovereign
9.87
x
(26.8)
12.50
x
(14.9)
LB Midcap Banks
13.50
x
14.69
x
-
-
56Sovereign Is Committed to the Following
- We will stick with our discipline of blocking
tackling as there are tremendous opportunities
within our market for organic growth. We have a
strong management team in place and our structure
and strategy is organized as such to seize those
opportunities. - We will continue with our capital and MA
discipline. As always any acquisition that we
do must be accretive to earnings within the first
year not take us away materially from our
capital goals and must not be dilutive to our
future growth prospects. Any acquisition
opportunity which requires capital allocation
will be analyzed against share repurchases or
other uses of capital. - We are committed to improving our operating
fundamentals including net interest margin
return on assets return on equity and dividends
57 In Closing
- Sovereign has consistently delivered on its
promises - On earnings 21 compound annual growth rate in
operating earnings since 2000 - On capital 2.0 billion in TCE growth 315
basis points of ratio improvement since 3Q00 - On its underlying business metrics- loan
deposit fee income growth and efficiency ratio
improvements - The stage is set to deliver strong financial
results for the next several years - Sovereigns franchise is very unique and cannot
be duplicated - Significant insider ownership
- SOV is currently trading at 11.6x 05 operating
EPS mean analyst estimate 10.8x 05 implied cash
mean and 154 of current book value as of
November 3 2004
