Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

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Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007

Transcript of Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

Page 1: Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

Sovereign Bancorp, Inc.

Merrill Lynch Banking and Financial Services Conference

November 13, 2007

Page 2: Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

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Forward-Looking Statements

This presentation contains statements of Sovereign Bancorp, Inc.’s (the “Company”) strategies, plans and objectives, 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, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and other technological factors affecting the Company’s operations, pricing, products and services

We refer you to our reports filed unto the SEC under the Securities Exchange Act of 1934 for a more detailed explanation of the factors and the risks facing our business

Page 3: Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

Overview of Sovereign

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An Exceptional Franchise Serving the Northeastern United States 19th largest bank in

U.S. with $87 billion in assets at September

30, 2007

750 offices& over 2,300 ATM’s

Approx. 12,000 team members

Source: SNL DataSource. Market share as of June 2007.

5 Largest MSA’s in Northeast U.S.No. of SOV Mkt SOVOffices Share Rank

New York 208 1.95% 11

Philadelphia 82 6.90% 6

Boston 165 8.58% 3

Providence 56 10.57% 3

Hartford 26 4.68% 6

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$72.5$58.3

$48.3$43.5

$38.1$35.8

$23.3$25.1$16.7$12.6$15.2

$17.1

$5.4$6.2

$(0.0)$1.5

$(0.3)

$1.5$5.3

$5.1$0.1

$10.2

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Organic assets Net change in assets from acquisitions/(sales)

Sovereign’s Growth – A Combination of Organic Growth and Acquisitions

Deposits ($ in billions)

Assets ($ in billions)

$8.6 $7.3 $8.5 $11.5 $12.9$23.7

$25.6$27.4

$28.4

$35.1$41.4

$11.6

$0.1 $2.2 $3.9 $0.5

$(0.3)$1.3 $(0.0)

$4.2

$2.9

$11.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Organic deposits Net change in deposits from acquisitions/(sales)

$9.5$8.7

$12.0

$24.5 $23.3$26.9

$27.3$32.6

$38.0

$52.4

$12.3

$15.3$17.7

$21.9$26.6

$33.5$35.5

$39.6$43.5

$54.5$63.7

$89.6

Organic CAGR 5.7%CAGR 19.7%

Organic CAGR 9.4%CAGR 19.3%

Source: Wall Street Research, Company data

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Sovereign’s Vision and Strategy

VisionTo be recognized by customers and prospects as a customer-centric local community bank with large bank capabilities

StrategyTo acquire and retain customers by: Demonstrating convenience through our locations,

technology and business approach Offering innovative and easy-to-use products and services Providing high-quality customer service that is both

responsive and flexible

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America’s Neighborhood Banksm

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Sovereign’s Business Model

Increased emphasis on core commercial and consumer, franchise based businesses; Sovereign does not have any lending units whose principal focus is on sub-prime lending

Core Commercial: Commercial Real Estate Mini Perm Conduit C&I Lending Business Banking

• Branch Business Banking• SBA

Centralized strategy with a de-centralized delivery structure Community Banking delivery model, each with a Market CEO Local decision making by experienced commercial/retail bankers

Core Consumer (within footprint): Home Equity Lending Residential Mortgage Retail Banking

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Specialty Businesses – Regional and National

Auto Finance Dealer Floor Plan Indirect Auto

Aviation Finance

Multi-Family/CRE

Health Care/Not-For-Profit

Asset Based Lending Business Alliance

Capital Corp.

Franchise Finance

Capital Markets

Cash Management

Equipment Finance/Leasing

Trade Finance

Retail Finance

Sports Lending

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Strategic Alliances

CVS/Cardtronics Over 1,100 ATMs installed to date Over 500,000 transactions monthly

First Data Corp. Sovereign Merchant Services Dedicated sales force in excess of 100 44,000 processing merchants

ADP Sovereign Payroll Services Dedicated sales force of approximately 225

American Express – OPEN Customer Rewards Program Official card issuer

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Improve productivity and expense management

Improve the capital position and quality of earnings

Improve the customer experience

Improve communications with all stakeholders

-

Objectives for 2007

Execute on four key initiatives to deliver improved quality of earnings, provide greater transparency and understanding of Sovereign’s businesses and strategy, and better position Sovereign for sustainable growth

Progress to date on four initiatives:

+

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Improving Productivity and Expense Management

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Expense Reduction Initiative

Primary focus on: Functional redundancies and operating inefficiencies Products/business lines not meeting profit or

strategic goals Leverage economies of scale with vendor supply

and service contracts Capacity utilization and expenses associated with

facilities Consolidation of departments Optimization of retail delivery channels

While minimizing impact on customer facing activities and organic revenue generation~$100 million of expense reductions reflected in 3Q07 G&A expense run rate partially offset by

reinvestment in the core franchise

~$100 million of expense reductions reflected in 3Q07 G&A expense run rate partially offset by

reinvestment in the core franchise

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Capital Re-investment in Core Businesses to Continue Sovereign will continue to invest in core commercial and

consumer businesses as well as targeted specialty businesses

Sovereign will continue to make investments to improve the customer experience Comprehensive review of all bank information systems recently

completed Improvements being made on front-end systems to reduce

account opening time More incentives focused on sales and service Revitalization of Community Banking Offices

Sovereign intends to direct greater marketing resources toward deposit products in 2007 and 2008

Sovereign plans to open/relocate up to 40 new community banking offices in more desirable demographics over the next 2 years – 17 in 2007 and up to 20 in 2008

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Improving Capital Position and Quality of Earnings

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Commercial Real Estate

21%

C&I22%Multi-family

9%Other

Commercial1%

Home Equity11%

Auto10%

OtherConsumer

1%

Residential Mortgages

25%

Commercial Real Estate

18%

C&I20%

Multi-family9%

Residential Mortgages

28%

Home Equity15%

Auto8%

Other Commercial

1%

Other Consumer

1%

Improved Loan Mix – Result of Balance Sheet Restructuring

Period-end balances

December 31, 2006

1Q07 Loan Sales:$3.3 billion correspondent home equity loans$2.5 billion purchased residential mortgages

$1.3 billion multi-family loans

Total Commercial Loans 48.7%Total Consumer Loans 51.3%

Total Commercial Loans 52.3%Total Consumer Loans 47.7%

September 30, 2007

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DDA13%

NOW11%

Repo5%

Savings8% Money

Market20%

CD's24%

Wholesale 19%

DDA13%

NOW12%

Repo4%

Savings9% Money

Market17%

CD's22%

Wholesale 24%

Period-end balances

December 31, 2006 September 30, 2007

Improved Deposit Mix – Less Reliance on Wholesale Deposits

Total Deposits $52.4 bn @ 3.14%Excluding Wholesale $40.0 bn @ 2.50%

Total Deposits $50.0 bn @ 3.21%Excluding Wholesale $40.6 bn @ 2.78%

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6.48% 6.68% 6.74%

5.69% 5.82% 5.73%

6.29% 6.40%6.03%

4.54%

4.73% 4.81%3.49%

3.78% 3.73%

4.20% 4.33%4.09%

4.54%

4.73% 4.81%

3.25%3.55% 3.50%

3.95% 4.07% 3.85%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07

Tier 1 Leverage Tangible Equity/Tangible Assets Tangible Common Equity/Tangible Assets

Restoring Capital LevelsSovereign Bancorp, Inc.

* Capital ratios were negatively impacted due to the need to temporarily hold an additional $4.5 billion of cash and investments over quarter-end to maintain compliance with a regulatory guideline. Tangible ratios negatively impacted by 22 bps and Tier 1 leverage by 35 bps as a result of this requirement.

*

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$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07

0%

5%

10%

15%

20%

25%

30%

35%

40%

Wh

ole

sale

Assets

/To

tal A

ssets

Wholesale Assets Total Assets Wholesale Assets/Total Assets

Less Reliance on Wholesale Assets

Wholesale assets includes investments and purchased loans. 3Q07 excludes $4.5 billion of cash and investments temporarily held over quarter end to maintain compliance with a regulatory guideline.

$ in millions

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Benefits of Restructuring

Repositioned Sovereign for sustainable growth in core earnings long-term

Improved risk profile of balance sheet

Improved capital levels

Provided investment capital to support organic growth

Reduced reliance on purchased assets and wholesale funding, improved quality of balance sheet and income statement

Enabled management to fully focus attention on building core competencies

Page 21: Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

Improving The Customer Experience

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Tactical Plans to Improve Customer Experience

Rationalize product set Rolled out customer switching services across franchise Upgraded commercial online banking system Streamlined retail product set by half in first quarter – 10 checking

products to 5 Converted over 400,000 grandfathered accounts to increase balance

retention

Optimize sales process During the fourth quarter of 2007, rolled out pilot program focused on:

• Measurable improvement in sales productivity and sales management practices• Increasing customer acquisition, development and retention

Implement coordinated, aggressive balance-building campaigns Align advertising, incentives, and communication in support of core deposit

growth goals Optimize effectiveness of the advertising spend by re-allocating across

geographies

Centralized strategy for product development, pricing, etc. with decentralized delivery model

Page 23: Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

Improving Communications with all Stakeholders

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Improving Communication

Management’s responsibility is to share with all key constituents information that is timely, accurate, consistent and concise

Key constituents include: Team Members Shareholders Analysts Customers

Changes to date – Financial Disclosures: Operating earnings definition Capital ratios streamlined More credit quality detail (C&I, CRE) More deposit detail (wholesale vs. core)

Community leaders Advisory groups Regulators Rating agencies

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Residential Mortgages – As of September 30, 2007

Total Residential Mortgages

Outstanding Balance $14.0 billion

Weighted Average FICO 736

Weighted Average LTV 53.3%

Fixed RateAdjustable Rate

69%31%

>91% 5%

80% to 90% 6%

51% to 79% 72%

<50% 17%

>741 44%

681 to 740 36%

621 to 680 17%

<620 3%

LTVDistribution

FICODistribution

Alt – A Mortgages

Outstanding Balance $2.8 billion

Weighted Average FICO 721

Weighted Average LTV 66.7%

Fixed RateAdjustable Rate

33%67%

>91% 2%

80% to 90% 9%

51% to 79% 76%

<50% 13%

>741 41%

681 to 740 45%

621 to 680 14%

<620 0%

LTVDistribution

FICODistribution

1

1

1

1

1 Statistics based on original loan amount and are as of time of origination for those loans that data were available.

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Retained Correspondent HMEQ

Outstanding Balance $517 million

Reserves/Discount $102 million

Balance, net $415 million

Weighted Average FICO 647

Weighted Average CLTV 83%

First LienSecond Lien

71%29%

>91% 33%

80% to 90% 31%

51% to 79% 32%

<50% 4%

>741 23%

681 to 740 18%

621 to 680 20%

<620 39%

Home Equity Lending – As of September 30, 2007Direct Home Equity

Outstanding Balance $5.4 billion

Weighted Average FICO 784

Weighted Average CLTV 61.0%

Fixed Rate LoansLines of Credit

68%32%

First LienSecond Lien

38%62%

>91% 4%

80% to 90% 22%

51% to 79% 44%

<50% 30%

>741 61%

681 to 740 27%

621 to 680 10%

<620 2%

CLTVDistribution

FICODistribution

CLTVDistribution

FICODistribution

1

1 Statistics based on original loan amount and are as of time of origination for those loans that data were available. 2 Statistics based on current FICO for those loans that data were available. 3 In reaction to projected declines in housing values, increased delinquency and charge-off rates, reserves were increased on this portfolio by $47 million in the third quarter of 2007.

1

2

1

3

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Indirect Auto – As of September 30, 2007

Indirect Auto

Outstanding Balance $6.9 billion

Weighted Average FICO New Used

727739715

NewUsed

55%45%

In-footprintOut of Footprint

64%36%

>741 32%

681 to 740 41%

621 to 680 24%

<620 2%

FICODistribution

1

1 Statistics based on original loan amount and are as of time of origination for those loans that data were available.

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Indirect Auto Expansion

Began originating in expansion markets in June of 2006

Experienced professionals managing markets

Currently 36% of indirect auto loan outstandings

Recently terminated relationships withapproximately 90 auto dealers; thesedealers representeda disproportionatepercentage of defaults

Increased allowanceby $37 million in 3Q07

Potential to cross-sellinto Dealer Floor Plan

VA

CA

AZ

UTNV

RI

MANH

CTNJ

ME

MD

DE

PA

NY

VT

FL

GA

NC

SC

Sovereign Footprint

Expansion Markets

Page 29: Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

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Indirect Auto Underwriting

Average FICO

660680700720740

1Q05 3Q05 1Q06 3Q06 1Q07 3Q07

New Used

Debt-to-Income

30%

40%

50%

1Q05 3Q05 1Q06 3Q06 1Q07 3Q07

New Used

Rate

5%6%7%8%9%

10%

1Q05 3Q05 1Q06 3Q06 1Q07 3Q07

New Used

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Indirect Loss Mitigation Initiatives

Increase Tier 1 originations More than 70% of new volumes

are now in Tier 1 compared to 60% in the beginning of the year

Increase new vs. used mix

Increase spread on Tiers 3 to 5

Reduce expansion market volumes

Increase collections to sales communication

Increase default resolution

Origination Mix

FICO Historic Current

Tier 1 700-729 60% 74%

Tier 2 675-699 18% 12%

Tier 3 650-674 13% 9%

Tier 4 620-649 8% 4%

Tier 5 590-619 1% 1%

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Credit Quality Trends

0.37% 0.35%0.43%

0.49%0.42%

3Q06 4Q06 1Q07 2Q07 3Q07

Non-Performing Loans toLoans Held for Investment

0.23%0.29%

0.16%

0.24%0.18%

3Q06 4Q06 1Q07 2Q07 3Q07

Annualized Net Charge-offsto Average Loans

* 4Q06 net charge-offs exclude credit charges related to balance sheet restructuring of $390 million

*

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0.37%

0.55%

0.20%

0.59%

0.42%

0.56% 0.57%

0.89%

0.00%0.10%0.20%0.30%0.40%0.50%0.60%0.70%0.80%0.90%1.00%

Commercial Real Estate C&I and Other Residential Mortgages Home Equity

9/30/06

9/30/07

0.03%

0.21%

0.01%

0.76%0.66%

0.06%

0.25%

0.05% 0.06%

1.18%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

Commercial Real Estate C&I and Other Residential Mortgages Home Equity Auto

3Q06

3Q07Annualized Net Charge-offs/

Average Loans

Non-Performing Loans and Net Charge-offsNon-Performing Loans/

Total Loans Held for Investment

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Strengthening Reserves

0.88% 0.88% 0.90%1.14%

0.92%

3Q06 4Q06 1Q07 2Q07 3Q07

Allowance to Total Loans

3.9

2.6

5.2 4.85.1

3Q06 4Q06 1Q07 2Q07 3Q07

Allowance to Net Charge-offs

240.0% 251.0%208.0% 230.0%217.0%

3Q06 4Q06 1Q07 2Q07 3Q07

Allowance toNon-Performing Loans

* 4Q06 net charge-offs exclude credit charges related to balance sheet restructuring of $390 million

*

x

x

x x x

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What to Expect Going Forward

Disciplined and focused approach to increasing the value of our core franchise Increase the rate of household and enterprise acquisition Increase the rate of cross selling and share of wallet

Disciplined credit risk management practices

Continued formation of a solid capital position

Company-wide program to improve our sales culture

Continued focus on operational excellence Better, faster and cheaper

Continue to increase communications and transparency Both internally and externally

Page 35: Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

Appendix

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Operating Earnings Per Share

This presentation 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 measures of Operating Earnings in its analysis of the company’s performance. These measures typically 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 and integrating businesses, and certain non-cash charges

Since certain of these excluded 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, which may be presented by other companies

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One Non-GAAP Financial Measure

Sovereign’s management uses Operating Earnings, a non-GAAP measure, and the related per share amounts, in their analysis of the company. Management believes that Operating Earnings, as calculated by Sovereign: Provides greater financial transparency

Provides useful supplemental information when evaluating Sovereign’s core businesses

Is consistent with the SEC’s publicly stated desire for fewer non-GAAP disclosures

Operating Earnings represent net income adjusted for after-tax effects of merger-related and integration charges and any other non-recurring charges

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Reconciliation of Operating Earnings to Reported GAAP Earnings

($ in thousands) Year Ended December 31,

2006 2005 2004 2003 2002Net Income as reported 136,911$ 676,160$ 453,552$ 401,851$ 341,985$ Dividends on preferred stock (7,908) - - - - Net Income available to common shareholders 129,003$ 676,160$ 453,552$ 401,851$ 341,985$

Net Income available to common shareholders 129,003 Contingently convertible trust preferred interest expense, net of tax 25,360 25,427 21,212

Net Income for EPS purposes 154,363$ 0.30$ 701,587$ 1.69$ 474,764$ 1.29 401,851$ 1.32 341,985$ 1.17

Net income for Operating earnings EPS purposes 154,363$ 0.33$ 701,587$ 1.69$ 453,552$ 1.31 401,851$ 1.32 341,985$ 1.17 Merger-related and integration costs 27,574 0.06 8,284 0.02 30,134 0.09 10,316 0.04 Provision for loan loss 200,499 0.43 3,900 0.01 3,900 0.01 Loss on economic hedge 7,402 0.02 Restructuring of balance sheet 197,799 0.42 42,605 0.12 18,838 0.06 Restructuring charges 51,134 0.11 2,589 0.01 Impairment charge for FNMA and FHLMC preferred stock 43,875 0.09 20,891 0.06 Proxy and professional fees 9,319 0.02 3,788 0.01 Non-solicitation expenseOperating earnings for EPS purposes 691,965$ 1.48$ 716,248$ 1.72$ 551,082$ 1.59$ 420,689$ 1.38$ 356,201$ 1.22$

Weighted average diluted shares for GAAP EPS 433,908 415,996 367,811 305,001 292,991 Add back of diluted shares for Operating EPS not factored into GAAP diluted shares due to antidilution 33,840 - (22,823) - - Adjusted weighted average diluted shares for Operating EPS 467,748 415,996 344,988 305,001 292,991

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Reconciliation of Operating Earnings to Reported GAAP Earnings

($ in thousands)

Quarter Ended

Total dollars Per shareSept. 30 Sept. 30 Sept. 30 Sept. 30

2007 2006 2007 2006

Net income/ (loss) as reported 58,210$ 184,009$

Dividends on preferred stock (3,650) (1,825)

Net income available to common shareholders 54,560 182,184

Contingently convertible trust preferred interest expense, net of tax - 6,344 Net income/ (loss) for EPS purposes 54,560$ 188,528$ 0.11$ 0.37$

Non GAAP adjustments to adjust antidilutive EPS

Net income available to common shareholders 54,560$

Trust IV expense, net of tax 6,423

Antidilutive net income/ (loss) for operating EPS calculation 60,983$

Reconciliation to Operating earnings EPS

Net income/ (loss) for Operating earnings EPS purposes 60,983$ 188,528$ 0.12$ 0.37$

Merger related and integration costs - 18,463 - 0.04

Provision for credit losses 30,550 - 0.06 - Loss on restructuring, other employee severance and debt repurchase charges 3,919 - 0.01 -

Operating earnings for EPS purposes 95,452$ 206,991$ 0.19$ 0.41$

Weighted average diluted shares for GAAP EPS 480,171 506,135 Add back of diluted shares for operating EPS not factored into GAAP diluted shares due to antidilution (1) 32,480 - Adjusted weighted average diluted shares for Operating EPS 512,651 506,135

Page 40: Sovereign Bancorp, Inc. Merrill Lynch Banking and Financial Services Conference November 13, 2007.

Sovereign Bancorp, Inc.