Acquired by Santander in 2008, Sovereign Bank was a savings bank attracting deposits from a network of community banking offices, and originating small business and middle market commercial loans, multi-family loans, residential mortgage loans, home equity loans and lines of credit, and auto and other consumer loans in the communities served by those offices.
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Sovereign Bancorp, Inc. is a financial company. Financial companies, by their nature, typically have high debt to equity leverage, which is not a meaningful analytical metric. We suggest you use the equity to assets ratio instead.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
On June 25, 1996, Sovereign executed a Definitive Agreement to acquire First State Financial Services ("First State"), a $600.0 million holding company headquartered in West Caldwell, New Jersey. The transaction closed on February 18, 1997; accordingly, financial data for First State is not reflected in Sovereign's year-end financial results. First State's sole banking subsidiary, First Dewitt Bank, operates 14 branch offices located in central and northern New Jersey. The transaction will add loans of approximately $450.0 million and deposits of approximately $520.0 million to Sovereign's balance sheet. The terms of the agreement called for Sovereign to exchange 1.225 shares (1.47 shares as adjusted for all subsequent stock dividends and stock splits) of Sovereign common stock for each share of First State common stock. Sovereign will issue approximately 4.9 million new shares (5.9 million shares as adjusted for all subsequent stock dividends and stock splits) in connection with the transaction, which will be tax-free to First State and First State's shareholders, and will be accounted for as a pooling-of-interests.
On August 29, 1997, Sovereign acquired Bankers Corp., Inc. ("Bankers"), a $2.6 billion financial services holding company headquartered in Perth Amboy, New Jersey. Bankers' sole banking subsidiary, Bankers Savings, operates 15 branch offices located in Middlesex, Monmouth, and Ocean counties, New Jersey. The transaction added loans, deposits, and shareholders' equity to Sovereign of $1.5 billion, $1.7 billion, and $203.5 million, respectively. In accordance with the merger agreement, Bankers shareholders received 1.854 shares of Sovereign common stock in exchange for each share of Bankers common stock. Sovereignissued approximately 23.0 million new shares of Sovereign common stock in connection with the transaction, which was tax-free to Bankers and Bankers shareholders. This transaction was accounted for as a pooling-of-interests and accordingly, the consolidated financial statements have been restated to include the accounts of Bankers for all periods presented.
On September 18, 1997, Sovereign executed a Definitive Agreement to acquire ML Bancorp, Inc. ("ML Bancorp"), a $2.3 billion bank holding company headquartered in Villanova, Pennsylvania. ML Bancorp's principal operating subsidiary, Main Line Bank, operates 29 branch offices located in the suburbs of Philadelphia, Pennsylvania. This transaction subsequently closed on February 28, 1998. The transaction added loans, deposits and stockholders' equity to Sovereign of $1.04 billion, $989.5 million and $173.1 million, respectively. In accordance with the merger agreement, ML Bancorp shareholders received 1.62 (1.944 shares as adjusted for all subsequent stock dividends and stock splits) shares of common stock in exchange for each share of ML Bancorp common stock. Approximately 20.5 million new shares (24.6 million new shares as adjusted for all subsequent stock dividends and stock splits) of Sovereign common stock were issued in connection with the transaction. The transaction is tax-free to ML Bancorp and ML Bancorp shareholders, and will be accounted for as a pooling-of-interests.
Holders of Series B Preferred Stock who converted such shares on May 15, 1998 received shares of common stock of Sovereign issuable upon conversion of Series B Preferred Stock and were entitled to receive the quarterly dividend payable on the Series B Preferred Stock. Holders of Series B Preferred Stock who converted such shares prior to the Redemption Date received shares of common stock of Sovereign issuable upon conversion of Series B Preferred Stock, but were not entitled to receive the quarterly dividend payable on the Series B Preferred Stock. Holders of Series B Preferred Stock who did not convert such shares on or prior to the Redemption Date received the Redemption Price of $52.188 per share, plus all accrued and unpaid dividends through the Redemption Date of $.78125 per share, but did not receive any shares of common stock of Sovereign issuable upon conversion of Series B Preferred Stock. Accordingly, the planned redemption by Sovereign resulted in virtually all of preferred shareholders exercising their right to convert their preferred shares into Sovereign common stock and 14.3 million common shares were issued as a result of the transaction.
On August 3, 1998, Sovereign announced the completion of its acquisitions of Carnegie Bancorp ("Carnegie") and First Home Bancorp, Inc. ("First Home"). Carnegie, a $424 million commercial bank holding company headquartered in Princeton, New Jersey, operated seven branches throughout central New Jersey and one in Pennsylvania. First Home, a $523 million savings bank holding company headquartered in Pennsville, New Jersey, had one principal operating subsidiary which operated ten branches in Salem, Gloucester and Camden counties, New Jersey and New Castle County, Delaware. In accordance with the merger agreements, Carnegie common stock shareholders received 2.022 shares of Sovereign common stock in exchange for each share of Carnegie common stock and First Home common stock shareholders received 1.779 of Sovereign common stock in exchange for each share of First Home common stock. As a result of these two mergers, Sovereign issued approximately 10.9 million new shares of common stock. Both transactions were tax-free to Sovereign, Carnegie, and First Home shareholders. The mergers were each treated as a pooling-of-interests for financial accounting purposes; as such, in future filings, all prior periods of Sovereign will be restated to reflect the balances and activity of Carnegie and First Home.
On September 4, 1998, Sovereign acquired 93 former CoreStates Financial Corp. ("CoreStates") branch offices from First Union Corporation ("First Union"). The former CoreStates offices are located throughout Pennsylvania and New Jersey and added approximately $2.2 billion of commercial bank deposits and $725 million of commercial and consumer loans to Sovereign's balance sheet. The transaction was accounted for as a purchase. Sovereign paid a premium of $325 million for the CoreStates branches, of which $226 million was allocated to a core deposit intangible and of which $99 million was allocated to goodwill. Additionally, Sovereign established an initial loan loss reserve of $20.5 million in connection with the loans acquired from CoreStates. The goodwill and core deposit intangible are being amortized over approximately 25 years and 10 years, respectively. Sovereign's results of operations include the operations of the aforementioned branches from September 4, 1998 and thereafter.
On June 30, 1999, Sovereign completed its acquisition of Peoples Bancorp, Inc. ("Peoples"), a $1.4 billion bank holding company headquartered in Lawrenceville, New Jersey whose principal operating subsidiary operated 14 community banking offices in Mercer, Burlington and Ocean counties, New Jersey. The transaction added investments, loans, deposits and stockholders' equity to Sovereign of approximately $922 million, $503 million, $515 million and $291 million, respectively. In accordance with the merger agreement, Peoples' common stock shareholders received .80 shares of Sovereign common stock for each outstanding share of Peoples common stock. Sovereign issued approximately 23.6 million shares of Sovereign common stock in connection with the transaction, which was accounted for as a purchase. The allocation of the purchase price for the Peoples' acquisition as of June 30, 1999, is preliminary and Sovereign expects to finalize the allocation in the third quarter of 1999. Sovereign does not expect a material difference between the preliminary and final purchase price allocation. The pro forma effect of this acquisition on operations was not material for the second quarter.
43.8 million shares of common stock were issued on November 15, 1999 resulting in net proceeds to Sovereign of $331.5 million.
On March 8, 2002, Sovereign Bancorp, Inc. issued 11,367,000 shares as partial consideration for the acquisition of Main Street Bancorp, Inc.
On November 15, 1999, Sovereign issued 5,750,000 units of PIERS, generating net proceeds to Sovereign of $278.3 million with a stated maturity of January 15, 2030. At the time of issuance, each PIERS unit consisted of (1) a preferred capital security (Trust Preferred II) issued by Sovereign Capital Trust II (Trust II), valued at $32.50, having a face amount of $50 and (2) a warrant to purchase 5.3355 shares of Sovereign common stock at any time prior to November 20, 2029. For additional discussion, see Note 14 to the consolidated financial statements included in Sovereign's Form 10-K for the year-ended December 31, 2002. On May 28, 2003, Sovereign announced its intent to redeem the Trust Preferred II securities as Sovereign's stock traded at certain specified thresholds that allowed for early redemption. On June 27, 2003, Sovereign completed the purchase of the Trust Preferred II securities by remarketing the existing securities in a public auction. In addition to third parties, Sovereign bid on the securities and provided the lowest bid. Consequently, Sovereign purchased the Trust Preferred II securities at $32.79 per unit. Prior to completing the purchase of the Trust Preferred II securities, Sovereign issued 30,626,632 shares of common stock to those holders of its warrants who gave notice to exercise. Fractional shares were paid in cash and all other warrants were redeemed at their warrant value of $17.21.
On February 6, 2004 Sovereign completed the acquisition of First Essex, a commercial bank holding company headquartered in Andover, Massachusetts, and the results of First Essex's operations are included in the accompanying financial statements subsequent to the acquisition date. Sovereign issued 12.7 million shares of common stock and exchanged Sovereign stock options for existing First Essex options, whose combined value totaled $209.9 million, and made cash payments of $208.2 million to acquire and convert all outstanding First Essex shares and employee stock options and pay associated fees.
On July 23, 2004, Sovereign completed the purchase of Seacoast Financial Services Corporation ("Seacoast"), a bank holding company based in New Bedford, Massachusetts with 67 banking offices throughout Southeastern Massachusetts. Sovereign issued 36.3 million shares of common stock and exchanged Sovereign stock options for existing Seacoast options, whose combined value totaled $824.6 million, and made cash payments of $265.8 million to acquire and convert all outstanding Seacoast shares and employee stock options and pay associated fees.
Sovereign closed on its acquisition of Independence effective June 1, 2006 for $42 per share in cash, representing an aggregate transaction value of $3.6 billion. Sovereign funded this acquisition using the proceeds from the $2.4 billion equity offering to Santander, net proceeds from recent issuances of perpetual and trust preferred securities and cash on hand. Sovereign issued 88,705,123 shares to Santander, which makes Santander its largest shareholder. Independence was headquartered in Brooklyn, New York, with 125 community banking offices in the five boroughs of New York City, Nassau and Suffolk Counties and New Jersey. Sovereign acquired Independence to connect their Mid-Atlantic geographic footprint to New England and create new markets in certain areas of New York.
During the fourth quarter of 2007, we completed our annual assessment of goodwill using a third party valuation firm who considered the impact of current credit conditions, our 2007 actual results, expected results for 2008, as well as current market valuations. We evaluated goodwill for impairment for each of our reporting units under 3 different valuation approaches (transaction market approach, guideline company approach, and discounted net income approach) to ensure that the fair value of our reporting units was in excess of net book value including goodwill. Based on this analysis, we concluded that we had goodwill impairment in our Shared Services Consumer and Metro New York segments of $634 million and $943 million, respectively.
On May 16th, 2008, Sovereign issued 179.7 million shares of common stock which raised net proceeds of $1.39 billion to enhance its capital and liquidity positions. As a result, this increased our weighted average shares outstanding during the second quarter by 90.8 million. Therefore, our weighted average share count in the third quarter will increase due to the full quarter impact of this transaction by approximately 88.9 million shares.
On October 13, 2008, Sovereign and Santander entered into a transaction agreement pursuant to which Santander agreed to acquire all of Sovereign's common stock that it did not already own (the "Transaction"). Prior to entering into the transaction agreement, Santander owned approximately 24.35% of Sovereign's voting common stock. Both the Board of Directors of Sovereign and the Executive Committee of Santander unanimously approved the Transaction, and both companies' shareholders voted in favor of the Transaction in January 2009. The Transaction closed on January 30, 2009. Upon adoption of the transaction agreement and the Transaction becoming effective, each share of Sovereign's common stock was exchanged into the right to receive 0.3206 Santander American Depository Shares ("ADSs"), or at the election of the holders of Sovereign's common stock, 0.3206 ordinary shares of Santander (subject to Santander's discretion).