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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934,
 for the fiscal year ended December 31, 2006, or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934,
 for the transition period from N/A to ___.
 Commission File Number 001-16581
 SOVEREIGN BANCORP, INC.
  Pennsylvania
    
    23-2453088(State or other Jurisdiction 
of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)1500 Market Street, Philadelphia, Pennsylvania
(Address of Principal Executive Offices)
    
    19102
(Zip Code)
 
  Securities registered pursuant to Section 12(b) of the Act:
 Title
    
    Name of Exchange on Which RegisteredCommon stock, no par value
    
    NYSEDepository Shares for Series C non-cumulative preferred stock
    
    NYSE7.75% Capital Securities (Sovereign Capital Trust V)
    
    NYSE8.50% Cumulative Trust Preferred Securities (Seacoast Capital Trust I)
    
    NASDAQ
 Securities registered pursuant to Section 12(g) of the Act:
  þ o
 o þ
 þ o
 þ
  þ o o
 o þ




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##### 



Form 10-K Cross Reference Index
 PageForward-Looking Statements
    
    3-4PART IItem 1
    
     Business
    
    5-8Item 1A
    
     Risk Factors
    
    9-10Item 1B
    
     Unresolved Staff Comments
    
    11Item 2
    
     Properties
    
    11Item 3
    
     Legal Proceedings
    
    11Item 4
    
     Submission of Matters to a Vote of Security Holders
    
    12Item 4A
    
     Executive Officers of the Registrant
    
    12PART IIItem 5
    
     Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    13Item 6
    
     Selected Financial Data
   
    14Item 7
    
     Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    15-49Item 7A
    
     Quantitative and Qualitative Disclosures About Market Risk
    
    49Item 8
    
     Financial Statements and Supplementary Data
    
    50-106Item 9
    
     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    107Item 9A
    
     Controls and Procedures
    
    107Item 9B
    
     Other Information
    
    107PART IIIItem 10
    
     Directors and Executive Officers of the Registrant
    
    107Item 11
    
     Executive Compensation
    
    107Item 12
    
     Security Ownership of Certain Beneficial Owners and Management
    
    107-111Item 13
    
     Certain Relationships and Related Transactions
    
    111Item 14
    
     Principal Accountant Fees and Services
    
    111PART IVItem 15
    
     Exhibits and Financial Statement Schedules
    
    112-115Signatures
    
    116-117Sovereign Bancorp, Inc. Non-Employee Directors Services Compensation PlanSovereign Bancorp, Inc. 1993 Stock Option PlanSovereign Bancorp, Inc. 1996 Stock Option PlanAgreement to Amend dated May 30, 2006, between Sovereign Bancorp, Inc. and Mark R McCollomAgreement to Amend, dated May 30, 2006, between Sovereign Bancorp, Inc. and James J. LynchChange in Control Agreement, dated January 1, 2001, Sovereign Bancorp, Inc. and M. Robert RoseSovereign Bancorp, Inc. 2001 Stock Incentive PlanSovereign Bancorp, Inc. 2006 Non-Employee Director Compensation PlanSovereign Bancorp, Inc. 2004 Broad-Based Stock Incentive PlanSovereign Bancorp, Inc. 2007 Deferred Compensation PlanSubsidiaries of RegistrantConsent of Ernst & Young LLPChief Executive Officer certificationChief Financial Officer certificationChief Executive Officer certificationChief Financial Officer certification
  2




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Forward-Looking Statements
   
    
    growth in net income, shareholder value and internal tangible equity generation;
    
    growth in earnings per share;
    
    return on equity;
    
    return on assets;
    
    efficiency ratio;
    
    Tier 1 leverage ratio;
    
    annualized net charge-offs and other asset quality measures;
    
    fee income as a percentage of total revenue;
    
    ratio of tangible equity to assets or other capital adequacy measures;
    
    book value and tangible book value per share; and
    
    loan and deposit portfolio compositions, employee retention, deposit retention, asset quality and reserve adequacy.
  
    
    the strength of the United States economy in general and the strength of the regional and local economies in which Sovereign conducts
operations;
    
    the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors
of the Federal Reserve System;
    
    inflation, interest rate, market and monetary fluctuations;
    
    adverse changes that may occur in the securities markets, including those related to the financial condition of significant issuers in our
investment portfolio;
    
    Sovereigns ability to successfully integrate any assets, liabilities, customers, systems and management personnel Sovereign acquires into
its operations and its ability to realize related revenue synergies and cost savings within expected time frames;
    
    the 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 Sovereigns acquisitions, including adverse effects on
relationships with employees may be greater than expected;
    
    the implementation of cost savings initiatives may take longer to implement than anticipated or may cost more to implement than anticipated;
    
    the implementation of cost savings initiatives may have unintended impacts on our ability to attract and retain businesses and customers;
    
    revenue enhancement ideas may not be successful in the marketplace or may result in unintended costs;
    
    assumed attrition required to achieve workforce reductions may not come in the right place or at the right times to meet planned goals;
    
    changing market conditions may force us to alter the implementation or continuation of cost savings or revenue enhancement strategies;
    
    Sovereigns plans to sell loan portfolios may take longer than anticipated, may be sold at prices lower than anticipated or may not occur in their entirety;
 3




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
    
    Sovereigns 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 vendors to convert and maintain Sovereigns data 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
and policies 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;
    
    competitors of Sovereign may have greater financial resources and develop products and technology that
enable those competitors to compete more successfully than Sovereign;
    
    changes in consumer spending and savings habits;
    
    acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters;
    
    regulatory or judicial proceedings;
    
    changes in asset quality;
    
    if Sovereign acquires companies with weak internal controls, it will take time to get the acquired
company up to the same level of operating effectiveness as Sovereigns internal control structure. The
Companys inability to address these risks could negatively affect the Companys operating results; and
    
    Sovereigns success in managing the risks involved in the foregoing.
   4




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PART I
 
 Item 1  Business
 General
     Business Strategy
  Subsidiaries
  Employees
  Competition
  5




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Environmental Laws
  Supervision and Regulation
 General.
   Holding Company Regulation.
   Control of Sovereign.
   6




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Regulatory Capital Requirements.
   Standards for Safety and Soundness.
 Insurance of Accounts and Regulation by the FDIC.
    Federal Restrictions on Transactions with Affiliates.
 Restrictions on Subsidiary Savings Institution Capital Distributions.
 7




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Qualified Thrift Lender.
 Other Loan Limitations.
 Federal Reserve Regulation.
  Federal Home Loan Bank System.
 Community Reinvestment Act.
 Other Legislation.
    Corporate Information. www.sec.gov
 8




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Item 1A  Risk Factors
  
    
    An Economic Downturn May Lead to a Deterioration in Our Asset Quality and Adversely Affect Our Earnings and Cash Flow.
  
    
    The Preparation of Sovereigns Financial Statements Requires the Use of Estimates That May Vary From Actual Results.
  
    
    Changing Interest Rates May Adversely Affect Our Profits.
  
    
    We Experience Intense Competition for Loans and Deposits.
  
    
    We Are Subject to Substantial Regulation Which Could Adversely Affect Our Business and Operations.
    
    
    Changes in Accounting Standards could Impact Reported Earnings.
  9




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
    
    Difficulties in combining the operations of acquired entities with
Sovereigns own operations may prevent Sovereign from achieving the
expected benefits from its acquisitions.
  
    
    Our cost saving initiatives which began being implemented at the end
of 2006 and will continue in 2007 may take longer to implement than
anticipated or may lead to unintended consequences.
  
    
    Sovereigns plans to sell the majority of the home equity correspondent loan portfolio
and a portion of the multi-family loan portfolio may take longer than anticipated, may
be sold at prices lower than anticipated or may not occur in their entirety.
  10




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Item 1B  Unresolved Staff Comments
  
 Item 2  Properties
           
 Item 3  Legal Proceedings
  11




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Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 4A  Executive Officers of the Registrant
       12




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PART II
 
 Item 5  Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
     Average
    
    Total Number of
    
    Maximum Number ofTotal
    
    Price
    
    Shares Purchased as
    
    Shares that may beNumber of
    
    Paid
    
    Part of Publicly
    
    Purchased UnderShares
    
    Per
    
    Announced Plans or
    
    the Plans orPeriod
    
    Purchased
    
    Share
    
    Programs (1)
    
    Programs (1)10/1/06 through 10/31/06
    
    
    1,147
    
    
    $
    21.03
    
    
    Not Applicable
    
    
    19,500,00011/1/06 through 11/30/06
    
    
    
    
    
    $
    
    
    
    Not Applicable
    
    
    19,500,00012/1/06 through 12/31/06
    
    
    431
    
    
    $
    23.06
    
    
    Not Applicable
    
    
    19,500,000
 
 (1)
    
    Sovereign has three stock repurchase programs in effect that would allow the Company to
repurchase up to 40.5 million shares of common stock as of December 31, 2006. Twenty one million
shares have been purchased under these repurchase programs as of December 31, 2006. All of
Sovereigns stock repurchase programs have no prescribed time limit in which to fill the authorized
repurchase amount.  13




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Item 6  Selected Financial Data
 SELECTED FINANCIAL DATAAT OR FOR THE YEAR ENDED DECEMBER 31,(Dollars in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Balance Sheet DataTotal assets
    
    $
    89,641,849
    
    
    $
    63,678,726
    
    
    $
    54,489,026
    
    
    $
    43,517,433
    
    
    $
    39,601,034Loans held for investment, net of allowance
    
    
    54,505,645
    
    
    
    43,072,670
    
    
    
    36,102,598
    
    
    
    25,695,715
    
    
    
    22,905,056Loans held for sale(1)
    
    
    7,611,921
    
    
    
    311,578
    
    
    
    137,478
    
    
    
    137,154
    
    
    
    382,055Investment securities
    
    
    14,877,640
    
    
    
    12,557,328
    
    
    
    11,546,877
    
    
    
    12,618,971
    
    
    
    11,366,077Deposits and other customer accounts
    
    
    52,384,554
    
    
    
    37,977,706
    
    
    
    32,555,518
    
    
    
    27,344,008
    
    
    
    26,851,089Borrowings and other debt obligations
    
    
    26,849,717
    
    
    
    18,720,897
    
    
    
    16,140,128
    
    
    
    12,197,603
    
    
    
    8,829,289Stockholders equity
    
    $
    8,644,399
    
    
    $
    5,810,699
    
    
    $
    4,988,372
    
    
    $
    3,260,406
    
    
    $
    2,764,318Summary Statement of OperationsTotal interest income(5)
    
    $
    4,326,404
    
    
    $
    2,962,587
    
    
    $
    2,255,917
    
    
    $
    1,951,888
    
    
    $
    2,076,654Total interest expense(2)
    
    
    2,504,856
    
    
    
    1,330,498
    
    
    
    819,327
    
    
    
    724,123
    
    
    
    899,924Net interest income(5)
    
    
    1,821,548
    
    
    
    1,632,089
    
    
    
    1,436,590
    
    
    
    1,227,765
    
    
    
    1,176,730Provision for credit losses(1)
    
    
    484,461
    
    
    
    90,000
    
    
    
    127,000
    
    
    
    161,957
    
    
    
    146,500Net interest income after provision for credit
losses(5)
    
    
    1,337,087
    
    
    
    1,542,089
    
    
    
    1,309,590
    
    
    
    1,065,808
    
    
    
    1,030,230Total non-interest income(1) (5)
    
    
    285,574
    
    
    
    602,664
    
    
    
    450,525
    
    
    
    499,439
    
    
    
    413,071General and administrative expenses
    
    
    1,289,989
    
    
    
    1,089,204
    
    
    
    942,661
    
    
    
    852,364
    
    
    
    813,784Other expenses(1) (2)
    
    
    313,541
    
    
    
    163,429
    
    
    
    236,232
    
    
    
    157,984
    
    
    
    162,962Income before income taxes
    
    
    19,131
    
    
    
    892,120
    
    
    
    581,222
    
    
    
    554,899
    
    
    
    466,555Income tax provision (benefit)
    
    
    (117,780
    )
    
    
    215,960
    
    
    
    127,670
    
    
    
    153,048
    
    
    
    124,570Net Income(4)
    
    $
    136,911
    
    
    $
    676,160
    
    
    $
    453,552
    
    
    $
    401,851
    
    
    $
    341,985Share DataCommon shares outstanding at end of period (in
thousands)(3)
    
    
    473,755
    
    
    
    358,018
    
    
    
    345,775
    
    
    
    293,111
    
    
    
    261,624Basic earnings per share(3) (4)
    
    $
    0.30
    
    
    $
    1.77
    
    
    $
    1.34
    
    
    $
    1.38
    
    
    $
    1.26Diluted earnings per share(3) (4)
    
    $
    0.30
    
    
    $
    1.69
    
    
    $
    1.29
    
    
    $
    1.32
    
    
    $
    1.17Common share price at end of period
    
    $
    25.39
    
    
    $
    20.59
    
    
    $
    21.48
    
    
    $
    22.62
    
    
    $
    13.38Dividends declared per common share
    
    $
    .300
    
    
    $
    .170
    
    
    $
    .115
    
    
    $
    .100
    
    
    $
    .100Selected Financial RatiosBook value per common share(6)
    
    $
    17.83
    
    
    $
    15.46
    
    
    $
    13.74
    
    
    $
    10.59
    
    
    $
    10.06Common dividend payout ratio(7)
    
    
    92.11
    %
    
    
    9.02
    %
    
    
    8.21
    %
    
    
    6.99
    %
    
    
    7.62
    %Return on average assets(8)
    
    
    0.17
    %
    
    
    1.11
    %
    
    
    .90
    %
    
    
    .97
    %
    
    
    .91
    %Return on average equity(9)
    
    
    1.82
    %
    
    
    11.92
    %
    
    
    10.74
    %
    
    
    13.41
    %
    
    
    13.50
    %Average equity to average assets(10)
    
    
    9.46
    %
    
    
    9.34
    %
    
    
    8.36
    %
    
    
    7.24
    %
    
    
    6.71
    %
 
 (1)
    
    In connection with a strategic decision made in the fourth quarter of 2006, management decided to take several steps to improve the profitability and capital position of the Company. The Company decided
to sell certain loans including $2.9 billion of low yielding residential real estate and $4.3 billion of correspondent home equity loans whose credit quality had deteriorated significantly over the past
year. The proceeds from these sales will be utilized to reduce FHLB borrowings and brokered certificate of deposits. We recorded charges of $296 million through the provision for credit losses related
to the correspondent home equity loan sale and recorded a $28.2 million reduction in mortgage banking revenues as a result of classifying these loans as held for sale at December 31, 2006 and carrying
the loans at their market value which was less than cost. Also in the fourth quarter of 2006, several members of executive management resigned from the Company and approximately 360 employees were
notified that their positions were being eliminated. Sovereign recorded severance charges of $63.9 million related to these events. Finally, Sovereign sold approximately $1.5 billion of low yielding
investment securities in connection with the restructuring plan. The proceeds from this sale were reinvested in higher yielding securities as they were needed for collateral on certain of our debt and
deposit obligations. However, we recorded a pre-tax loss of $43 million in connection with this sale. Sovereign also recorded investment securities charges of $305.8 million during the second quarter of
2006. See Managements Discussion and Analysis and Footnotes 6, 7 and 28 to the Consolidated Financial Statements for further discussion.(2)
    
    Effective July 1, 2003, management elected to change its accounting policy to treat its Trust Preferred Security obligations as liabilities and the associated dividends on the trust preferred securities
as interest expense. Previously, this cost was included in Other Expenses since the obligations were classified on the consolidated balance sheet as Company  Obligated Mandatorily Redeemable Preferred
Securities. Periods prior to July 1, 2003 have not been reclassified to conform to the new presentation.(3)
    
    Earnings per share and weighted average common shares have been restated to reflect the 5% stock dividend paid to shareholders of record on June 15, 2006.(4)
    
    Net income includes after-tax merger-related charges, restructuring charges, debt extinguishment charges and other charges of $538 million ($1.24 per share) in 2006, $15 million ($0.04 per diluted share)
in 2005, $98 million ($0.27 per diluted share) in 2004, $19 million ($0.06 per diluted share) in 2003, and $14 million ($0.05 per diluted share) in 2002.(5)
    
    Effective March 31, 2006, Sovereign reclassified its loan prepayment fees and late fees from non-interest income to interest income. Prior periods were reclassified to conform to the current presentation.(6)
    
    Book value per share is calculated using stockholders equity divided by common shares outstanding at end of period.(7)
    
    Common dividend payout ratio is calculated by dividing total common dividends paid by net income for the period.(8)
    
    Return on average assets is calculated by dividing net income by the average balance of total assets for the year.(9)
    
    Return on average equity is calculated by dividing net income by the average balance of stockholders equity for the year.(10)
    
    Average equity to average assets is calculated by dividing the average balance of stockholders equity for the year by the average balance of total assets for the year. 14




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Managements Discussion and Analysis
 
 Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A)
 EXECUTIVE SUMMARY
             15




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RECENT INDUSTRY CONSOLIDATION IN OUR GEOGRAPHIC FOOTPRINT
  CURRENT INTEREST RATE ENVIRONMENT
  CREDIT RISK ENVIRONMENT
  16




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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 YEAR ENDED DECEMBER 31,(Dollars in thousands, except per share data)
    
    2006
    
    2005Net interest income
    
    $
    1,821,548
    
    
    $
    1,632,089Provision for credit losses
    
    
    484,461
    
    
    
    90,000Total non-interest income
    
    
    285,574
    
    
    
    602,664General and administrative expenses
    
    
    1,289,989
    
    
    
    1,089,204Other expenses
    
    
    313,541
    
    
    
    163,429Net income
    
    $
    136,911
    
    
    $
    676,160Basic earnings per share
    
    $
    0.30
    
    
    $
    1.77Diluted earnings per share
    
    $
    0.30
    
    
    $
    1.69
  
    
    The growth in net interest income was driven by the increase in the balance of earning assets, as a
result of the Independence acquisition as well as organic balance sheet growth, partially offset by
a decline in net interest margin to 2.75% in 2006 from 3.17% in 2005. The decline in margin was
due to the flattening yield curve, which has contracted the spread between our longer-term assets
and shorterterm liabilities and a lack of low cost core deposit growth which has forced the
Company to fund asset growth with higher cost borrowings and wholesale deposit obligations.
    
    Included in non-interest income:
 (1)
    
    Net losses on investment securities of $238.3 million on the sale of investment securities and an
other-than-temporary impairment charge of $67.5 million on FNMA and FHLMC Preferred Stock in the second quarter of 2006
and a $43.0 million loss on the sale of $1.5 billion of available for sale investments as part of the balance sheet
restructuring in the fourth quarter of 2006. See Note 6 for additional details.(2)
    
    An increase in consumer and commercial fee income in 2006 of $49.1 million. The continued growth in fee income in
consumer and commercial banking is due to loan and deposit growth as a result of Independence acquisition as well as
strong growth in commercial loans.(3)
    
    A decrease in mortgage banking revenues in 2006 of $63.9 million is due to a $28.2 million lower of cost or market
adjustment related to the previously mentioned $2.9 billion residential real estate portfolio that is classified as held
for sale. In 2005, Sovereign also sold $1.4 billion of home equity loans and recognized a gain of $32.1 million.
Sovereign did not recognize any gains associated with sales of home equity loans in 2006.
 
    
    Other expenses have increased due primarily to employee severance and restructuring charges of $78.7 million in 2006
compared to only $4.0 million in 2005. Additionally, merger-related charges of $42.4 million were incurred in 2006,
compared to charges of $12.7 million in 2005.
 
    
    The increase in provision for credit losses in 2006 is primarily related to the previously
mentioned lower of cost or market adjustment for the correspondent home equity portfolio in the
fourth quarter. Since the loss was determined to be solely related to credit deterioration,
Sovereign recorded an additional provision of $296 million.
 
    
    Sovereign recorded an income tax (benefit) of
$117.8 million in 2006, compared to an income tax provision of $216.0
million in 2005. The reason for the variance was due to the low level of pre-tax earnings in 2006 due to the
aforementioned restructuring and other significant charges in 2006, which have magnified the impact of our favorable
permanent tax-free items. See a later section of the MD&A for further discussion.
 
    
    Increases in general and administrative expenses were due primarily to the Independence acquisition.
 Net Interest Income.
    17




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Table 1: Net Interest Margin
 YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-earning assets:Interest-earning deposits
    
    $
    285,382
    
    
    $
    13,897
    
    
    
    4.87
    %
    
    $
    155,672
    
    
    $
    5,717
    
    
    
    3.67
    %
    
    $
    135,338
    
    
    $
    2,153
    
    
    
    1.59
    %Investment securities(1)Available for sale
    
    
    11,217,296
    
    
    
    658,966
    
    
    
    5.87
    
    
    
    7,404,848
    
    
    
    385,158
    
    
    
    5.20
    
    
    
    10,320,377
    
    
    
    521,084
    
    
    
    5.05Held to maturity
    
    
    2,248,565
    
    
    
    125,886
    
    
    
    5.60
    
    
    
    4,062,700
    
    
    
    217,889
    
    
    
    5.36
    
    
    
    3,309,530
    
    
    
    167,455
    
    
    
    5.06Other
    
    
    849,040
    
    
    
    51,414
    
    
    
    6.06
    
    
    
    623,005
    
    
    
    18,058
    
    
    
    2.90
    
    
    
    477,010
    
    
    
    8,789
    
    
    
    1.84Total investments
    
    
    14,600,283
    
    
    
    850,163
    
    
    
    5.82
    
    
    
    12,246,225
    
    
    
    626,822
    
    
    
    5.12
    
    
    
    14,242,255
    
    
    
    699,481
    
    
    
    4.91Loans:Commercial loans(3)
    
    
    20,833,022
    
    
    
    1,489,484
    
    
    
    7.15
    
    
    
    15,904,425
    
    
    
    983,461
    
    
    
    6.18
    
    
    
    12,530,293
    
    
    
    624,984
    
    
    
    4.99Multifamily
    
    
    3,612,737
    
    
    
    224,290
    
    
    
    6.21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer:Residential mortgages(3)
    
    
    15,770,676
    
    
    
    888,546
    
    
    
    5.63
    
    
    
    10,588,935
    
    
    
    568,831
    
    
    
    5.37
    
    
    
    6,215,557
    
    
    
    329,546
    
    
    
    5.30Home equity loans and lines of
credit(3)
    
    
    10,119,375
    
    
    
    654,760
    
    
    
    6.47
    
    
    
    10,157,824
    
    
    
    567,548
    
    
    
    5.59
    
    
    
    7,828,671
    
    
    
    405,670
    
    
    
    5.18Total consumer loans secured by
real estate(3)
    
    
    25,890,051
    
    
    
    1,543,306
    
    
    
    5.96
    
    
    
    20,746,759
    
    
    
    1,136,379
    
    
    
    5.48
    
    
    
    14,044,228
    
    
    
    735,216
    
    
    
    5.24Auto loans
    
    
    4,457,932
    
    
    
    266,806
    
    
    
    5.98
    
    
    
    4,356,121
    
    
    
    233,283
    
    
    
    5.36
    
    
    
    3,891,325
    
    
    
    209,660
    
    
    
    5.39Other
    
    
    452,029
    
    
    
    37,201
    
    
    
    8.23
    
    
    
    535,616
    
    
    
    40,468
    
    
    
    7.56
    
    
    
    465,908
    
    
    
    34,107
    
    
    
    7.32Total Consumer
    
    
    30,800,012
    
    
    
    1,847,313
    
    
    
    6.00
    
    
    
    25,638,496
    
    
    
    1,410,130
    
    
    
    5.50
    
    
    
    18,401,461
    
    
    
    978,983
    
    
    
    5.32Total loans
    
    
    55,245,771
    
    
    
    3,561,087
    
    
    
    6.45
    
    
    
    41,542,921
    
    
    
    2,393,591
    
    
    
    5.76
    
    
    
    30,931,754
    
    
    
    1,603,967
    
    
    
    5.19Allowance for loan losses
    
    
    (489,775
    )
    
    
    
    
    
    
    
    
    
    
    (420,879
    )
    
    
    
    
    
    
    
    
    
    
    (359,920
    )
    
    
    
    
    
    
    Net loans(1)(2)
    
    
    54,755,996
    
    
    
    3,561,087
    
    
    
    6.50
    
    
    
    41,122,042
    
    
    
    2,393,591
    
    
    
    5.82
    
    
    
    30,571,834
    
    
    
    1,603,967
    
    
    
    5.25Total interest-earning assets
    
    
    69,356,279
    
    
    
    4,411,250
    
    
    
    6.36
    
    
    
    53,368,267
    
    
    
    3,020,413
    
    
    
    5.66
    
    
    
    44,814,089
    
    
    
    2,303,448
    
    
    
    5.14Non-interest-earning assets
    
    
    10,139,116
    
    
    
    
    
    
    
    
    
    
    
    7,363,707
    
    
    
    
    
    
    
    
    
    
    
    5,744,518
    
    
    
    
    
    
    
    Total assets
    
    $
    79,495,395
    
    
    $
    4,411,250
    
    
    
    5.55
    %
    
    $
    60,731,974
    
    
    $
    3,020,413
    
    
    
    4.97
    %
    
    $
    50,558,607
    
    
    $
    2,303,448
    
    
    
    4.56
    %Interest-bearing liabilities:Deposits:NOW accounts
    
    $
    5,990,180
    
    
    $
    70,303
    
    
    
    1.17
    %
    
    $
    5,296,828
    
    
    $
    33,232
    
    
    
    0.63
    %
    
    $
    4,632,908
    
    
    $
    19,012
    
    
    
    0.41
    %NOW accounts  government and wholesale
    
    
    4,293,111
    
    
    
    215,557
    
    
    
    5.02
    
    
    
    3,435,963
    
    
    
    120,045
    
    
    
    3.49
    
    
    
    2,111,905
    
    
    
    37,491
    
    
    
    1.78Customer repurchase agreements
    
    
    1,229,845
    
    
    
    55,158
    
    
    
    4.48
    
    
    
    887,614
    
    
    
    24,230
    
    
    
    2.73
    
    
    
    834,636
    
    
    
    7,462
    
    
    
    0.89Savings accounts
    
    
    4,286,355
    
    
    
    29,660
    
    
    
    0.69
    
    
    
    3,779,333
    
    
    
    25,347
    
    
    
    0.67
    
    
    
    3,498,539
    
    
    
    19,417
    
    
    
    0.56Money market accounts
    
    
    10,904,581
    
    
    
    362,969
    
    
    
    3.33
    
    
    
    8,244,406
    
    
    
    131,354
    
    
    
    1.59
    
    
    
    7,633,932
    
    
    
    81,992
    
    
    
    1.07Certificates of deposits
    
    
    9,870,674
    
    
    
    405,215
    
    
    
    4.10
    
    
    
    6,662,657
    
    
    
    176,136
    
    
    
    2.64
    
    
    
    5,678,604
    
    
    
    118,320
    
    
    
    2.08Certificates of deposits  wholesale
    
    
    4,590,767
    
    
    
    233,335
    
    
    
    5.08
    
    
    
    2,918,679
    
    
    
    114,246
    
    
    
    3.91
    
    
    
    920,619
    
    
    
    19,351
    
    
    
    2.10Total deposits
    
    
    41,165,513
    
    
    
    1,372,197
    
    
    
    3.33
    
    
    
    31,225,480
    
    
    
    624,590
    
    
    
    2.00
    
    
    
    25,311,143
    
    
    
    303,045
    
    
    
    1.20Total borrowings and other debt obligations
    
    
    23,377,692
    
    
    
    1,132,659
    
    
    
    4.85
    
    
    
    17,707,167
    
    
    
    705,908
    
    
    
    3.99
    
    
    
    15,591,901
    
    
    
    516,282
    
    
    
    3.31Total interest-bearing liabilities
    
    
    64,543,205
    
    
    
    2,504,856
    
    
    
    3.88
    
    
    
    48,932,647
    
    
    
    1,330,498
    
    
    
    2.72
    
    
    
    40,903,044
    
    
    
    819,327
    
    
    
    2.00Non-interest-bearing DDA
    
    
    6,020,184
    
    
    
    
    
    
    
    
    
    
    
    5,294,135
    
    
    
    
    
    
    
    
    
    
    
    4,698,584
    
    
    
    
    
    
    
    Non-interest-bearing liabilities
    
    
    1,412,368
    
    
    
    
    
    
    
    
    
    
    
    831,296
    
    
    
    
    
    
    
    
    
    
    
    733,856
    
    
    
    
    
    
    
    Total liabilities
    
    
    71,975,757
    
    
    
    2,504,856
    
    
    
    3.48
    
    
    
    55,058,078
    
    
    
    1,330,498
    
    
    
    2.42
    
    
    
    46,335,484
    
    
    
    819,327
    
    
    
    1.77Stockholders equity
    
    
    7,519,638
    
    
    
    
    
    
    
    
    
    
    
    5,673,896
    
    
    
    
    
    
    
    
    
    
    
    4,223,123
    
    
    
    
    
    
    
    Total liabilities and stockholders equity
    
    $
    79,495,395
    
    
    $
    2,504,856
    
    
    
    3.15
    %
    
    $
    60,731,974
    
    
    $
    1,330,498
    
    
    
    2.19
    %
    
    $
    50,558,607
    
    
    $
    819,327
    
    
    
    1.62
    %Net interest spread(4)
    
    
    
    
    
    
    
    
    
    
    2.48
    %
    
    
    
    
    
    
    
    
    
    
    2.94
    %
    
    
    
    
    
    
    
    
    
    
    3.14
    %Taxable equivalent interest income/net
interest margin
    
    
    
    
    
    
    1,906,394
    
    
    
    2.75
    %
    
    
    
    
    
    
    1,689,915
    
    
    
    3.17
    %
    
    
    
    
    
    
    1,484,121
    
    
    
    3.31
    %Tax equivalent basis adjustment
    
    
    
    
    
    
    (84,846
    )
    
    
    
    
    
    
    
    
    
    
    (57,826
    )
    
    
    
    
    
    
    
    
    
    
    (47,531
    )Net interest income
    
    
    
    
    
    $
    1,821,548
    
    
    
    
    
    
    
    
    
    
    $
    1,632,089
    
    
    
    
    
    
    
    
    
    
    $
    1,436,590Ratio of interest-earning assets to
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    1.07
    x
    
    
    
    
    
    
    
    
    
    
    1.09
    x
    
    
    
    
    
    
    
    
    
    
    1.10
    x
 
 (1)
    
    The average balance of our non-taxable investment securities for the year-ended December 31, 2006, 2005, and
2004 were $2.9 billion, $1.9 billion and $1.5 billion, respectively. Tax equivalent adjustments to interest
on investment securities available for sale for the years ended December 31, 2006, 2005, and 2004 were $75.4
million, $51.3 million, and $40.6 million, respectively. Tax equivalent adjustments to loans for the years
ended December 31, 2006, 2005, and 2004, were $9.5 million, $6.6 million, and $6.9 million, respectively. Tax
equivalent interest income is based upon an effective tax rate of 35%.(2)
    
    Amortization of premiums and discounts on purchased loans and amortization of deferred loan fees, net of
origination costs, of $97.6 million, $136.3 million, and $61.3 million for the years ended December 31, 2006,
2005, and 2004, respectively, are included in interest income. Average loan balances include non-accrual
loans and loans held for sale. 18




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##### Table of Contents



(3)
    
    In accordance with banking regulatory reporting guidance issued in the first quarter of 2006, Sovereign
reclassified prepayment fees and late fees on loans from non-interest income to interest income. Prior
periods were reclassified to conform to the current period presentation.(4)
    
    Represents the difference between the yield on total earning assets and the cost of total funding liabilities.  Table 2: Volume/Rate Analysis
 YEAR ENDED DECEMBER 31,2006 VS. 2005
    
    
    2005 VS. 2004INCREASE/(DECREASE)
    
    
    INCREASE/(DECREASE)Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest-earning assets:Interest-earning deposits
    
    $
    5,879
    
    
    $
    2,301
    
    
    $
    8,180
    
    
    $
    368
    
    
    $
    3,196
    
    
    $
    3,564Investment securities available for sale
    
    
    218,809
    
    
    
    54,999
    
    
    
    273,808
    
    
    
    (151,220
    )
    
    
    15,294
    
    
    
    (135,926
    )Investment securities held to maturity
    
    
    (101,182
    )
    
    
    9,179
    
    
    
    (92,003
    )
    
    
    39,918
    
    
    
    10,516
    
    
    
    50,434Investment securities other
    
    
    8,335
    
    
    
    25,021
    
    
    
    33,356
    
    
    
    3,227
    
    
    
    6,042
    
    
    
    9,269Net loans(1)
    
    
    862,362
    
    
    
    305,134
    
    
    
    1,167,496
    
    
    
    599,161
    
    
    
    190,463
    
    
    
    789,624Total interest-earning assets
    
    
    
    
    
    
    
    
    
    
    1,390,837
    
    
    
    
    
    
    
    
    
    
    
    716,965Interest-bearing liabilities:Deposits
    
    
    241,660
    
    
    
    505,948
    
    
    
    747,608
    
    
    
    83,082
    
    
    
    238,463
    
    
    
    321,545Borrowings
    
    
    255,166
    
    
    
    171,584
    
    
    
    426,750
    
    
    
    75,747
    
    
    
    113,879
    
    
    
    189,626Total interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    1,174,358
    
    
    
    
    
    
    
    
    
    
    
    511,171Net change in net interest income
    
    $
    497,377
    
    
    $
    (280,898
    )
    
    $
    216,479
    
    
    $
    332,625
    
    
    $
    (126,831
    )
    
    $
    205,794
 
 (1)
    
    Includes non-accrual loans and loans held for sale. Provision for Credit Losses.
   19




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Table 3: Reconciliation of the Allowance for Credit Losses
 2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Allowance for loan losses, beginning
of period
    
    $
    419,599
    
    
    $
    391,003
    
    
    $
    315,790
    
    
    $
    288,018
    
    
    $
    255,153Allowance acquired in acquisitions
    
    
    97,824
    
    
    
    28,778
    
    
    
    64,105
    
    
    
    
    
    
    
    14,877Provision for loan losses (2)
    
    
    487,418
    
    
    
    89,501
    
    
    
    121,391
    
    
    
    160,585
    
    
    
    145,282Allowance released in connection
with loan sales or securitizations
    
    
    (4,728
    )
    
    
    (8,010
    )
    
    
    
    
    
    
    
    
    
    
    Charge-offs:Commercial
    
    
    56,916
    
    
    
    40,935
    
    
    
    77,499
    
    
    
    101,597
    
    
    
    85,931Consumer secured by real estate
    
    
    463,902
    
    
    
    24,125
    
    
    
    12,219
    
    
    
    16,685
    
    
    
    21,205Consumer not secured by real estate
    
    
    73,958
    
    
    
    71,906
    
    
    
    63,530
    
    
    
    47,106
    
    
    
    55,509Total charge-offs (1)
    
    
    594,776
    
    
    
    136,966
    
    
    
    153,248
    
    
    
    165,388
    
    
    
    162,645Recoveries:Commercial
    
    
    14,097
    
    
    
    13,100
    
    
    
    12,825
    
    
    
    7,531
    
    
    
    6,082Consumer secured by real estate
    
    
    9,933
    
    
    
    7,085
    
    
    
    5,395
    
    
    
    6,405
    
    
    
    4,826Consumer not secured by real estate
    
    
    41,663
    
    
    
    35,108
    
    
    
    24,745
    
    
    
    18,639
    
    
    
    24,443Total recoveries
    
    
    65,693
    
    
    
    55,293
    
    
    
    42,965
    
    
    
    32,575
    
    
    
    35,351Charge-offs, net of recoveries
    
    
    529,083
    
    
    
    81,673
    
    
    
    110,283
    
    
    
    132,813
    
    
    
    127,294Allowance for loan losses, end of
period
    
    $
    471,030
    
    
    $
    419,599
    
    
    $
    391,003
    
    
    $
    315,790
    
    
    $
    288,018Reserve for unfunded lending
commitments, beginning of period
    
    
    18,212
    
    
    
    17,713
    
    
    
    12,104
    
    
    
    10,732
    
    
    
    9,514Provision for unfunded lending
commitments (2)
    
    
    (2,957
    )
    
    
    499
    
    
    
    5,609
    
    
    
    1,372
    
    
    
    1,218Reserve for unfunded lending
commitments, end of period (3)
    
    
    15,255
    
    
    
    18,212
    
    
    
    17,713
    
    
    
    12,104
    
    
    
    10,732Total Allowance for credit losses
    
    $
    486,285
    
    
    $
    437,811
    
    
    $
    408,716
    
    
    $
    327,894
    
    
    $
    298,750Net charge-offs to average loans (1)
    
    
    .96
    %
    
    
    .20
    %
    
    
    .36
    %
    
    
    .55
    %
    
    
    .58
    %
 
 (1)
    
    The 2006 consumer secured by real estate charge-offs included $389.6 million of
charge-offs or 71 basis points related to the lower of cost or market valuation adjustment
recorded for the correspondent home equity loan ($382.5 million) and purchased residential
mortgage loans ($7.1 million) that were classified as held for sale at December 31, 2006.
The 2002 consumer secured by real estate charge-offs include $4.6 million of charge-offs
incurred as part of accelerated dispositions of non-performing residential loans sold
during the first and fourth quarters of 2002.(2)
    
    The provision for credit losses on the consolidated statement of operations consists of
the sum of the provision for loan losses and the provision for unfunded lending
commitments.(3)
    
    The reserve for unfunded commitments is classified on other liabilities on the
consolidated balance sheet.
  20




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Non-interest Income.
    Twelve-months ended December 31,2006
    
    
    2005Recoveries / (impairments) to mortgage servicing rights
    
    $
    (7,123
    )
    
    $
    5,944Mortgage servicing fees
    
    
    30,799
    
    
    
    20,376Amortization of mortgage servicing rights
    
    
    (19,987
    )
    
    
    (17,578
    )Net (losses) gains under SFAS 133
    
    
    825
    
    
    
    645Sales of mortgage, home equity and multifamily loans
and mortgage backed securities
    
    
    19,725
    
    
    
    78,730Total
    
    $
    24,239
    
    
    $
    88,117
    General and Administrative Expenses.
 Other Expenses.
 21




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Income Tax Provision/ (Benefit).
   Line of Business Results.
 22




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23




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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
 YEAR ENDED DECEMBER 31,2005
    
    2004(Dollars in thousands, except per share data)Net interest income
    
    $
    1,632,089
    
    
    $
    1,436,590Provision for credit losses
    
    
    90,000
    
    
    
    127,000Total non-interest income
    
    
    602,664
    
    
    
    450,525General and administrative expenses
    
    
    1,089,204
    
    
    
    942,661Other expenses
    
    
    163,429
    
    
    
    236,232Net income
    
    $
    676,160
    
    
    $
    453,552Basic earnings per share
    
    $
    1.77
    
    
    $
    1.34Diluted earnings per share
    
    $
    1.69
    
    
    $
    1.29
  
    
    The growth in net interest income was driven by the increase in the balance of earning assets, which were primarily related to business
acquisitions and organic balance sheet growth, offset by a decline in net interest margin to 3.17% in 2005 from 3.31% in 2004. The
decline in margin was due to the flattening yield curve, which has contracted the spread between our longer-term assets and
shorterterm liabilities.
    
    The debt extinguishment charges of $63.8 million in 2004. We felt it was prudent to redeem these high cost borrowings, even in light of the significant
charges we incurred, since the redemption improved net interest margin and net income in subsequent periods.
    
    Included in net gains on investment securities for 2004 is an other-than-temporary impairment charge of $32.1 million on FNMA and FHLMC Preferred Stock.
    
    The merger-related charges of $46.4 million incurred in 2004 related to the First Essex and Seacoast acquisitions, compared to net after tax merger
related charges of $12.7 million incurred in 2005.
    
    The decrease in provision for credit losses in 2005 of $37 million resulting from the improving credit quality of our loan portfolio in
2005 compared to 2004, as average charge-off rates declined to 0.20% in 2005 compared with 0.36% in 2004.
    
    The continued growth in fee income in consumer and commercial banking due to loan and deposit growth.
    
    The increase in mortgage banking revenues in 2005 of $66.7 million due primarily to increased sales of residential and home equity loans.
    
    Increases in general and administrative expenses to supporting the growth in Sovereigns franchise and continued investment in human
resources and systems and increases related to business acquisitions.
 Net Interest Income.
    24




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Provision for Credit Losses.
   Non-interest Income.
    Twelve-months ended December 31,2005
    
    
    2004Impairments to mortgage servicing rights
    
    $
    5,944
    
    
    $
    (1,792
    )Mortgage servicing fees
    
    
    20,376
    
    
    
    18,489Amortization of mortgage servicing rights
    
    
    (17,578
    )
    
    
    (18,895
    )Net (losses) gains under SFAS 133
    
    
    645
    
    
    
    (2,020
    )Sales of mortgage loans and mortgage backed securities
    
    
    78,730
    
    
    
    25,805Total
    
    $
    88,117
    
    
    $
    21,587
   25




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##### Table of Contents



General and Administrative Expenses.
 Other Expenses.
  Income Tax Provision.
 26




---



##### Table of Contents



Line of Business Results.
       27




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##### Table of Contents



Critical Accounting Policies
   Allowance for Loan Losses and Reserve for Unfunded Lending Commitments.
 Securitizations.
    Goodwill.
     28




---



##### Table of Contents



Derivatives and Hedging Activities
   Recent Acquisitions
     29




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##### Table of Contents



Financial Condition
 Loan Portfolio.
   Table 4: Composition of Loan Portfolio
 AT DECEMBER 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002BALANCE
    
    
    PERCENT
    
    
    BALANCE
    
    
    PERCENT
    
    
    BALANCE
    
    
    PERCENT
    
    
    BALANCE
    
    
    PERCENT
    
    
    BALANCE
    
    
    PERCENTCommercial real estate loans
    
    $
    11,514,983
    
    
    
    18.4
    %
    
    $
    7,209,180
    
    
    
    16.5
    %
    
    $
    5,824,133
    
    
    
    15.9
    %
    
    $
    4,702,046
    
    
    
    18.0
    %
    
    $
    4,386,522
    
    
    
    18.9
    %Commercial and industrial loans
    
    
    13,188,909
    
    
    
    21.1
    
    
    
    9,426,466
    
    
    
    21.5
    
    
    
    8,040,107
    
    
    
    21.9
    
    
    
    6,361,640
    
    
    
    24.3
    
    
    
    5,940,234
    
    
    
    25.6Multifamily (1)
    
    
    5,768,451
    
    
    
    9.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Commercial Loans
    
    
    30,472,343
    
    
    
    48.7
    
    
    
    16,635,646
    
    
    
    38.0
    
    
    
    13,864,240
    
    
    
    37.8
    
    
    
    11,063,686
    
    
    
    42.3
    
    
    
    10,326,756
    
    
    
    44.5Residential mortgages
    
    
    17,404,730
    
    
    
    27.8
    
    
    
    12,462,802
    
    
    
    28.4
    
    
    
    8,497,496
    
    
    
    23.2
    
    
    
    5,074,684
    
    
    
    19.4
    
    
    
    4,347,512
    
    
    
    18.7Home equity loans and lines of credit
    
    
    9,443,560
    
    
    
    15.1
    
    
    
    9,793,124
    
    
    
    22.4
    
    
    
    9,577,656
    
    
    
    26.2
    
    
    
    6,457,682
    
    
    
    24.7
    
    
    
    5,165,834
    
    
    
    22.3Total Consumer Loans secured by real estate
    
    
    26,848,290
    
    
    
    42.9
    
    
    
    22,255,926
    
    
    
    50.8
    
    
    
    18,075,152
    
    
    
    49.4
    
    
    
    11,532,366
    
    
    
    44.1
    
    
    
    9,513,346
    
    
    
    41.0Auto loans
    
    
    4,848,204
    
    
    
    7.7
    
    
    
    4,434,021
    
    
    
    10.1
    
    
    
    4,205,547
    
    
    
    11.5
    
    
    
    3,240,383
    
    
    
    12.4
    
    
    
    3,038,976
    
    
    
    13.1Other
    
    
    419,759
    
    
    
    0.7
    
    
    
    478,254
    
    
    
    1.1
    
    
    
    486,140
    
    
    
    1.3
    
    
    
    312,224
    
    
    
    1.2
    
    
    
    314,356
    
    
    
    1.4Total Consumer Loans
    
    
    32,116,253
    
    
    
    51.3
    
    
    
    27,168,201
    
    
    
    62.0
    
    
    
    22,766,839
    
    
    
    62.2
    
    
    
    15,084,973
    
    
    
    57.7
    
    
    
    12,866,678
    
    
    
    55.5Total Loans
    
    $
    62,588,596
    
    
    
    100.0
    %
    
    $
    43,803,847
    
    
    
    100.0
    %
    
    $
    36,631,079
    
    
    
    100.0
    %
    
    $
    26,148,659
    
    
    
    100.0
    %
    
    $
    23,193,434
    
    
    
    100.0
    %Total Loans with:Fixed rates
    
    $
    39,716,958
    
    
    
    63.5
    %
    
    $
    26,141,411
    
    
    
    59.7
    %
    
    $
    21,145,915
    
    
    
    57.7
    %
    
    $
    15,171,129
    
    
    
    58.0
    %
    
    $
    13,599,898
    
    
    
    58.6
    %Variable rates
    
    
    22,871,638
    
    
    
    36.5
    
    
    
    17,662,436
    
    
    
    40.3
    
    
    
    15,485,164
    
    
    
    42.3
    
    
    
    10,977,530
    
    
    
    42.0
    
    
    
    9,593,536
    
    
    
    41.4Total Loans
    
    $
    62,588,596
    
    
    
    100.0
    %
    
    $
    43,803,847
    
    
    
    100.0
    %
    
    $
    36,631,079
    
    
    
    100.0
    %
    
    $
    26,148,659
    
    
    
    100.0
    %
    
    $
    23,193,434
    
    
    
    100.0
    %
 
 (1)
    
    Effective with the acquisition of Independence on June 1, 2006,
Sovereign acquired $5.6 billion of multifamily loans. As this
was primarily a new asset class for Sovereign we have disclosed
these loan separately in the table above. At December 31, 2005,
2004, 2003, and 2002, Sovereigns multifamily loan portfolio
totaled approximately $475 million, $463 million, $349 million
and $254 million, respectively which were classified as
commercial real estate loans.
 30




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##### Table of Contents



Table 5: Commercial Loan Maturity Schedule
 AT DECEMBER 31, 2006, MATURINGIn One Year
    
    
    One To
    
    
    AfterOr Less
    
    
    Five Years
    
    
    Five Years
    
    
    TotalCommercial real estate loans
    
    $
    1,526,448
    
    
    $
    4,183,122
    
    
    $
    5,805,413
    
    
    $
    11,514,983Commercial and industrial loans
    
    
    4,471,495
    
    
    
    5,936,475
    
    
    
    2,780,939
    
    
    
    13,188,909Multi-family loans
    
    
    100,071
    
    
    
    2,920,914
    
    
    
    2,747,466
    
    
    
    5,768,451Total
    
    $
    6,098,014
    
    
    $
    13,040,511
    
    
    $
    11,333,818
    
    
    $
    30,472,343Loans with:Fixed rates
    
    $
    549,259
    
    
    $
    6,586,494
    
    
    $
    7,081,443
    
    
    $
    14,217,196Variable rates
    
    
    5,548,755
    
    
    
    6,454,017
    
    
    
    4,252,375
    
    
    
    16,255,147Total
    
    $
    6,098,014
    
    
    $
    13,040,511
    
    
    $
    11,333,818
    
    
    $
    30,472,343
 31




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##### Table of Contents



Investment Securities.
      Investment Securities Available for Sale.
 32




---



##### Table of Contents



Table 6: Investment Securities by Obligor
 AT DECEMBER 31,2006
    
    
    2005
    
    
    2004Investment securities available for sale:U.S. Treasury and government agencies
    
    $
    1,606,905
    
    
    $
    1,170,613
    
    
    $
    1,010,186FNMA, FHLMC, and FHLB securities
    
    
    4,791,355
    
    
    
    3,173,878
    
    
    
    3,385,090State and municipal securities
    
    
    2,554,806
    
    
    
    4,468
    
    
    
    5,292Other securities
    
    
    4,921,562
    
    
    
    2,909,443
    
    
    
    2,664,811Total investment securities available for sale
    
    $
    13,874,628
    
    
    $
    7,258,402
    
    
    $
    7,065,379Investment securities held to maturity:U.S. Treasury and government agencies
    
    $
    
    
    
    $
    106,881
    
    
    $
    126,654FNMA, FHLMC, and FHLB securities
    
    
    
    
    
    
    1,940,582
    
    
    
    1,952,010State and municipal securities
    
    
    
    
    
    
    1,752,739
    
    
    
    824,331Other securities
    
    
    
    
    
    
    847,425
    
    
    
    1,001,324Total investment securities held to maturity
    
    $
    
    
    
    $
    4,647,627
    
    
    $
    3,904,319Investments in FHLB stock
    
    
    1,003,012
    
    
    
    651,299
    
    
    
    577,179Total investment portfolio
    
    $
    14,877,640
    
    
    $
    12,557,328
    
    
    $
    11,546,877
 Table 7: Investment Securities of Single Issuers
 AT DECEMBER 31, 2006Amortized
    
    
    FairCost
    
    
    ValueFNMA
    
    $
    2,679,975
    
    
    $
    2,700,623FHLMC
    
    
    1,217,984
    
    
    
    1,220,726FHLB
    
    
    1,148,042
    
    
    
    1,149,925Total
    
    $
    5,046,001
    
    
    $
    5,071,274
 33




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##### Table of Contents



Goodwill and Intangible Assets.
  Other Assets.
 Deposits and Other Customer Accounts.
 Borrowings and Other Debt Obligations.
 34




---



##### Table of Contents



Table 8: Details of Borrowings
 DECEMBER 31,2006
    
    2005
    
    2004Securities sold under repurchase agreements:Balance
    
    $
    199,671
    
    
    $
    189,112
    
    
    $
    613,239Weighted average interest rate at year-end
    
    
    3.85
    %
    
    
    4.19
    %
    
    
    2.76
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,740,824
    
    
    $
    942,799
    
    
    $
    2,827,482Average amount outstanding during the year
    
    $
    596,583
    
    
    $
    395,940
    
    
    $
    1,789,931Weighted average interest rate during the year
    
    
    5.21
    %
    
    
    3.31
    %
    
    
    1.75
    %Federal Funds Purchased:Balance
    
    $
    1,700,000
    
    
    $
    819,000
    
    
    $
    970,100Weighted average interest rate at year-end
    
    
    5.22
    %
    
    
    4.18
    %
    
    
    2.29
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,915,000
    
    
    $
    1,215,593
    
    
    $
    1,244,160Average amount outstanding during the year
    
    $
    998,867
    
    
    $
    940,100
    
    
    $
    930,495Weighted average interest rate during the year
    
    
    5.17
    %
    
    
    3.33
    %
    
    
    1.62
    %FHLB advances:Balance
    
    $
    19,563,985
    
    
    $
    13,295,493
    
    
    $
    10,623,394Weighted average interest rate at year-end
    
    
    4.81
    %
    
    
    4.46
    %
    
    
    3.80
    %Maximum amount outstanding at any month-end during the year
    
    $
    20,409,561
    
    
    $
    14,023,128
    
    
    $
    10,623,394Average amount outstanding during the year
    
    $
    16,727,311
    
    
    $
    12,123,306
    
    
    $
    9,132,898Weighted average interest rate during the year
    
    
    4.61
    %
    
    
    4.09
    %
    
    
    3.79
    %Senior Credit Facility:Balance
    
    $
    
    
    
    $
    
    
    
    $
    50,000Weighted average interest rate at year-end
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    3.60
    %Maximum amount outstanding at any month-end during the year
    
    $
    100,000
    
    
    $
    300,000
    
    
    $
    250,000Average amount outstanding during the year
    
    $
    12,466
    
    
    $
    151,164
    
    
    $
    127,295Weighted average interest rate during the year
    
    
    11.71
    %
    
    
    4.41
    %
    
    
    3.30
    %Asset-Backed Floating Rate Notes:Balance
    
    $
    1,971,000
    
    
    $
    1,971,000
    
    
    $
    1,971,000Weighted average interest rate at year-end
    
    
    3.58
    %
    
    
    2.50
    %
    
    
    0.54
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,971,000
    
    
    $
    1,971,000
    
    
    $
    1,971,000Average amount outstanding during the year
    
    $
    1,971,000
    
    
    $
    1,971,000
    
    
    $
    1,581,974Weighted average interest rate during the year
    
    
    3.87
    %
    
    
    1.91
    %
    
    
    0.31
    %Senior Notes:Balance
    
    $
    740,334
    
    
    $
    797,916
    
    
    $
    299,500Weighted average interest rate at year-end
    
    
    5.13
    %
    
    
    4.76
    %
    
    
    2.74
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,039,210
    
    
    $
    797,916
    
    
    $
    815,626Average amount outstanding during the year
    
    $
    833,577
    
    
    $
    466,088
    
    
    $
    501,100Weighted average interest rate during the year
    
    
    5.62
    %
    
    
    4.30
    %
    
    
    6.84
    %Subordinated Notes:Balance
    
    $
    1,139,511
    
    
    $
    772,063
    
    
    $
    782,139Weighted average interest rate at year-end
    
    
    4.68
    %
    
    
    5.27
    %
    
    
    3.94
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,139,511
    
    
    $
    798,535
    
    
    $
    793,724Average amount outstanding during the year
    
    $
    981,397
    
    
    $
    781,627
    
    
    $
    776,980Weighted average interest rate during the year
    
    
    5.60
    %
    
    
    4.72
    %
    
    
    3.50
    %Junior Subordinated Debentures to Capital Trusts:Balance
    
    $
    1,535,216
    
    
    $
    876,313
    
    
    $
    830,756Weighted average interest rate at year-end
    
    
    7.65
    %
    
    
    8.09
    %
    
    
    7.22
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,535,216
    
    
    $
    886,434
    
    
    $
    902,597Average amount outstanding during the year
    
    $
    1,256,491
    
    
    $
    877,730
    
    
    $
    751,781Weighted average interest rate during the year
    
    
    7.88
    %
    
    
    7.38
    %
    
    
    7.03
    %
   35




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##### Table of Contents




    
    A junior subordinated debentures issued by Sovereign, each of which
will have a principal amount at maturity of $50, and which have a
stated maturity of March 1, 2034; and
    
    Warrants to purchase shares of common stock from Sovereign at any time
prior to the close of business on March 1, 2034, by delivering junior
subordinated debentures (or, in the case of warrant exercises before
March 5, 2007, cash equal to the accreted principal amount of a junior
subordinated debenture).
   36




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##### Table of Contents



Off-Balance Sheet Arrangements.
  Minority Interests.
 Credit Risk Management
    37




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##### Table of Contents



Commercial Loans.
    Consumer Loans Secured by Real Estate.
 Consumer Loans Not Secured by Real Estate.
 Collections.
 Non-performing Assets.
  38




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##### Table of Contents



Table 9: Non-Performing Assets
 AT DECEMBER 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Non-accrual loans:ConsumerResidential
    
    $
    33,682
    
    
    $
    30,393
    
    
    $
    33,656
    
    
    $
    38,195
    
    
    $
    36,849Home Equity loans and lines of credit
    
    
    10,312
    
    
    
    55,543
    
    
    
    26,801
    
    
    
    29,370
    
    
    
    30,329Auto loans and other consumer loans
    
    
    2,955
    
    
    
    2,389
    
    
    
    1,220
    
    
    
    1,551
    
    
    
    2,515Total consumer loans
    
    
    46,949
    
    
    
    88,325
    
    
    
    61,677
    
    
    
    69,116
    
    
    
    69,693Commercial
    
    
    69,207
    
    
    
    68,572
    
    
    
    54,042
    
    
    
    83,976
    
    
    
    122,504Commercial real estate
    
    
    75,710
    
    
    
    31,800
    
    
    
    26,757
    
    
    
    45,053
    
    
    
    38,302Multifamily
    
    
    1,486
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-accrual loans
    
    
    193,352
    
    
    
    188,697
    
    
    
    142,476
    
    
    
    198,145
    
    
    
    230,499Restructured loans
    
    
    557
    
    
    
    777
    
    
    
    1,097
    
    
    
    1,235
    
    
    
    893Total non-performing loans (1)
    
    
    193,909
    
    
    
    189,474
    
    
    
    143,573
    
    
    
    199,380
    
    
    
    231,392Real estate owned
    
    
    22,562
    
    
    
    11,411
    
    
    
    12,276
    
    
    
    17,016
    
    
    
    19,007Other repossessed assets
    
    
    5,126
    
    
    
    4,678
    
    
    
    4,247
    
    
    
    4,051
    
    
    
    6,663Total other real estate owned and other repossessed assets
    
    
    27,688
    
    
    
    16,089
    
    
    
    16,523
    
    
    
    21,067
    
    
    
    25,670Total non-performing assets
    
    $
    221,597
    
    
    $
    205,563
    
    
    $
    160,096
    
    
    $
    220,447
    
    
    $
    257,062Past due 90 days or more as to interest or principal and
accruing interest
    
    $
    40,103
    
    
    $
    54,794
    
    
    $
    38,914
    
    
    $
    36,925
    
    
    $
    40,500Net loan charge-off rate to average loans(3)
    
    
    .96
    %
    
    
    .20
    %
    
    
    .36
    %
    
    
    .55
    %
    
    
    .58
    %Non-performing assets as a percentage of total assets,
excluding loans held for sale
    
    
    .27
    
    
    
    .32
    
    
    
    .29
    
    
    
    .51
    
    
    
    .66Non-performing loans as a percentage of total loans held
for investment
    
    
    .35
    
    
    
    .44
    
    
    
    .39
    
    
    
    .77
    
    
    
    1.01Non-performing assets as a percentage of total loans held
for investment, real estate owned and repossessed assets
    
    
    .40
    
    
    
    .47
    
    
    
    .44
    
    
    
    .85
    
    
    
    1.13Allowance for credit losses as a percentage of total
non-performing assets (2)
    
    
    219.4
    
    
    
    213.0
    
    
    
    255.3
    
    
    
    148.7
    
    
    
    116.2Allowance for credit losses as a percentage of total
non-performing loans (2)
    
    
    250.8
    
    
    
    231.1
    
    
    
    284.7
    
    
    
    164.5
    
    
    
    129.1
 
 (1)
    
    Non-performing loans at December 31, 2006 exclude $21.5 million of residential non-accrual
loans and $66.0 million of home equity non-accrual loans that are classified as held for sale.(2)
    
    Allowance for credit losses is comprised of the allowance for loan losses and the reserve for
unfunded commitments, which is included in other liabilities.(3)
    
    Includes lower of cost of market adjustments resulting in a charge-off of $382.5 million on the
correspondent home equity loans and a charge-off of approximately $7.1 million on the purchased
residential mortgage portfolio both of which were classified as held for sale at December 31, 2006.
These charge-offs accounted for 71 basis points of the total 96 basis points above.  Potential Problem Loans
 39




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##### Table of Contents



Delinquencies.
 Allowance for Credit Losses
 Allowance for Loan Losses.
        Reserve for Unfunded Lending Commitments
  40




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##### Table of Contents



Table 10: Allocation of the Allowance for Credit Losses by Product Type
 AT DECEMBER 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofLoans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans toTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansAllocated
allowances:Commercial loans
    
    $
    375,014
    
    
    
    49
    %
    
    $
    220,314
    
    
    
    38
    %
    
    $
    209,587
    
    
    
    38
    %
    
    $
    192,454
    
    
    
    42
    %
    
    $
    193,528
    
    
    
    44
    %Consumer loans
secured by real
estate
    
    
    45,521
    
    
    
    43
    
    
    
    142,728
    
    
    
    51
    
    
    
    121,311
    
    
    
    49
    
    
    
    79,968
    
    
    
    44
    
    
    
    65,671
    
    
    
    41Consumer loans not
secured by real
estate
    
    
    45,730
    
    
    
    8
    
    
    
    50,557
    
    
    
    11
    
    
    
    50,167
    
    
    
    13
    
    
    
    29,774
    
    
    
    14
    
    
    
    23,235
    
    
    
    15Unallocated
allowance
    
    
    4,765
    
    
    
    n/a
    
    
    
    6,000
    
    
    
    n/a
    
    
    
    9,938
    
    
    
    n/a
    
    
    
    13,594
    
    
    
    n/a
    
    
    
    5,584
    
    
    
    n/aTotal allowance for
loan losses
    
    $
    471,030
    
    
    
    100
    %
    
    $
    419,599
    
    
    
    100
    %
    
    $
    391,003
    
    
    
    100
    %
    
    $
    315,790
    
    
    
    100
    %
    
    $
    288,018
    
    
    
    100
    %Reserve for
unfunded lending
commitments
    
    
    15,255
    
    
    
    
    
    
    
    18,212
    
    
    
    
    
    
    
    17,713
    
    
    
    
    
    
    
    12,104
    
    
    
    
    
    
    
    10,732Total allowance for
credit losses
    
    $
    486,285
    
    
    
    
    
    
    $
    437,811
    
    
    
    
    
    
    $
    408,716
    
    
    
    
    
    
    $
    327,894
    
    
    
    
    
    
    $
    298,750
 Commercial Portfolio.
 41




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##### Table of Contents



Consumer Loans Secured by Real Estate Portfolio.
    Consumer Loans Not Secured by Real Estate Portfolio.
 Unallocated Allowance.
 Bank Regulatory Capital
   Table 11: Regulatory Capital Ratios
 OTS - REGULATIONSSovereignBank
    
    
    
    
    
    WellDecember 31,
    
    Minimum
    
    Capitalized2006
    
    Requirement
    
    RequirementTangible capital to tangible assets
    
    
    6.22
    %
    
    
    2.00
    %
    
    NoneTier 1 leverage capital to tangible assets
    
    
    6.22
    
    
    
    3.00
    
    
    
    5.00
    %Tier 1 risk-based capital to risk adjusted assets
    
    
    7.52
    
    
    
    4.00
    
    
    
    6.00Total risk-based capital to risk adjusted assets
    
    
    10.07
    
    
    
    8.00
    
    
    
    10.00
 Sovereign Bancorp
    
    Sovereign BancorpDecember 31, 2006(1)
    
    December 31, 2005(1)Tier 1 leverage capital ratio
    
    
    5.73
    %
    
    
    6.68
    %Tangible equity to tangible assets, including AOCI(2)
    
    
    3.50
    %
    
    
    4.73
    %
 
 (1)
    
    OTS capital regulations do not apply to savings and loan holding companies. These ratios are
computed as if those regulations did apply to Sovereign Bancorp.(2)
    
    Accumulated other comprehensive income 42




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##### Table of Contents



Liquidity and Capital Resources
       43




---



##### Table of Contents



Contractual Obligations and Other Commitments
  Contractual Obligations
 PAYMENTS DUE BY PERIODLess Than
    
    
    
    
    
    
    
    
    
    
    After(Dollars in thousands)
    
    Total
    
    
    1 Year
    
    
    13 Years
    
    
    45 Years
    
    
    5 YearsBorrowings and other debt obligations:Securities sold under repurchase agreements(1)
    
    $
    209,028
    
    
    $
    130,151
    
    
    $
    78,877
    
    
    $
    
    
    
    $
    FHLB advances(1)
    
    
    21,336,904
    
    
    
    13,502,143
    
    
    
    1,567,710
    
    
    
    849,927
    
    
    
    5,417,124Fed Funds(1)
    
    
    1,700,000
    
    
    
    1,700,000
    
    
    
    
    
    
    
    
    
    
    
    Other debt obligations(1)(2)
    
    
    4,600,315
    
    
    
    1,075,654
    
    
    
    1,545,261
    
    
    
    683,400
    
    
    
    1,296,000Junior subordinated debentures to Capital
Trusts(1)(2)
    
    
    8,135,762
    
    
    
    1,973,158
    
    
    
    1,482,686
    
    
    
    233,376
    
    
    
    4,446,542Certificates of deposit(1)
    
    
    16,856,603
    
    
    
    13,883,413
    
    
    
    2,051,649
    
    
    
    409,944
    
    
    
    511,597Investment partnership commitments(3)
    
    
    52,294
    
    
    
    25,115
    
    
    
    23,538
    
    
    
    3,529
    
    
    
    112Operating leases
    
    
    721,263
    
    
    
    97,749
    
    
    
    153,248
    
    
    
    119,937
    
    
    
    350,329Total contractual cash obligations
    
    $
    53,612,169
    
    
    $
    32,387,383
    
    
    $
    6,902,969
    
    
    $
    2,300,113
    
    
    $
    12,021,704
 
 (1)
    
    Includes interest on both fixed and variable rate obligations. The interest associated with
variable rate obligations is based upon interest rates in effect at December 31, 2006. The
contractual amounts to be paid on variable rate obligations are affected by changes in market
interest rates. Future changes in market interest rates could materially affect the contractual
amounts to be paid.(2)
    
    Includes all carrying value adjustments, such as unamortized premiums or discounts and hedge
basis adjustments.(3)
    
    The commitments to fund investment partnerships represent future cash outlays for the
construction and development of properties for low-income housing and historic tax credit projects.
The timing and amounts of these commitments are projected based upon the financing arrangements
provided in each projects partnership or operating agreement and could change due to variances in
the construction schedule, project revisions, or the cancellation of the project.     44




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##### Table of Contents



OTHER COMMERCIAL COMMITMENTS
 AMOUNT OF COMMITMENT EXPIRATION PER PERIODTotalAmounts
    
    
    Less Than
    
    
    
    
    
    
    
    
    
    
    Over(Dollars in thousands)
    
    Committed
    
    
    1 Year
    
    
    13 Years
    
    
    45 Years
    
    
    5 YearsCommitments to extend credit
    
    $
    18,042,931
    
    
    $
    8,310,009
    
    
    $
    3,264,940
    
    
    $
    3,190,359
    
    
    $
    3,277,623
    (1)Standby letters of credit
    
    
    3,788,018
    
    
    
    928,093
    
    
    
    994,825
    
    
    
    1,643,520
    
    
    
    221,580Loans sold with recourse
    
    
    220,724
    
    
    
    3,021
    
    
    
    16,632
    
    
    
    32,903
    
    
    
    168,168Forward buy commitments
    
    
    597,202
    
    
    
    597,202
    
    
    
    
    
    
    
    
    
    
    
    Total commercial commitments
    
    $
    22,648,875
    
    
    $
    9,838,325
    
    
    $
    4,276,397
    
    
    $
    4,866,782
    
    
    $
    3,667,371
 
 (1)
    
    Of this amount, $2.7 billion represents the unused portion of home equity lines of
credit.  Asset and Liability Management
     If interest rates changed in parallel by
    
    The following estimated percentage increase/(decrease) to net interestthe amounts below at December 31, 2006
    
    income over the subsequent twelve months would resultUp 100 basis points
    
    
    1.61
    %Up 200 basis points
    
    
    2.45
    %Down 100 basis points
    
    
    (0.61
    )%
  45




---



##### Table of Contents



If interest rates changed inparallel by the amounts below at
    
    Estimated NPV Ratio
    
    Estimated NPV RatioDecember 31, 2006
    
    December 31, 2006
    
    December 31, 2005Base
    
    
    10.87
    %
    
    
    12.38
    %Up 200 basis points
    
    
    10.16
    %
    
    
    11.82
    %Up 100 basis points
    
    
    10.58
    %
    
    
    12.16
    %Down 100 basis points
    
    
    10.79
    %
    
    
    12.37
    %Down 200 basis points
    
    
    10.33
    %
    
    
    12.00
    %
       46




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##### Table of Contents



Table 12: Gap Analysis
 AT DECEMBER 31, 2006 REPRICINGYear One
    
    
    Year Two
    
    
    Year Three
    
    
    Year Four
    
    
    Year Five
    
    
    Thereafter
    
    
    TotalInterest earning assets:Investment securities(1)(2)
    
    $
    5,048,009
    
    
    $
    1,016,530
    
    
    $
    748,971
    
    
    $
    654,554
    
    
    $
    684,082
    
    
    $
    7,325,280
    
    
    $
    15,477,426Loans
    
    
    28,635,420
    
    
    
    8,638,120
    
    
    
    6,154,552
    
    
    
    4,675,037
    
    
    
    3,584,402
    
    
    
    10,901,065
    
    
    
    62,588,596Total interest earning assets
    
    $
    33,683,429
    
    
    $
    9,654,650
    
    
    $
    6,903,523
    
    
    $
    5,329,591
    
    
    $
    4,268,484
    
    
    $
    18,226,345
    
    
    $
    78,066,022Non-interest earning assets
    
    
    4,347,477
    
    
    
    1,539,876
    
    
    
    1,539,876
    
    
    
    1,539,876
    
    
    
    1,539,876
    
    
    
    1,068,846
    
    
    
    11,575,827Total assets
    
    $
    38,030,906
    
    
    $
    11,194,526
    
    
    $
    8,443,399
    
    
    $
    6,869,467
    
    
    $
    5,808,360
    
    
    $
    19,295,191
    
    
    $
    89,641,849Interest bearing liabilities:Deposits
    
    $
    27,430,458
    
    
    $
    4,211,724
    
    
    $
    3,488,174
    
    
    $
    2,917,625
    
    
    $
    2,651,729
    
    
    $
    11,684,844
    
    
    $
    52,384,554Borrowings
    
    
    20,170,154
    
    
    
    727,067
    
    
    
    589,693
    
    
    
    985,777
    
    
    
    29,006
    
    
    
    4,348,020
    
    
    
    26,849,717Total interest bearing liabilities
    
    $
    47,600,612
    
    
    $
    4,938,791
    
    
    $
    4,077,867
    
    
    $
    3,903,402
    
    
    $
    2,680,735
    
    
    $
    16,032,864
    
    
    $
    79,234,271Non-interest bearing liabilities
    
    
    1,606,794
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,606,794Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,385
    
    
    
    156,385Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,644,399
    
    
    
    8,644,399Total liabilities and stockholders
equity
    
    $
    49,207,406
    
    
    $
    4,938,791
    
    
    $
    4,077,867
    
    
    $
    3,903,402
    
    
    $
    2,680,735
    
    
    $
    24,833,648
    
    
    $
    89,641,849Excess assets (liabilities) before
effect of hedging transactions
    
    $
    (11,176,500
    )
    
    $
    6,255,735
    
    
    $
    4,365,532
    
    
    $
    2,966,065
    
    
    $
    3,127,625
    
    
    $
    (5,538,457
    )To total assets
    
    
    (12.47
    )%
    
    
    6.98
    %
    
    
    4.87
    %
    
    
    3.31
    %
    
    
    3.49
    %
    
    
    (6.18
    )%Cumulative excess assets
(liabilities) before effect of
hedging transactions
    
    $
    (11,176,500
    )
    
    $
    (4,920,765
    )
    
    $
    (555,233
    )
    
    $
    2,410,832
    
    
    $
    5,538,457
    
    
    $
    To total assets
    
    
    (12.47
    )%
    
    
    (5.49
    )%
    
    
    (0.62
    )%
    
    
    2.69
    %
    
    
    6.18
    %
    
    
    0.00
    %Effect of hedging transactions on
assets and liabilities
    
    $
    6,720,778
    
    
    $
    (1,346,446
    )
    
    $
    (2,403,564
    )
    
    $
    (1,579,677
    )
    
    $
    (1,199,745
    )
    
    $
    (191,346
    )Excess assets (liabilities) after
effect of hedging transactions
    
    $
    (4,455,722
    )
    
    $
    4,909,289
    
    
    $
    1,961,968
    
    
    $
    1,386,388
    
    
    $
    1,927,880
    
    
    $
    (5,729,803
    )To total assets
    
    
    (4.97
    )%
    
    
    5.48
    %
    
    
    2.19
    %
    
    
    1.55
    %
    
    
    2.15
    %
    
    
    (6.39
    )%Cumulative excess assets
(liabilities) after effect of hedging
transactions
    
    $
    (4,455,722
    )
    
    $
    453,567
    
    
    $
    2,415,535
    
    
    $
    3,801,923
    
    
    $
    5,729,803
    
    
    
    To total assets
    
    
    (4.97
    )%
    
    
    0.51
    %
    
    
    2.69
    %
    
    
    4.24
    %
    
    
    6.39
    %
    
    
    0.00
    %
 
 (1)
    
    Includes interest-earning deposits.(2)
    
    Investment securities include market rate payment and repayment assumptions. 47




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##### Table of Contents



Table 13: Selected Quarterly Consolidated Financial Data
 THREE MONTHS ENDEDDec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    Mar. 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    Mar. 31,2006
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2005Total interest income(2)
    
    $
    1,254,002
    
    
    $
    1,240,851
    
    
    $
    992,018
    
    
    $
    839,533
    
    
    $
    811,036
    
    
    $
    761,242
    
    
    $
    720,085
    
    
    $
    670,224Total interest expense
    
    
    766,970
    
    
    
    749,064
    
    
    
    553,247
    
    
    
    435,575
    
    
    
    407,793
    
    
    
    352,901
    
    
    
    306,926
    
    
    
    262,878Net interest income(2)
    
    
    487,032
    
    
    
    491,787
    
    
    
    438,771
    
    
    
    403,958
    
    
    
    403,243
    
    
    
    408,341
    
    
    
    413,159
    
    
    
    407,346Provision for credit losses
    
    
    365,961
    
    
    
    45,000
    
    
    
    44,500
    
    
    
    29,000
    
    
    
    26,000
    
    
    
    20,000
    
    
    
    22,000
    
    
    
    22,000Net interest income after provision
for credit loss(2)
    
    
    121,071
    
    
    
    446,787
    
    
    
    394,271
    
    
    
    374,958
    
    
    
    377,243
    
    
    
    388,341
    
    
    
    391,159
    
    
    
    385,346(Loss)/gain on investment securities,
net(2)
    
    
    (36,089
    )
    
    
    29,154
    
    
    
    (305,027
    )
    
    
    
    
    
    
    (1,296
    )
    
    
    1,675
    
    
    
    3,355
    
    
    
    7,979Total fees and other income
    
    
    149,369
    
    
    
    171,851
    
    
    
    141,975
    
    
    
    134,341
    
    
    
    159,885
    
    
    
    158,232
    
    
    
    148,567
    
    
    
    124,267General and administrative and other
expenses
    
    
    489,401
    
    
    
    427,163
    
    
    
    362,195
    
    
    
    324,771
    
    
    
    321,797
    
    
    
    309,456
    
    
    
    300,477
    
    
    
    320,903Income before income taxes
    
    
    (255,050
    )
    
    
    220,629
    
    
    
    (130,976
    )
    
    
    184,528
    
    
    
    214,035
    
    
    
    238,792
    
    
    
    242,604
    
    
    
    196,689Income tax provision
    
    
    (125,610
    )
    
    
    36,620
    
    
    
    (71,920
    )
    
    
    43,130
    
    
    
    48,540
    
    
    
    57,749
    
    
    
    59,133
    
    
    
    50,538Net income
    
    $
    (129,440
    )
    
    $
    184,009
    
    
    $
    (59,056
    )
    
    $
    141,398
    
    
    $
    165,495
    
    
    $
    181,043
    
    
    $
    183,471
    
    
    $
    146,151Dividends on preferred stock
    
    
    (3,650
    )
    
    
    (1,825
    )
    
    
    (2,433
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Contingently convertible debt expense,
net of tax
    
    
    
    
    
    
    6,344
    
    
    
    
    
    
    
    6,327
    
    
    
    6,354
    
    
    
    6,344
    
    
    
    6,335
    
    
    
    6,394Net Income for EPS purposes
    
    $
    (133,090
    )
    
    $
    188,528
    
    
    $
    (61,489
    )
    
    $
    147,725
    
    
    $
    171,849
    
    
    $
    187,387
    
    
    $
    189,806
    
    
    $
    152,545Earnings per share:Basic(1)
    
    $
    (0.28
    )
    
    $
    0.39
    
    
    $
    (0.15
    )
    
    $
    0.38
    
    
    $
    0.44
    
    
    $
    0.48
    
    
    $
    0.48
    
    
    $
    0.38Diluted(1)
    
    $
    (0.28
    )
    
    $
    0.37
    
    
    $
    (0.15
    )
    
    $
    0.36
    
    
    $
    0.42
    
    
    $
    0.45
    
    
    $
    0.45
    
    
    $
    0.36Market prices:High
    
    $
    25.90
    
    
    $
    21.60
    
    
    $
    21.76
    
    
    $
    21.53
    
    
    $
    22.37
    
    
    $
    23.54
    
    
    $
    21.62
    
    
    $
    22.60Low
    
    
    21.27
    
    
    
    20.07
    
    
    
    20.19
    
    
    
    19.57
    
    
    
    19.65
    
    
    
    20.66
    
    
    
    19.17
    
    
    
    20.85Dividends declared per common share
    
    
    0.080
    
    
    
    0.080
    
    
    
    0.080
    
    
    
    0.060
    
    
    
    0.060
    
    
    
    0.040
    
    
    
    0.040
    
    
    
    0.030
 
 (1)
    
    Prior period earnings per share have been restated to reflect the 5% stock dividend paid to shareholders of record on June 15, 2006.(2)
    
    In the first quarter of 2006, Sovereign reclassified loan prepayment fees and late fees from non-interest income to interest
income. Prior periods were reclassified to conform to the current period presentation. 48




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##### Table of Contents



2006 Fourth Quarter Results
     RECENT ACCOUNTING PRONOUNCEMENT
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 Index to Financial Statements and Supplementary Data
    
    PageReport of Management
    
    
    50Reports of Independent Registered Public Accounting Firm
    
    
    51-52Consolidated Balance Sheet
    
    
    53Consolidated Statements of Operations
    
    
    54Consolidated Statements of Stockholders Equity
    
    
    55-56Consolidated Statements of Cash Flow
    
    
    57-58Notes to Consolidated Financial Statements
    
    
    59-106
 49




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##### Table of Contents



Report of Managements Assessment of
Internal Control Over Financial Reporting
    /s/ Joseph P. Campanelli
    
    /s/ Mark R. McCollomJoseph P. Campanelli
President and
Chief Executive Officer
    
    Mark R. McCollom
Chief Financial Officer and
Executive Vice President/s/ Larry K. Davis
    
    /s/ Thomas D. CestareLarry K. Davis
Corporate Controller
and Senior Vice President
    
    Thomas D. Cestare
Chief Accounting Officer and
Executive Vice PresidentMarch 1, 2007
 50




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 THE BOARD OF DIRECTORS AND STOCKHOLDERS  SOVEREIGN BANCORP, INC.
     /s/ Ernst & Young LLP 
 51




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
On Effectiveness of Internal Control Over Financial Reporting
 THE BOARD OF DIRECTORS AND STOCKHOLDERSSOVEREIGN BANCORP, INC.
       /s/ Ernst & Young LLP 
 52




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##### Table of Contents



Consolidated Balance Sheets
 AT DECEMBER 31,(IN THOUSANDS, EXCEPT SHARE DATA)
    
    2006
    
    
    2005AssetsCash and amounts due from depository institutions
    
    $
    1,804,117
    
    
    $
    1,131,936Investment securities available for sale
    
    
    13,874,628
    
    
    
    7,258,402Investment securities held to maturity (fair value $4,561,397 in 2005)
    
    
    
    
    
    
    4,647,627Other investments
    
    
    1,003,012
    
    
    
    651,299Loans held for investment
    
    
    54,976,675
    
    
    
    43,492,269Allowance for loan losses
    
    
    (471,030
    )
    
    
    (419,599
    )Net loans held for investment
    
    
    54,505,645
    
    
    
    43,072,670Loans held for sale
    
    
    7,611,921
    
    
    
    311,578Premises and equipment
    
    
    605,707
    
    
    
    412,017Accrued interest receivable
    
    
    422,901
    
    
    
    286,300Goodwill
    
    
    5,005,185
    
    
    
    2,716,826Core deposit and other intangibles, net of accumulated amortization of $629,218
in 2006 and $519,380 in 2005
    
    
    498,420
    
    
    
    213,975Bank owned life insurance
    
    
    1,725,222
    
    
    
    1,018,125Other assets
    
    
    2,585,091
    
    
    
    1,957,971Total Assets
    
    $
    89,641,849
    
    
    $
    63,678,726LiabilitiesDeposits and other customer accounts
    
    $
    52,384,554
    
    
    $
    37,977,706Borrowings and other debt obligations
    
    
    26,849,717
    
    
    
    18,720,897Advance payments by borrowers for taxes and insurance
    
    
    98,041
    
    
    
    49,313Other liabilities
    
    
    1,508,753
    
    
    
    914,451Total Liabilities
    
    
    80,841,065
    
    
    
    57,662,367Minority interest-preferred securities of subsidiaries
    
    
    156,385
    
    
    
    205,660Stockholders EquityPreferred stock; no par value; $50 liquidation preference; 7,500,000 shares
authorized; 8,000 shares issued and outstanding in 2006 and 0 shares issued and
outstanding in 2005
    
    
    195,445
    
    
    
    Common stock; no par value; 800,000,000 shares authorized; 479,228,330 issued
in 2006 and 382,582,202 issued in 2005
    
    
    6,183,281
    
    
    
    3,657,543Warrants and employee stock options issued
    
    
    343,391
    
    
    
    337,346Unallocated common stock held by the Employee Stock Ownership Plan (2,760,133
shares in 2006 and 2,957,285 shares in 2005, at cost)
    
    
    (19,019
    )
    
    
    (21,396
    )Treasury stock (2,713,086 shares in 2006 and 21,606,549 shares in 2005, at cost)
    
    
    (49,028
    )
    
    
    (478,734
    )Accumulated other comprehensive loss
    
    
    (24,746
    )
    
    
    (170,798
    )Retained earnings
    
    
    2,015,075
    
    
    
    2,486,738Total Stockholders Equity
    
    
    8,644,399
    
    
    
    5,810,699Total Liabilities and Stockholders Equity
    
    $
    89,641,849
    
    
    $
    63,678,726
  53




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##### Table of Contents



Consolidated Statements of Operations
 FOR THE YEAR ENDED DECEMBER 31,(IN THOUSANDS EXCEPT PER SHARE DATA)
    
    2006
    
    
    2005
    
    
    2004Interest Income:Interest-earning deposits
    
    $
    16,752
    
    
    $
    8,756
    
    
    $
    4,734Investment securities:Available for sale
    
    
    603,631
    
    
    
    359,692
    
    
    
    492,682Held to maturity
    
    
    102,970
    
    
    
    189,059
    
    
    
    152,680Other
    
    
    51,414
    
    
    
    18,058
    
    
    
    8,789Interest on loans
    
    
    3,551,637
    
    
    
    2,387,022
    
    
    
    1,597,032Total interest income
    
    
    4,326,404
    
    
    
    2,962,587
    
    
    
    2,255,917Interest Expense:Deposits and other customer accounts
    
    
    1,372,197
    
    
    
    624,590
    
    
    
    303,045Borrowings and other debt obligations
    
    
    1,132,659
    
    
    
    705,908
    
    
    
    516,282Total interest expense
    
    
    2,504,856
    
    
    
    1,330,498
    
    
    
    819,327Net interest income
    
    
    1,821,548
    
    
    
    1,632,089
    
    
    
    1,436,590Provision for credit losses
    
    
    484,461
    
    
    
    90,000
    
    
    
    127,000Net interest income after provision for credit losses
    
    
    1,337,087
    
    
    
    1,542,089
    
    
    
    1,309,590Non-interest Income:Consumer banking fees
    
    
    275,952
    
    
    
    256,617
    
    
    
    223,179Commercial banking fees
    
    
    179,060
    
    
    
    149,274
    
    
    
    112,394Mortgage banking revenue
    
    
    24,239
    
    
    
    88,117
    
    
    
    21,587Capital markets revenue
    
    
    17,569
    
    
    
    17,821
    
    
    
    19,943Bank-owned life insurance
    
    
    67,039
    
    
    
    47,285
    
    
    
    39,272Miscellaneous income
    
    
    33,677
    
    
    
    31,837
    
    
    
    19,921Total fees and other income
    
    
    597,536
    
    
    
    590,951
    
    
    
    436,296Net (loss)/gain on investment securities
    
    
    (311,962
    )
    
    
    11,713
    
    
    
    14,229Total non-interest income
    
    
    285,574
    
    
    
    602,664
    
    
    
    450,525General and administrative expenses:Compensation and benefits
    
    
    652,703
    
    
    
    538,912
    
    
    
    448,142Occupancy and equipment
    
    
    290,163
    
    
    
    246,993
    
    
    
    220,673Technology expense
    
    
    95,488
    
    
    
    84,185
    
    
    
    77,359Outside services
    
    
    69,195
    
    
    
    60,989
    
    
    
    53,315Marketing expense
    
    
    55,053
    
    
    
    52,362
    
    
    
    46,523Other administrative
    
    
    127,387
    
    
    
    105,763
    
    
    
    96,649Total general and administrative expenses
    
    
    1,289,989
    
    
    
    1,089,204
    
    
    
    942,661Other Expenses:Amortization of intangibles
    
    
    109,838
    
    
    
    73,821
    
    
    
    72,635Other minority interest expense and equity method investment expense
    
    
    56,891
    
    
    
    66,868
    
    
    
    53,477Loss on economic hedges
    
    
    11,387
    
    
    
    
    
    
    
    Loss on debt extinguishment
    
    
    
    
    
    
    187
    
    
    
    63,761Merger related and integration charges, net
    
    
    42,420
    
    
    
    12,744
    
    
    
    46,359Employee severance charges and other restructuring costs
    
    
    78,668
    
    
    
    3,982
    
    
    
    Proxy and related professional fees
    
    
    14,337
    
    
    
    5,827
    
    
    
    Total other expenses
    
    
    313,541
    
    
    
    163,429
    
    
    
    236,232Income before income taxes
    
    
    19,131
    
    
    
    892,120
    
    
    
    581,222Income tax (benefit)/provision
    
    
    (117,780
    )
    
    
    215,960
    
    
    
    127,670NET INCOME
    
    $
    136,911
    
    
    $
    676,160
    
    
    $
    453,552Earnings per share:Basic
    
    $
    0.30
    
    
    $
    1.77
    
    
    $
    1.34Diluted
    
    $
    0.30
    
    
    $
    1.69
    
    
    $
    1.29Dividends Declared Per Common Share
    
    $
    .300
    
    
    $
    .170
    
    
    $
    .115
  54




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##### Table of Contents



Consolidated Statements of Stockholders Equity
 Common
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    Unallocated(IN THOUSANDS)
    
    Shares Outstanding
    
    
    Preferred Stock
    
    
    Common Stock
    
    
    and Stock Options
    
    
    Stock Held by ESOPBalance, January 1, 2004
    
    
    293,111
    
    
    $
    
    
    
    $
    1,892,126
    
    
    $
    13,944
    
    
    $
    (26,078
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock and stock options issued in connection with business acquisitions
    
    
    48,864
    
    
    
    
    
    
    
    997,540
    
    
    
    35,130
    
    
    
    Issuance of warrants, in connection with PIERS offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285,435
    
    
    
    Purchase payout Network Capital
    
    
    85
    
    
    
    
    
    
    
    820
    
    
    
    
    
    
    
    Stock issued in connection with employee benefit and incentive compensation plans
    
    
    4,022
    
    
    
    
    
    
    
    59,384
    
    
    
    (21,156
    )
    
    
    2,371Employee stock options issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,489
    
    
    
    Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock repurchased
    
    
    (307
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2004
    
    
    345,775
    
    
    
    
    
    
    
    2,949,870
    
    
    
    317,842
    
    
    
    (23,707
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeStock and stock options issued in connection with business acquisitions
    
    
    29,813
    
    
    
    
    
    
    
    645,940
    
    
    
    35,636
    
    
    
    Stock issued in connection with employee benefit and incentive compensation plans
    
    
    3,758
    
    
    
    
    
    
    
    61,733
    
    
    
    (20,748
    )
    
    
    2,311Employee stock options issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,616
    
    
    
    Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock repurchased
    
    
    (21,328
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2005
    
    
    358,018
    
    
    
    
    
    
    
    3,657,543
    
    
    
    337,346
    
    
    
    (21,396
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adoption of SFAS 158
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeIssuance of common stock
    
    
    90,182
    
    
    
    
    
    
    
    2,031,857
    
    
    
    
    
    
    
    Issuance of preferred stock
    
    
    
    
    
    
    195,445
    
    
    
    
    
    
    
    
    
    
    
    Stock issued in connection with employee benefit and
incentive compensation plans
    
    
    3,197
    
    
    
    
    
    
    
    19,319
    
    
    
    (3,923
    )
    
    
    2,377Employee stock options issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,968
    
    
    
    Stock dividend
    
    
    22,607
    
    
    
    
    
    
    
    474,562
    
    
    
    
    
    
    
    Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock repurchased
    
    
    (249
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2006
    
    
    473,755
    
    
    $
    195,445
    
    
    $
    6,183,281
    
    
    $
    343,391
    
    
    $
    (19,019
    )
  55




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##### Table of Contents



Consolidated Statements of Stockholders Equity (continued)
 AccumulatedOther
    
    
    
    
    
    
    TotalTreasury
    
    
    Comprehensive
    
    
    Retained
    
    
    Stockholders'Stock
    
    
    Income/(Loss)
    
    
    Earnings
    
    
    EquityBalance, January 1, 2004
    
    $
    (21,927
    )
    
    $
    (52,924
    )
    
    $
    1,455,265
    
    
    $
    3,260,406Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    453,552
    
    
    
    453,552Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    (86,463
    )
    
    
    
    
    
    
    (86,463
    )Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    31,295
    
    
    
    
    
    
    
    31,295Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,384Stock and stock options issued in connection with business acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,032,670Issue of warrants, in connection with PIERS offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285,435Purchase payout Network Capital
    
    
    1,180
    
    
    
    
    
    
    
    
    
    
    
    2,000Stock issued in connection with employee benefit and incentive
compensation plans
    
    
    8,188
    
    
    
    
    
    
    
    
    
    
    
    48,787Employee stock option issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,489Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    (37,222
    )
    
    
    (37,222
    )Stock repurchased
    
    
    (6,577
    )
    
    
    
    
    
    
    
    
    
    
    (6,577
    )Balance, December 31, 2004
    
    
    (19,136
    )
    
    
    (108,092
    )
    
    
    1,871,595
    
    
    
    4,988,372Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    676,160
    
    
    
    676,160Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    (86,861
    )
    
    
    
    
    
    
    (86,861
    )Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    24,155
    
    
    
    
    
    
    
    24,155Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    613,454Stock and stock options issued in connection with business acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    681,576Stock issued in connection with employee benefit and incentive
compensation plans
    
    
    23,114
    
    
    
    
    
    
    
    
    
    
    
    66,410Employee stock option issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,616Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    (61,017
    )
    
    
    (61,017
    )Stock repurchased
    
    
    (482,712
    )
    
    
    
    
    
    
    
    
    
    
    (482,712
    )Balance, December 31, 2005
    
    
    (478,734
    )
    
    
    (170,798
    )
    
    
    2,486,738
    
    
    
    5,810,699Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    136,911
    
    
    
    136,911Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    169,518
    
    
    
    
    
    
    
    169,518Adoption of SFAS 158
    
    
    
    
    
    
    (6,111
    )
    
    
    
    
    
    
    (6,111
    )Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    (17,355
    )
    
    
    
    
    
    
    (17,355
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282,963Issuance of common stock
    
    
    389,956
    
    
    
    
    
    
    
    
    
    
    
    2,421,813Issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,445Stock issued in connection with employee benefit and incentive
compensation plans
    
    
    45,038
    
    
    
    
    
    
    
    
    
    
    
    62,811Employee stock option issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,968Stock dividend
    
    
    
    
    
    
    
    
    
    
    (474,562
    )
    
    
    Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    (126,104
    )
    
    
    (126,104
    )Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    (7,908
    )
    
    
    (7,908
    )Stock repurchased
    
    
    (5,288
    )
    
    
    
    
    
    
    
    
    
    
    (5,288
    )Balance, December 31, 2006
    
    $
    (49,028
    )
    
    $
    (24,746
    )
    
    $
    2,015,075
    
    
    $
    8,644,399
  56




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##### Table of Contents



Consolidated Statements of Cash Flow
 FOR THE YEAR ENDED DECEMBER 31,(IN THOUSANDS)
    
    2006
    
    
    2005
    
    
    2004Cash Flows From Operating Activities:Net income
    
    $
    136,911
    
    
    $
    676,160
    
    
    $
    453,552Adjustments to reconcile net income to net cash provided by (used in) operating activities:Provision for credit losses
    
    
    484,461
    
    
    
    90,000
    
    
    
    127,000Deferred taxes
    
    
    (226,432
    )
    
    
    69,013
    
    
    
    17,334Depreciation and amortization
    
    
    220,959
    
    
    
    167,262
    
    
    
    161,810Net amortization/accretion of investment securities and loan premiums and discounts
    
    
    126,417
    
    
    
    127,880
    
    
    
    56,321Net gain on the sale of loans
    
    
    (30,078
    )
    
    
    (98,797
    )
    
    
    (37,668
    )Net (gain)/loss on investment securities
    
    
    311,962
    
    
    
    (11,713
    )
    
    
    (14,229
    )Net (gain) loss on real estate owned and premises and equipment
    
    
    2,049
    
    
    
    367
    
    
    
    511Loss on debt extinguishments
    
    
    
    
    
    
    187
    
    
    
    63,761Loss on hedging activities
    
    
    11,387
    
    
    
    
    
    
    
    Stock based compensation
    
    
    35,475
    
    
    
    30,404
    
    
    
    22,428Allocation of Employee Stock Ownership Plan
    
    
    2,377
    
    
    
    2,311
    
    
    
    2,371Origination and purchase of loans held for sale, net of repayments
    
    
    (2,980,514
    )
    
    
    (1,602,710
    )
    
    
    (1,399,211
    )Proceeds from the sale of loans held for sale
    
    
    3,421,425
    
    
    
    1,438,972
    
    
    
    1,409,350Net change in:Accrued interest receivable
    
    
    (57,765
    )
    
    
    (60,288
    )
    
    
    (9,422
    )Other assets and bank owned life insurance
    
    
    (585,389
    )
    
    
    (64,015
    )
    
    
    (264,907
    )Other liabilities
    
    
    114,240
    
    
    
    310,744
    
    
    
    (24,901
    )Net cash provided by operating activities
    
    
    987,485
    
    
    
    1,075,777
    
    
    
    564,100Cash Flows From Investing Activities:Proceeds from sales investment securities:Available for sale
    
    
    12,052,450
    
    
    
    1,601,754
    
    
    
    5,653,374Held to maturity
    
    
    1,774,475
    
    
    
    
    
    
    
    Proceeds from repayments and maturities of investment securities:Available for sale
    
    
    1,847,294
    
    
    
    2,412,834
    
    
    
    1,888,103Held to maturity
    
    
    186,845
    
    
    
    580,928
    
    
    
    459,345Net change in other short-term investments
    
    
    19,982
    
    
    
    (408,836
    )
    
    
    (174,987
    )Purchases of investment securities:Available for sale
    
    
    (14,591,166
    )
    
    
    (3,576,405
    )
    
    
    (5,371,243
    )Held to maturity
    
    
    (557,704
    )
    
    
    (1,306,087
    )
    
    
    (447,099
    )Proceeds from sales of loans
    
    
    4,848,438
    
    
    
    7,470,127
    
    
    
    2,018,868Purchase of loans
    
    
    (6,828,628
    )
    
    
    (6,070,671
    )
    
    
    (4,573,274
    )Net change in loans other than purchases and sales
    
    
    (4,616,040
    )
    
    
    (5,886,247
    )
    
    
    (2,622,126
    )Proceeds from sales of fixed assets and real estate owned
    
    
    21,155
    
    
    
    23,577
    
    
    
    22,880Purchases of premises and equipment
    
    
    (115,162
    )
    
    
    (98,193
    )
    
    
    (96,268
    )Net cash (paid) received from business combinations
    
    
    (2,713,208
    )
    
    
    280,210
    
    
    
    (208,237
    )Net cash used in investing activities
    
    
    (8,671,269
    )
    
    
    (4,977,009
    )
    
    
    (3,450,664
    )Cash Flows From Financing Activities:Net increase in deposits and other customer accounts
    
    
    3,368,642
    
    
    
    2,541,527
    
    
    
    297,482Net increase in borrowings and other debt obligations
    
    
    2,271,801
    
    
    
    1,364,210
    
    
    
    1,909,988Proceeds from senior credit facility and subordinated notes, net of issuance costs
    
    
    875,000
    
    
    
    797,805
    
    
    
    1,397,710Proceeds from issuance of Contingent Convertible Trust Preferred Equity Income Redeemable
Securities and warrants
    
    
    
    
    
    
    
    
    
    
    285,435Repayments of borrowings and other debt obligations
    
    
    (550,000
    )
    
    
    (350,000
    )
    
    
    (796,010
    )Net increase (decrease) in advance payments by borrowers for taxes and insurance
    
    
    (60,532
    )
    
    
    16,553
    
    
    
    11,558Maturity of minority interest
    
    
    (54,000
    )
    
    
    
    
    
    
    Proceeds from issuance of preferred stock, net of issuance costs
    
    
    195,445
    
    
    
    
    
    
    
    Proceeds from issuance of common stock, net of issuance costs
    
    
    2,043,009
    
    
    
    33,383
    
    
    
    34,080Treasury stock repurchases, net of proceeds
    
    
    400,612
    
    
    
    (470,215
    )
    
    
    (5,837
    )Cash dividends paid to preferred stockholders
    
    
    (7,908
    )
    
    
    
    
    
    
    Cash dividends paid to common stockholders
    
    
    (126,104
    )
    
    
    (61,017
    )
    
    
    (37,222
    )Net cash provided by financing activities
    
    
    8,355,965
    
    
    
    3,872,246
    
    
    
    3,097,184Net change in cash and cash equivalents
    
    
    672,181
    
    
    
    (28,986
    )
    
    
    210,620Cash and cash equivalents at beginning of year
    
    
    1,131,936
    
    
    
    1,160,922
    
    
    
    950,302Cash and cash equivalents at end of year
    
    $
    1,804,117
    
    
    $
    1,131,936
    
    
    $
    1,160,922
  57




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##### Table of Contents



Supplemental Disclosures:
 AT DECEMBER 31,(IN THOUSANDS)
    
    2006
    
    2005
    
    2004Income taxes paid
    
    $
    121,780
    
    
    $
    27,712
    
    
    $
    31,964Interest paid
    
    
    2,327,659
    
    
    
    1,235,694
    
    
    
    785,794
     58




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies
   a. Principles
of Consolidation -
 b. Use
of Estimates -
 c. Per
Share Information -
 d. Revenue Recognition 
 e. Investment Securities and Other Investments 
  f. Loans Held for Sale 
 g. Mortgage Servicing Rights 
   59




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (Continued)
 h. Allowance for Loan Losses and Reserve for Unfunded Lending Commitments 
         60




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (Continued)
 i. Loans 
    j. Premises and Equipment 
 Office buildings
    
    10 to 30 yearsLeasehold improvements
    
    Remaining lease termFurniture, fixtures and equipment
    
    3 to 10 yearsAutomobiles
    
    5 years
  k. Other
Real Estate Owned -
 l. Bank
Owned Life Insurance -
 m. Income
Taxes -
   61




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (Continued)
 n. Derivative Instruments and Hedging Activity 
       o. Forward Exchange 
 p. Consolidated Statement of Cash Flows 
 q. Prior Year Reclassifications
 r. Goodwill and Core Deposit Intangibles 
  62




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (Continued)
 s. Asset Securitizations 
   t. Marketing expense 
 u. Stock Based Compensation 
  GRANT DATE YEAR2006
    
    
    2005
    
    
    2004Expected volatility
    
    
    .262  .278
    
    
    
    .280  .293
    
    
    
    .296  .317Expected life in years
    
    
    6.00
    
    
    
    6.00
    
    
    
    6.00Stock price on date of grant
    
    $
    19.98  25.77
    
    
    $
    19.40  22.95
    
    
    $
    19.40  21.64Exercise price
    
    $
    19.98  25.77
    
    
    $
    19.40  22.95
    
    
    $
    19.40  21.64Weighted average exercise price
    
    $
    20.30
    
    
    $
    22.11
    
    
    $
    21.49Weighted average fair value
    
    $
    6.42
    
    
    $
    7.52
    
    
    $
    7.62Expected dividend yield
    
    
    1.11%  1.50
    %
    
    
    0.53%  1.11
    %
    
    
    .45%  .55
    %Risk-free interest rate
    
    
    4.28%  5.13
    %
    
    
    3.91%  4.45
    %
    
    
    2.80%  4.23
    %Vesting period in years
    
    
    2-5
    
    
    
    5
    
    
    
    5
   2004Net Income, as reported and for basic EPS
    
    $
    453,552Contingently convertible trust preferred expense, net of tax
    
    
    21,212Net Income for diluted EPS
    
    
    474,764Add: Stock-option expense included in reported net income, net of related tax effects
    
    
    2,917Deduct: Total stock-option expense determined under the fair value based method for
all awards, net of related tax benefits
    
    
    (3,088
    )Pro forma net income for diluted EPS
    
    $
    474,593Pro forma net income for basic EPS
    
    $
    453,381Basic earnings per share
    
    $
    1.34Diluted earnings per share
    
    $
    1.29Pro forma basic earnings per share
    
    $
    1.34Pro forma diluted earnings per share
    
    $
    1.29
 63




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (Continued)
 v. Equity Method Investments 
 Note 2  Recent Accounting Pronouncements
    64




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 2  Recent Accounting Pronouncements (Continued)
        65




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 3  Business Combinations
   AssetsInvestments
    
    $
    3,126.7Loans:Multifamily
    
    
    5,571.2Commercial
    
    
    5,313.3Consumer
    
    
    517.2Residential
    
    
    1,829.0Total loans
    
    
    13,230.7Less allowance for loan losses
    
    
    (97.8
    )Total loans, net
    
    
    13,132.9Cash acquired, net of cash paid
    
    
    (2,713.2
    )Premises and equipment, net
    
    
    167.9Bank Owned Life Insurance
    
    
    343.3Other assets
    
    
    371.9Core deposit and other intangibles
    
    
    394.2Goodwill
    
    
    2,282.8Total assets
    
    $
    17,106.5LiabilitiesDeposits:Core
    
    $
    6,960.8Time
    
    
    4,070.1Total deposits
    
    
    11,030.9Borrowings and other debt obligations
    
    
    5,488.8Other liabilities(1)
    
    
    586.8Total liabilities
    
    $
    17,106.5
 
 (1)
    
    Includes liabilities of $26.2 million directly associated
with the transaction which were recorded as part of the purchase
price which is primarily comprised of $14.4 million of
termination penalties for canceling certain long-term
Independence contracts related to redundant services and $2.8
million related to branch consolidation.  Estimated weighted
    
    
    
    
    
    Amortizationaverage remaining
    
    Unamortized balance
    
    expense/(income)Purchase accounting
    
    life at December
    
    at December 31,
    
    for the year endedadjustment
    
    31, 2006 (Years)
    
    2006
    
    December 31, 2006Mortgage Servicing Asset
    
    
    1.50
    
    
    
    13,469
    
    
    
    2,619Loans
    
    
    2.25
    
    
    
    (114,578
    )
    
    
    (12,851
    )Investments
    
    
    1.67
    
    
    
    (77,481
    )
    
    
    (15,499
    )Time Deposits
    
    
    0.58
    
    
    
    (14,208
    )
    
    
    8,001Borrowings
    
    
    3.87
    
    
    
    (36,014
    )
    
    
    12,187Core Deposit Intangibles
    
    
    2.83
    
    
    
    327,464
    
    
    
    41,638Other intangibles
    
    
    4.64
    
    
    
    22,747
    
    
    
    2,339Buildings
    
    
    14.71
    
    
    
    12,986
    
    
    
    258
 66




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 3  Business Combinations (continued)
  
    
    Mortgage servicing assets.The fair value is estimated by discounting the future cash flows using current market rates for
mortgage loan servicing with adjustment for market and credit risks.
    
    Loans.Fair value is estimated by discounting cash flows using estimated market discount rates at which similar loans
would be made to borrowers and reflect similar credit ratings and interest rate risk for the same remaining maturities.
    
    Investments.The fair value of investment securities is based on quoted market prices as of June 1, 2006.
    
    Deposits.The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, NOW accounts,
savings accounts and certain money market accounts, is equal to the amount payable on demand as of the balance sheet date.
The fair value of fixed-maturity certificates of deposit is estimated by discounting cash flows using currently offered
rates for deposits of similar remaining maturities.
    
    Borrowings and Other Debt Obligations.Fair value is estimated by discounting cash flows using rates currently available
to Sovereign for other borrowings with similar terms and remaining maturities. Certain debt instruments are valued using
available market quotes.
    
    Core Deposit and Other Intangibles.The fair value for the core deposit intangible asset was determined based on the
present value of the difference in expected future cash flows between the cost to replace such deposits (based on
applicable equivalent borrowing rates) versus the then-current yield on core deposits acquired. The aggregate future cash
flows are based on the average expected life of the deposits acquired for each product less the cost to service them.
The fair value of our other intangibles represents the fair market value adjustment on acquired lease obligations related
to its facilities and branch locations. This was determined by comparing the rent obligation on the lease against the
current market rentals for similar lease obligations in the marketplace. Sovereign also recorded an intangible related to
certain non-competition agreements with certain key employees.
    
    Buildings.The fair value of Independences owned buildings and land were based on broker appraisals and opinion of values.
 
    
    Other Assets and Other Liabilities.With the exception of the previously mentioned mortgage servicing assets, the carrying amounts of
other assets and liabilities have been assumed to be a reasonable estimate of fair value.
    Branch and office consolidations
    
    $
    2,330System conversions
    
    
    9,414Retail banking conversion costs
    
    
    10,059Marketing
    
    
    12,504Retention bonuses and other employee-related costs
    
    
    5,663Other
    
    
    2,781Total
    
    $
    42,751
  67




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 3  Business Combinations (continued)
   Proforma (1) Twelve Months Ended December 31,2006
    
    
    2005Net interest income
    
    $
    1,994,689
    
    
    $
    2,101,535Non-interest income
    
    
    319,363
    
    
    
    723,054Provision for credit losses
    
    
    484,461
    
    
    
    90,000Non-interest expense
    
    
    1,722,924
    
    
    
    1,613,357Income taxes
    
    $
    (90,391
    )
    
    $
    294,520Net income
    
    
    197,058
    
    
    
    826,712Less: Preferred dividend
    
    
    14,600
    
    
    
    14,600Net income available for common
stockholders
for diluted EPS purposes
    
    $
    182,458
    
    
    $
    812,112Weighted average basic shares outstanding
    
    
    472,185
    
    
    
    474,978Weighted average diluted shares outstanding
    
    
    472,185
    
    
    
    509,136Basic earnings per share
    
    $
    0.39
    
    
    $
    1.71Diluted earnings per share
    
    $
    0.39
    
    
    $
    1.65
 
 (1)
    
    Pro forma adjustments include the following adjustments: accretion for
loan and investment security fair value discount, reduction of
interest income for amounts used to fund the acquisition, amortization
for certificates of deposits fair value premium, accretion for
borrowing obligations fair value premium, amortization of fair value
adjustments on acquired premises and equipment, mortgage servicing
rights and related amortization for intangibles acquired, net of
Independences historical intangible amortization expense. The pro
forma income statement for the twelve months ended December 31, 2006, excluded $227.2 million of charges incurred by
Sovereign and Independence directly related to the acquisition. These
charges included $41.9 million of deal costs which were primarily
investment banking and legal fees, $83.9 million related to
compensation expense from the acceleration of stock options,
restricted stock, and the employee stock ownership plan, $71.1 million
of severance paid to terminated employees, and $32.2 million of merger
related costs as detailed above. 68




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 3  Business Combinations (continued)
  AssetsInvestments
    
    $
    379.2Total loans, net of allowance for loan loss
    
    
    2,577.6Cash acquired, net of cash paid
    
    
    324.2Premises and equipment, net
    
    
    33.0Bank Owned Life Insurance
    
    
    97.0Prepaid expenses and other assets
    
    
    262.8Core deposit intangible
    
    
    31.1Goodwill
    
    
    601.8Total assets
    
    $
    4,306.7LiabilitiesDeposits:Core
    
    $
    1,503.7Time
    
    
    1,384.6Total deposits
    
    
    2,888.3Borrowings and other debt obligations
    
    
    668.2Other liabilities (1)
    
    
    67.6Total liabilities
    
    $
    3,624.1
 
 (1)
    
    Includes liabilities of $11.6 million directly associated with the transaction which were
recorded as part of the purchase price. The major components of this liability consisted of $2.9
million related to branch consolidation, $4.1 million related to accruals established for
contractual disputes, and $2.1 million representing amounts to be paid to Waypoint senior
executives for severance and acceleration of certain retirement benefits earned by employees at the
date of the acquisition.   Branch and office consolidations
    
    $
    2,396System conversions
    
    
    5,831Retail banking conversion costs and other
    
    
    8,511Total
    
    $
    16,738
   69




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 3  Business Combinations (continued)
  First Essex
    
    
    Seacoast
    
    
    Waypoint
    
    
    Independenceacquisition
    
    
    acquisition
    
    
    acquisition
    
    
    acquisition
    
    
    TotalReserve balance at December 31, 2005
    
    $
    9,839
    
    
    $
    12,748
    
    
    $
    12,224
    
    
    $
    
    
    
    $
    34,811Charge recorded in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,751
    
    
    
    42,751Amount provided in purchase accounting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,185
    
    
    
    26,185Payments
    
    
    (4,011
    )
    
    
    (1,621
    )
    
    
    (6,653
    )
    
    
    (46,504
    )
    
    
    (58,789
    )Changes in estimates (1)
    
    
    2,467
    
    
    
    (1,606
    )
    
    
    (1,029
    )
    
    
    
    
    
    
    (168
    )Reserve balance as of December 31, 2006
    
    $
    8,295
    
    
    $
    9,521
    
    
    $
    4,542
    
    
    $
    22,432
    
    
    $
    44,790
 
 (1)
    
    Sovereign incurred a merger related charge of $2.5 million in the third quarter of 2006 related
to a revised lease termination assumption for the First Essex acquisition. Additionally, Sovereign
recorded merger and integration reserve reversals in the first quarter due to favorable conversion
costs and other merger-related items being lower than amounts initially estimated. In addition to
the Seacoast and Waypoint reversals above, Sovereign recorded a reversal of $0.2 million related to
a bank that the Company acquired in 2002. Note 4  Goodwill and Other Intangible Assets
   YEAR
    
    AMOUNT2007
    
    $
    122,8972008
    
    
    100,4672009
    
    
    71,3412010
    
    
    56,6172011
    
    
    44,963
  Note 5  Restrictions on Cash and Amounts Due From Depository Institutions
  70




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 6  Investment Securities
  AT DECEMBER 31,2006
    
    
    2005Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Appreciation
    
    
    Depreciation
    
    
    Value
    
    
    Cost
    
    
    Appreciation
    
    
    Depreciation
    
    
    ValueInvestment Securities
Available for sale:U.S. Treasury and government
agency securities
    
    $
    1,561,685
    
    
    $
    38
    
    
    $
    878
    
    
    $
    1,560,845
    
    
    $
    48,507
    
    
    $
    
    
    
    $
    764
    
    
    $
    47,743Debentures of FHLB, FNMA and
FHLMC
    
    
    242,248
    
    
    
    3,001
    
    
    
    1,149
    
    
    
    244,100
    
    
    
    182,809
    
    
    
    2,098
    
    
    
    2,970
    
    
    
    181,937Corporate debt and asset-backed
securities
    
    
    953,374
    
    
    
    3,443
    
    
    
    6,315
    
    
    
    950,502
    
    
    
    105,810
    
    
    
    36
    
    
    
    
    
    
    
    105,846Equity securities (1)
    
    
    893,627
    
    
    
    48,491
    
    
    
    
    
    
    
    942,118
    
    
    
    967,515
    
    
    
    1,231
    
    
    
    13,595
    
    
    
    955,151State and municipal securities
    
    
    2,510,975
    
    
    
    45,325
    
    
    
    1,494
    
    
    
    2,554,806
    
    
    
    4,758
    
    
    
    11
    
    
    
    301
    
    
    
    4,468Mortgage-backed Securities:U.S. government agencies
    
    
    45,400
    
    
    
    765
    
    
    
    105
    
    
    
    46,060
    
    
    
    1,153,497
    
    
    
    705
    
    
    
    31,332
    
    
    
    1,122,870FHLMC and FNMA securities
    
    
    3,598,731
    
    
    
    12,088
    
    
    
    5,185
    
    
    
    3,605,634
    
    
    
    2,094,665
    
    
    
    1,751
    
    
    
    59,626
    
    
    
    2,036,790Non-agencies
    
    
    4,009,789
    
    
    
    13,139
    
    
    
    52,365
    
    
    
    3,970,563
    
    
    
    2,860,278
    
    
    
    1,396
    
    
    
    58,077
    
    
    
    2,803,597Total investment securities
available for sale
    
    $
    13,815,829
    
    
    $
    126,290
    
    
    $
    67,491
    
    
    $
    13,874,628
    
    
    $
    7,417,839
    
    
    $
    7,228
    
    
    $
    166,665
    
    
    $
    7,258,402Held to Maturity
Investment Securities:U.S. Treasury and government agency securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,241
    
    
    $
    
    
    
    $
    147
    
    
    $
    7,094Debentures of FHLB, FNMA and
FHLMC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate debt and asset-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,954
    
    
    
    6
    
    
    
    895
    
    
    
    103,065State and municipal
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,752,739
    
    
    
    23,515
    
    
    
    17,167
    
    
    
    1,759,087Mortgage-backed Securities:U.S. government agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,640
    
    
    
    
    
    
    
    2,864
    
    
    
    96,776FHLMC and FNMA securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,940,582
    
    
    
    3,505
    
    
    
    74,988
    
    
    
    1,869,099Non-agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    743,471
    
    
    
    29
    
    
    
    17,224
    
    
    
    726,276Total investment securities
held to maturity
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,647,627
    
    
    $
    27,055
    
    
    $
    113,285
    
    
    $
    4,561,397
 
 (1)
    
    Equity securities are primarily composed of preferred stock of FNMA and FHLMC.  71




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 6  Investment Securities (Continued)
  AT DECEMBER 31, 2006Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesInvestment SecuritiesAvailable for sale and held to maturity
investment securities:U.S. Treasury and government agency securities
    
    $
    1,495,712
    
    
    $
    (733
    )
    
    $
    15,995
    
    
    $
    (145
    )
    
    $
    1,511,707
    
    
    $
    (878
    )Debentures of FHLB, FNMA and FHLMC
    
    
    
    
    
    
    
    
    
    
    101,341
    
    
    
    (1,149
    )
    
    
    101,341
    
    
    
    (1,149
    )Corporate debt and asset-backed securities
    
    
    446,261
    
    
    
    (4,014
    )
    
    
    61,820
    
    
    
    (2,301
    )
    
    
    508,081
    
    
    
    (6,315
    )State and municipal securities
    
    
    247,409
    
    
    
    (1,312
    )
    
    
    21,239
    
    
    
    (182
    )
    
    
    268,648
    
    
    
    (1,494
    )Mortgage-backed Securities:U.S. government agencies
    
    
    219
    
    
    
    (8
    )
    
    
    2,258
    
    
    
    (97
    )
    
    
    2,477
    
    
    
    (105
    )FHLMC and FNMA securities
    
    
    641,851
    
    
    
    (1,009
    )
    
    
    126,193
    
    
    
    (4,176
    )
    
    
    768,044
    
    
    
    (5,185
    )Non-agencies
    
    
    456,897
    
    
    
    (1,703
    )
    
    
    1,962,694
    
    
    
    (50,662
    )
    
    
    2,419,591
    
    
    
    (52,365
    )Total investment securities available for
sale and held to maturity
    
    $
    3,288,349
    
    
    $
    (8,779
    )
    
    $
    2,291,540
    
    
    $
    (58,712
    )
    
    $
    5,579,889
    
    
    $
    (67,491
    )
 AT DECEMBER 31, 2005Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesInvestment SecuritiesAvailable for sale and held to maturity
investment securities:U.S. Treasury and government agency securities
    
    $
    25,937
    
    
    $
    (368
    )
    
    $
    28,899
    
    
    $
    (543
    )
    
    $
    54,836
    
    
    $
    (911
    )Debentures of FHLB, FNMA and FHLMC
    
    
    63,748
    
    
    
    (895
    )
    
    
    4
    
    
    
    
    
    
    
    63,752
    
    
    
    (895
    )Corporate debt and asset-backed securities
    
    
    150,671
    
    
    
    (2,799
    )
    
    
    9,835
    
    
    
    (171
    )
    
    
    160,506
    
    
    
    (2,970
    )Equity securities
    
    
    858,985
    
    
    
    (13,595
    )
    
    
    
    
    
    
    
    
    
    
    858,985
    
    
    
    (13,595
    )State and municipal securities
    
    
    1,141,155
    
    
    
    (17,468
    )
    
    
    
    
    
    
    
    
    
    
    1,141,155
    
    
    
    (17,468
    )Mortgage-backed Securities:U.S. government agencies
    
    
    796,850
    
    
    
    (22,276
    )
    
    
    384,197
    
    
    
    (11,920
    )
    
    
    1,181,047
    
    
    
    (34,196
    )FHLMC and FNMA securities
    
    
    1,180,024
    
    
    
    (35,160
    )
    
    
    2,490,404
    
    
    
    (99,454
    )
    
    
    3,670,428
    
    
    
    (134,614
    )Non-agencies
    
    
    1,462,615
    
    
    
    (32,091
    )
    
    
    1,359,094
    
    
    
    (43,210
    )
    
    
    2,821,709
    
    
    
    (75,301
    )Total investment securities available for
sale and held to maturity
    
    $
    5,679,985
    
    
    $
    (124,652
    )
    
    $
    4,272,433
    
    
    $
    (155,298
    )
    
    $
    9,952,418
    
    
    $
    (279,950
    )
 72




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 6  Investment Securities (Continued)
   YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Proceeds from sales
    
    $
    12,052,450
    
    
    $
    1,601,754
    
    
    $
    5,653,374Gross realized gains
    
    
    37,668
    
    
    
    20,260
    
    
    
    57,587Gross realized losses
    
    
    (282,842
    )
    
    
    (5,852
    )
    
    
    (10,334
    )Net realized (losses)/gains
    
    $
    (245,174
    )
    
    $
    14,408
    
    
    $
    47,253
    73




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 6  Investment Securities (Continued)
  INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 2006(1)Due After
    
    
    
    
    
    
    WeightedDue Within
    
    
    Due After 1
    
    
    Due After 5
    
    
    10 Years/No
    
    
    
    
    
    
    AverageOne Year
    
    
    Within 5 Yrs
    
    
    Within 10 Yrs
    
    
    Maturity
    
    
    Total
    
    
    Yield(2)U.S. Treasury and government agency
    
    $
    1,550,420
    
    
    $
    10,425
    
    
    $
    
    
    
    $
    
    
    
    $
    1,560,845
    
    
    
    5.04
    %Debentures of FHLB, FNMA and FHLMC
    
    
    43,861
    
    
    
    33,792
    
    
    
    166,447
    
    
    
    
    
    
    
    244,100
    
    
    
    5.48
    %Corporate debt and asset backed securities
    
    
    26,695
    
    
    
    58,630
    
    
    
    761,394
    
    
    
    104,280
    
    
    
    950,999
    
    
    
    7.11
    %Equity securities (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    941,621
    
    
    
    941,621
    
    
    
    8.49
    %State and Municipal securities
    
    
    7,281
    
    
    
    61,899
    
    
    
    2,418,316
    
    
    
    67,310
    
    
    
    2,554,806
    
    
    
    6.53
    %Mortgage-backed Securities(2):U.S. government agencies
    
    
    10,818
    
    
    
    22,037
    
    
    
    8,719
    
    
    
    4,486
    
    
    
    46,060
    
    
    
    5.82
    %FHLMC and FNMA securities
    
    
    646,638
    
    
    
    1,804,780
    
    
    
    735,246
    
    
    
    418,970
    
    
    
    3,605,634
    
    
    
    5.78
    %Non-agencies
    
    
    1,121,031
    
    
    
    2,038,250
    
    
    
    570,642
    
    
    
    240,640
    
    
    
    3,970,563
    
    
    
    6.08
    %Total Fair Value
    
    $
    3,406,744
    
    
    $
    4,029,813
    
    
    $
    4,660,764
    
    
    $
    1,777,307
    
    
    $
    13,874,628
    
    
    
    6.19
    %Weighted average yield
    
    
    5.64
    %
    
    
    5.96
    %
    
    
    6.35
    %
    
    
    7.36
    %
    
    
    6.19
    %Total Amortized Cost
    
    $
    3,420,509
    
    
    $
    4,022,228
    
    
    $
    4,643,143
    
    
    $
    1,729,949
    
    
    $
    13,815,829
 
 (1)
    
    The maturities above do not represent the effective duration of Sovereigns portfolio since the amounts above are based on
contractual maturities and do not contemplate anticipated prepayments, with the exception of the securities identified in
Note 2 below.(2)
    
    Mortgage-backed and state and municipal securities are assigned to maturity categories based on their estimated average lives.(3)
    
    Weighted-average yields are based on amortized cost. Yields on tax-exempt securities are calculated on a tax equivalent basis
and are based on an effective tax rate of 35%.(4)
    
    Equity securities are primarily composed of FNMA and FHLMC preferred stock.  74




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Notes to Consolidated Financial Statements
 Note 7  Loans
  AT DECEMBER 31,2006
    
    
    2005Commercial real estate loans
    
    $
    11,514,983
    
    
    $
    7,209,180Commercial and industrial loans(1)
    
    
    11,561,183
    
    
    
    8,331,525Multifamily loans
    
    
    5,621,429
    
    
    
    Other
    
    
    1,518,603
    
    
    
    1,071,698Total Commercial Loans Held for Investment
    
    
    30,216,198
    
    
    
    16,612,403Residential mortgages
    
    
    14,316,168
    
    
    
    12,330,158Home equity loans and lines of credit
    
    
    5,176,346
    
    
    
    9,637,433Total consumer loans secured by real estate
    
    
    19,492,514
    
    
    
    21,967,591Auto loans
    
    
    4,848,204
    
    
    
    4,434,021Other
    
    
    419,759
    
    
    
    478,254Total Consumer Loans Held for Investment
    
    
    24,760,477
    
    
    
    26,879,866Total Loans Held for Investment(3)
    
    $
    54,976,675
    
    
    $
    43,492,269Total Loans Held for Investment with:Fixed rate
    
    $
    32,321,464
    
    
    $
    25,853,076Variable rate
    
    
    22,655,211
    
    
    
    17,639,193Total Loans Held for Investment(3)
    
    $
    54,976,675
    
    
    $
    43,492,269
 
 (1)
    
    Includes automotive floor plan loans of $534.2 million and $446.5 million at December 31, 2006 and 2005, respectively.(2)
    
    Effective with the acquisition of Independence on June 1, 2006, Sovereign acquired $5.6 billion of multifamily loans.
As this was primarily a new asset class for Sovereign, we have disclosed these loans separately in the note above.
At December 31, 2005, Sovereigns multifamily loan portfolio totaled approximately $475 million and was classified as
commercial real estate loans.(3)
    
    Loan totals include deferred loan origination costs, net of deferred loan fees and unamortized purchase premiums, net
of discounts. These items resulted in a net decrease in loans of $80.3 million and net increase of $312.8 million at
December 31, 2006 and 2005, respectively. Loans pledged as collateral for borrowings totaled $17.7 billion and $15.8 at
December 31, 2006 and 2005, respectively.
  AT DECEMBER 31,2006
    
    
    2005Commercial
    
    
    109,123
    
    
    
    23,243Multifamily
    
    
    147,022
    
    
    
    Residential mortgages
    
    
    3,088,562
    
    
    
    132,644Home equity loans and lines of credit
    
    
    4,267,214
    
    
    
    155,691Total Loans Held for Sale
    
    $
    7,611,921
    
    
    $
    311,578Total Loans Held for Sale with:Fixed rate
    
    $
    7,395,494
    
    
    $
    288,335Variable rate
    
    
    216,427
    
    
    
    23,243$
    7,611,921
    
    
    $
    311,578
  75




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 7  Loans (Continued)
  YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Allowance for loan losses balance, beginning
of period
    
    $
    419,599
    
    
    $
    391,003
    
    
    $
    315,790Allowance acquired from acquisitions
    
    
    97,824
    
    
    
    28,778
    
    
    
    64,105Provision for loan losses(1)
    
    
    487,418
    
    
    
    89,501
    
    
    
    121,391Allowance released in connection with dealer floor
plan securitization
    
    
    (4,728
    )
    
    
    (8,010
    )
    
    
    Charge-offs:Commercial
    
    
    56,916
    
    
    
    40,935
    
    
    
    77,499Consumer secured by real estate(1)
    
    
    463,902
    
    
    
    24,125
    
    
    
    12,219Consumer not secured by real estate
    
    
    73,958
    
    
    
    71,906
    
    
    
    63,530Total charge-offs
    
    
    594,776
    
    
    
    136,966
    
    
    
    153,248Recoveries:Commercial
    
    
    14,097
    
    
    
    13,100
    
    
    
    12,825Consumer secured by real estate
    
    
    9,933
    
    
    
    7,085
    
    
    
    5,395Consumer not secured by real estate
    
    
    41,663
    
    
    
    35,108
    
    
    
    24,745Total recoveries
    
    
    65,693
    
    
    
    55,293
    
    
    
    42,965Charge-offs, net of recoveries
    
    
    529,083
    
    
    
    81,673
    
    
    
    110,283Allowance for loan losses balance, end of period
    
    $
    471,030
    
    
    $
    419,599
    
    
    $
    391,003Reserve for unfunded lending commitments, beginning
of period
    
    
    18,212
    
    
    
    17,713
    
    
    
    12,104Provision for unfunded lending commitments
    
    
    (2,957
    )
    
    
    499
    
    
    
    5,609Reserve for unfunded lending commitments, end of
period
    
    
    15,255
    
    
    
    18,212
    
    
    
    17,713Total allowance for credit losses
    
    $
    486,285
    
    
    $
    437,811
    
    
    $
    408,716
 
 (1)
    
    Our 2006 provision for loan loss and charge-offs included $296.0
million and $382.5 million, respectively, related to the previously
discussed loss on the correspondent home equity loans that were
classified as held for sale as of December 31, 2006. Additionally,
Sovereign recorded an additional $12.5 million of provisions to cover
the inherent losses in the multifamily loan portfolio acquired from
Independence in the second quarter of 2006. Finally, as previously
discussed, we recorded a charge-off of $7.1 million on $2.9 billion of
residential mortgage loans that were classified as held for sale as of
December 31, 2006.
  AT DECEMBER 31,2006
    
    
    2005Impaired loans with a related allowance
    
    $
    321,138
    
    
    $
    214,686Impaired loans without a related allowance
    
    
    
    
    
    
    Total impaired loans
    
    $
    321,138
    
    
    $
    214,686Allowance for impaired loans
    
    $
    53,366
    
    
    $
    48,663Total Non-accrual loans
    
    $
    193,352
    
    
    $
    188,697Total loans past due 90 days as to interest or principal and accruing interest
    
    $
    40,103
    
    
    $
    54,794
 76




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 8  Mortgage Servicing Rights
  YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Gross balance, beginning of year
    
    $
    91,057
    
    
    $
    81,040
    
    
    $
    89,646Mortgage servicing assets recognized
    
    
    47,068
    
    
    
    25,715
    
    
    
    17,399Servicing rights acquired
    
    
    7,640
    
    
    
    3,019
    
    
    
    Amortization
    
    
    (19,988
    )
    
    
    (17,578
    )
    
    
    (18,895
    )Write-off of servicing assets
    
    
    (5,917
    )
    
    
    (1,123
    )
    
    
    (7,110
    )Gross balance, end of year
    
    
    119,860
    
    
    
    91,073
    
    
    
    81,040Valuation allowance
    
    
    (1,222
    )
    
    
    (16
    )
    
    
    (7,083
    )Balance, end of year
    
    $
    118,638
    
    
    $
    91,057
    
    
    $
    73,957
   December 31, 2006
    
    December 31, 2005
    
    December 31, 2004CPR speed
    
    
    14.23
    %
    
    
    12.42
    %
    
    
    16.53
    %Escrow credit spread
    
    
    4.85
    %
    
    
    4.16
    %
    
    
    3.92
    %
  YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Balance, beginning of period
    
    $
    16
    
    
    $
    7,083
    
    
    $
    12,400Write-offs of reserves
    
    
    (5,917
    )
    
    
    (1,123
    )
    
    
    (7,110
    )Increase/(decrease) in valuation allowance for mortgage servicing rights
    
    
    7,123
    
    
    
    (5,944
    )
    
    
    1,793Balance, end of year
    
    $
    1,222
    
    
    $
    16
    
    
    $
    7,083
  77




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 8  Mortgage Servicing Rights (Continued)
     78




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 9  Premises and Equipment
  AT DECEMBER 31,2006
    
    
    2005Land
    
    $
    72,571
    
    
    $
    29,428Office buildings
    
    
    237,773
    
    
    
    172,997Furniture, fixtures, and equipment
    
    
    369,265
    
    
    
    360,580Leasehold improvements
    
    
    235,302
    
    
    
    163,175Automobiles and other
    
    
    13,677
    
    
    
    3,509928,588
    
    
    
    729,689Less accumulated depreciation
    
    
    (322,881
    )
    
    
    (317,672
    )Total premises and equipment
    
    $
    605,707
    
    
    $
    412,017
  Note 10  Accrued Interest Receivable
  AT DECEMBER 31,2006
    
    
    2005Accrued interest receivable on:Investment securities
    
    $
    108,657
    
    
    $
    76,326Loans
    
    
    314,244
    
    
    
    209,974Total interest receivable
    
    $
    422,901
    
    
    $
    286,300
 79




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 11  Deposits
  AT DECEMBER 31,2006
    
    
    2005Balance
    
    
    Percent
    
    
    Rate
    
    
    Balance
    
    
    Percent
    
    
    RateDemand deposit accounts
    
    $
    6,577,585
    
    
    
    12
    %
    
    
    
    %
    
    $
    5,331,657
    
    
    
    14
    %
    
    
    
    %NOW accounts
    
    
    7,052,861
    
    
    
    13
    
    
    
    1.61
    
    
    
    5,280,872
    
    
    
    14
    
    
    
    0.68Wholesale NOW accounts
    
    
    3,573,861
    
    
    
    7
    
    
    
    4.97
    
    
    
    3,564,003
    
    
    
    9
    
    
    
    4.32Customer repurchase agreements
    
    
    1,487,251
    
    
    
    3
    
    
    
    4.67
    
    
    
    1,012,574
    
    
    
    3
    
    
    
    3.71Savings accounts
    
    
    4,637,346
    
    
    
    9
    
    
    
    0.65
    
    
    
    3,460,292
    
    
    
    9
    
    
    
    0.79Money market accounts
    
    
    12,991,770
    
    
    
    25
    
    
    
    3.91
    
    
    
    7,989,846
    
    
    
    21
    
    
    
    2.21Certificates of deposit
    
    
    11,338,935
    
    
    
    22
    
    
    
    4.45
    
    
    
    7,357,963
    
    
    
    19
    
    
    
    3.40Wholesale certificates of deposit
    
    
    4,724,945
    
    
    
    9
    
    
    
    5.14
    
    
    
    3,980,499
    
    
    
    11
    
    
    
    4.51Total deposits(1)
    
    $
    52,384,554
    
    
    
    100
    %
    
    
    3.14
    %
    
    $
    37,977,706
    
    
    
    100
    %
    
    
    2.27
    %
 
 (1)
    
    Includes foreign deposits of $1.1 billion and $570.6 million at December 31, 2006 and December 31, 2005, respectively.  YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004NOW accounts
    
    $
    70,303
    
    
    $
    33,231
    
    
    $
    19,012Wholesale NOW accounts
    
    
    215,557
    
    
    
    120,046
    
    
    
    37,491Customer repurchase agreements
    
    
    55,158
    
    
    
    24,230
    
    
    
    7,462Savings accounts
    
    
    29,660
    
    
    
    25,347
    
    
    
    19,417Money market accounts
    
    
    362,968
    
    
    
    131,354
    
    
    
    81,992Certificates of deposit
    
    
    405,216
    
    
    
    176,135
    
    
    
    118,320Wholesale certificate of deposit
    
    
    233,335
    
    
    
    114,247
    
    
    
    19,351Total interest expense on deposit
    
    $
    1,372,197
    
    
    $
    624,590
    
    
    $
    303,045
  Three months or less
    
    $
    1,440,072Over three through six months
    
    
    2,039,569Over six through twelve months
    
    
    2,718,496Over twelve months
    
    
    1,494,213Total
    
    $
    7,692,350
  2007
    
    $
    13,427,2862008
    
    
    1,122,4702009
    
    
    732,8672010
    
    
    234,5002011
    
    
    130,871Thereafter
    
    
    415,886Total
    
    $
    16,063,880
  80




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 12  Borrowings and Other Debt Obligations
  AT DECEMBER 31,2006
    
    
    2005EFFECTIVE
    
    
    
    
    
    
    EFFECTIVEBALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATESovereign Bank borrowings and other debt obligationsSecurities sold under repurchase agreements
    
    $
    199,671
    
    
    
    3.85
    %
    
    $
    189,112
    
    
    
    4.19
    %Overnight federal funds purchased
    
    
    1,700,000
    
    
    
    5.22
    
    
    
    819,000
    
    
    
    4.14Federal Home Loan Bank (FHLB) advances, maturing through
February 2013
    
    
    19,563,985
    
    
    
    4.81
    
    
    
    13,295,493
    
    
    
    4.46Asset-backed floating rate notes, due April 2013
    
    
    821,000
    
    
    
    5.73
    
    
    
    821,000
    
    
    
    4.75Asset-backed secured financing, due November 2008
    
    
    1,150,000
    
    
    
    2.05
    
    
    
    1,150,000
    
    
    
    0.903.500% subordinated debentures, due June 2013
    
    
    143,300
    
    
    
    3.66
    
    
    
    
    
    
    
    0.003.750% subordinated debentures, due April 2014
    
    
    237,456
    
    
    
    3.95
    
    
    
    
    
    
    
    0.005.125% subordinated debentures, due March 2013
    
    
    462,230
    
    
    
    5.54
    
    
    
    472,291
    
    
    
    5.824.375% subordinated debentures, due August 2013
    
    
    296,525
    
    
    
    4.43
    
    
    
    299,772
    
    
    
    4.40Holding Company borrowings and other debt obligations4.80% senior notes, due September 2010
    
    
    298,834
    
    
    
    4.82
    
    
    
    298,520
    
    
    
    4.80Floating rate senior notes, due September 2006
    
    
    
    
    
    
    0.00
    
    
    
    299,800
    
    
    
    4.76Floating rate senior notes, due March 2009
    
    
    199,721
    
    
    
    5.65
    
    
    
    199,596
    
    
    
    4.704.900% senior notes, due September 2010
    
    
    241,779
    
    
    
    5.07
    
    
    
    
    
    
    
    0.00Junior subordinated debentures due to Capital Trust Entities
    
    
    1,535,216
    
    
    
    7.65
    
    
    
    876,313
    
    
    
    8.09Total borrowings and other debt obligations
    
    $
    26,849,717
    
    
    
    4.90
    %
    
    $
    18,720,897
    
    
    
    4.45
    %
      81




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 12  Borrowings and Other Debt Obligations (Continued)
     
    
    Junior subordinated debentures issued by Sovereign with a
distribution rate of 4.375% per annum on the $50.00 issue price,
and each of which will have a principal amount at maturity of $50
and a stated maturity of March 1, 2034; and
    
    Warrants to purchase shares of Sovereign common stock from
Sovereign at any time prior to the close of business on March 1,
2034, by delivering junior subordinated debentures (or, in the
case of warrant exercises before March 5, 2007, cash equal to the
accreted principal amount of a junior subordinated debenture).
    82




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 12  Borrowings and Other Debt Obligations (Continued)
      2007
    
    $
    17,668,4912008
    
    
    1,883,0002009
    
    
    656,7212010
    
    
    980,6132011
    
    
    45,000Thereafter
    
    
    5,615,892Total
    
    $
    26,849,717
 83




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 13  Minority Interests
    Note 14  Stockholders Equity
        84




---



##### Table of Contents



Notes to Consolidated Financial Statements
 Note 15  Regulatory Matters
      REGULATORY CAPITAL (IN THOUSANDS)Tier 1
    
    
    Tier 1
    
    
    TotalTangible
    
    
    Leverage
    
    
    Risk-Based
    
    
    Risk-BasedCapital To
    
    
    Capital To
    
    
    Capital To
    
    
    Capital ToTangible
    
    
    Tangible
    
    
    Risk Adjusted
    
    
    Risk AdjustedAssets
    
    
    Assets
    
    
    Assets
    
    
    AssetsSovereign Bank at December 31, 2006:Regulatory capital
    
    $
    5,224,710
    
    
    $
    5,224,710
    
    
    $
    5,023,535
    
    
    $
    6,726,462Minimum capital requirement(1)
    
    
    1,679,397
    
    
    
    3,358,794
    
    
    
    2,671,247
    
    
    
    5,342,494Excess
    
    $
    3,545,313
    
    
    $
    1,865,916
    
    
    $
    2,352,288
    
    
    $
    1,383,968Capital ratio
    
    
    6.22
    %
    
    
    6.22
    %
    
    
    7.52
    %
    
    
    10.07
    %Sovereign Bank at December 31, 2005:Regulatory capital
    
    $
    4,167,306
    
    
    $
    4,167,306
    
    
    $
    4,090,381
    
    
    $
    5,313,535Minimum capital requirement(1)
    
    
    1,219,112
    
    
    
    2,438,224
    
    
    
    1,993,145
    
    
    
    3,986,289Excess
    
    $
    2,948,194
    
    
    $
    1,729,082
    
    
    $
    2,097,236
    
    
    $
    1,327,246Capital ratio
    
    
    6.84
    %
    
    
    6.84
    %
    
    
    8.21
    %
    
    
    10.66
    %
 
 (1)
    
    As defined by OTS Regulations. 85




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 16  Stock-Based Compensation
   Shares
    
    Price per shareOptions outstanding December 31, 2003 (9,220,511 exercisable)
    
    
    13,977,950
    
    
    $
    3.66  21.88Acquired in conjunction with business acquisitions
    
    
    2,583,380
    
    
    $
    2.79  15.15Granted
    
    
    781,654
    
    
    $
    19.40  21.64Exercised
    
    
    (3,158,623
    )
    
    $
    2.79  19.29Forfeited
    
    
    (341,812
    )
    
    $
    6.40  21.64Expired
    
    
    (9,241
    )
    
    $
    7.86  13.87Options outstanding December 31, 2004 (9,224,607 exercisable)
    
    
    13,833,308
    
    
    $
    2.95  21.88Acquired in conjunction with business acquisitions
    
    
    3,214,440
    
    
    $
    4.62  18.98Granted
    
    
    782,636
    
    
    $
    19.40  22.95Exercised
    
    
    (2,682,698
    )
    
    $
    2.95  19.29Forfeited
    
    
    (280,761
    )
    
    $
    5.34  22.32Expired
    
    
    (26,116
    )
    
    $
    5.39  21.64Options outstanding December 31, 2005 (10,249,285 exercisable)
    
    
    14,840,809
    
    
    $
    2.95  22.95Granted
    
    
    1,878,225
    
    
    $
    19.98  25.77Exercised
    
    
    (1,615,277
    )
    
    $
    2.95  17.05Forfeited
    
    
    (319,754
    )
    
    $
    6.67  22.95Expired
    
    
    (16,293
    )
    
    $
    6.39  17.05Options outstanding December 31, 2006 (9,111,666 exercisable)
    
    
    14,767,710
    
    
    $
    2.95  25.77
   OPTIONS OUTSTANDING
    
    
    OPTIONS EXERCISABLEWeightedWeighted
    
    
    Average
    
    
    
    
    
    
    WeightedAverage
    
    
    Remaining
    
    
    
    
    
    
    AverageExercise
    
    
    Contractual
    
    
    
    
    
    
    ExerciseExercise Prices
    
    Shares
    
    
    Price
    
    
    Life
    
    
    Shares
    
    
    Price$2.954.34
    
    
    43,610
    
    
    $
    3.41
    
    
    
    3.14
    
    
    
    43,610
    
    
    $
    3.41$5.297.36
    
    
    1,445,323
    
    
    
    6.62
    
    
    
    2.93
    
    
    
    1,445,323
    
    
    
    6.62$7.4410.30
    
    
    2,965,047
    
    
    
    8.79
    
    
    
    4.15
    
    
    
    2,965,047
    
    
    
    8.79$10.7814.76
    
    
    6,741,630
    
    
    
    12.23
    
    
    
    4.69
    
    
    
    4,061,442
    
    
    
    12.04$15.1021.10
    
    
    2,082,067
    
    
    
    19.53
    
    
    
    8.10
    
    
    
    438,729
    
    
    
    17.40$21.2125.77
    
    
    1,490,033
    
    
    
    21.91
    
    
    
    8.00
    
    
    
    157,515
    
    
    
    21.24Total
    
    
    14,767,710
    
    
    $
    12.97
    
    
    
    5.22
    
    
    
    9,111,666
    
    
    $
    10.50
  86




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 16  Stock-Based Compensation (Continued)
   Shares
    
    Weighted average(in thousands)
    
    grant date fair valueTotal non-vested restricted stock at
December 31, 2005
    
    
    2,161,460
    
    
    $
    21.46Restricted stock granted in 2006
    
    
    1,171,188
    
    
    
    20.16Vested restricted stock in 2006
    
    
    (541,356
    )
    
    
    19.23Non-vested shares forfeited during 2006
    
    
    (330,717
    )
    
    
    21.93Total non-vested restricted stock at
December 31, 2006
    
    
    2,460,575
    
    
    $
    21.26
  Note 17  Employee Benefit Plans
       87




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 17  Employee Benefit Plans (Continued)
   2007
    
    
    $   3,682,0942008
    
    
    3,785,1862009
    
    
    3,985,6922010
    
    
    4,102,4902011
    
    
    4,255,781Thereafter
    
    
    24,972,288Total
    
    
    $44,783,531
    At December 31, 2006Prior to adopting
    
    Effect of adopting
    
    As reported atStatement 158
    
    Statement 158
    
    December 31, 2006Other liabilities
    
    $
    1,499.4
    
    
    $
    9.4
    
    
    $
    1,508.8Deferred income taxes
    
    $
    367.5
    
    
    $
    3.3
    
    
    $
    370.8Total Liabilities
    
    $
    80,831.7
    
    
    $
    9.4
    
    
    $
    80,841.1Accumulated other comprehensive loss
    
    $
    (18.6
    )
    
    $
    (6.1
    )
    
    $
    (24.7
    )Total stockholders equity
    
    $
    8,650.5
    
    
    $
    (6.1
    )
    
    $
    8,644.4
  88




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 18  Income Taxes
  YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Current:Foreign (1)
    
    $
    87,593
    
    
    $
    79,812
    
    
    $
    65,113Federal
    
    
    16,844
    
    
    
    58,379
    
    
    
    44,513State
    
    
    4,195
    
    
    
    8,756
    
    
    
    710108,632
    
    
    
    146,947
    
    
    
    110,336Deferred:Federal
    
    
    (226,432
    )
    
    
    69,013
    
    
    
    17,334State
    
    
    
    
    
    
    
    
    
    
    Total income tax expense
    
    $
    (117,800
    )
    
    $
    215,960
    
    
    $
    127,670
 
 (1)
    
    Current foreign income tax expense in 2006, 2005 and 2004 relates to interest income on assets
that Sovereign transferred to a consolidated foreign special purpose entity to support a borrowing
arrangement that Sovereign has with an international bank. Foreign taxes paid on this income are
credited against United States income taxes for federal income tax purposes. See Note 12 for
further discussion.  YEAR ENDED DECEMBER 31,2006
    
    2005
    
    2004Federal income tax at statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase/(decrease) in taxes resulting from:Tax-exempt income
    
    
    (293.4
    )
    
    
    (4.1
    )
    
    
    (5.1
    )Bank owned life insurance
    
    
    (122.6
    )
    
    
    (1.8
    )
    
    
    (2.4
    )State income taxes, net of federal tax benefit
    
    
    16.5
    
    
    
    0.7
    
    
    
    0.1Credit for synthetic fuels
    
    
    (94.1
    )
    
    
    (3.2
    )
    
    
    (3.6
    )Low income housing credits
    
    
    (189.5
    )
    
    
    (3.2
    )
    
    
    (3.1
    )Other
    
    
    32.3
    
    
    
    0.8
    
    
    
    1.1Effective tax rate
    
    
    (615.8
    )%
    
    
    24.2
    %
    
    
    22.0
    %
 89




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 18  Income Taxes (Continued)
  AT DECEMBER 31,2006
    
    
    2005Deferred tax assets:Allowance for possible loan losses
    
    $
    167,502
    
    
    $
    89,808Unrealized loss on available for sale portfolio
    
    
    
    
    
    
    71,104Unrealized loss on derivatives
    
    
    7,677
    
    
    
    Net operating loss carry forwards
    
    
    708
    
    
    
    14,474Non-solicitation payments
    
    
    65,967
    
    
    
    74,601Employee benefits
    
    
    53,010
    
    
    
    12,485General Business credit carry forwards
    
    
    77,228
    
    
    
    25,168Foreign tax credit carry forwards
    
    
    39,131
    
    
    
    Broker commissions paid on originated mortgage loans
    
    
    37,026
    
    
    
    25,487Loss on loans held for sale
    
    
    91,688
    
    
    
    Deferred interest expense
    
    
    35,700
    
    
    
    Other
    
    
    162,466
    
    
    
    98,475Total gross deferred tax assets
    
    
    738,103
    
    
    
    411,602Deferred tax liabilities:Purchase accounting adjustments
    
    
    113,977
    
    
    
    36,547Deferred income
    
    
    44,046
    
    
    
    24,299Originated mortgage servicing rights
    
    
    38,959
    
    
    
    31,088Unrealized gain on available for sale portfolio
    
    
    20,756
    
    
    
    Unrealized gain on derivatives
    
    
    
    
    
    
    9,970Depreciation and amortization
    
    
    65,849
    
    
    
    46,444Other
    
    
    83,672
    
    
    
    48,178Total gross deferred tax liabilities
    
    
    367,259
    
    
    
    196,526Net deferred tax asset
    
    $
    370,844
    
    
    $
    215,076
   90




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 18  Income Taxes (Continued)
  Note 19  Commitments and Contingencies
 Financial Instruments.
  CONTRACT OR NOTIONALAMOUNT AT DECEMBER 31,2006
    
    
    2005Financial instruments whose contract amounts represent credit risk:Commitments to extend credit
    
    $
    18,042,931
    
    
    $
    14,576,983Standby letters of credit
    
    
    3,788,018
    
    
    
    2,831,954Loans sold with recourse
    
    
    220,724
    
    
    
    7,359Forward buy commitments
    
    
    597,202
    
    
    
    2,829,704
      Litigation.
 91




---



##### Table of Contents



Notes to Consolidated Financial Statements
 Note 19  Commitments and Contingencies (Continued)
 Leases.
 AT DECEMBER 31, 2006Future MinimumLease
    
    
    Sublease
    
    
    NetPayments
    
    
    Income
    
    
    Payments2007
    
    $
    97,749
    
    
    $
    (14,976
    )
    
    $
    82,7732008
    
    
    81,794
    
    
    
    (10,327
    )
    
    
    71,4672009
    
    
    71,454
    
    
    
    (8,365
    )
    
    
    63,0892010
    
    
    63,351
    
    
    
    (7,330
    )
    
    
    56,0212011
    
    
    56,586
    
    
    
    (6,663
    )
    
    
    49,923Thereafter
    
    
    350,329
    
    
    
    (14,929
    )
    
    
    335,400Total
    
    $
    721,263
    
    
    $
    (62,590
    )
    
    $
    658,673
  92




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 20  Fair Value of Financial Instruments
   AT DECEMBER 31,2006
    
    2005Carrying
    
    
    
    
    
    CarryingValue
    
    Fair Value
    
    Value
    
    Fair ValueFinancial Assets:Cash and amounts due from depository institutions
    
    $
    1,804,117
    
    
    $
    1,804,117
    
    
    $
    1,131,936
    
    
    $
    1,131,936Investment securities:Available for sale
    
    
    13,874,628
    
    
    
    13,874,628
    
    
    
    7,258,402
    
    
    
    7,258,402Held to maturity
    
    
    
    
    
    
    
    
    
    
    4,647,627
    
    
    
    4,561,397Other investments
    
    
    1,003,012
    
    
    
    1,003,012
    
    
    
    651,299
    
    
    
    651,299Loans held for investment, net
    
    
    54,505,645
    
    
    
    54,364,599
    
    
    
    43,384,248
    
    
    
    43,535,657Loans held for sale
    
    
    7,611,921
    
    
    
    7,611,921Mortgage servicing rights
    
    
    117,415
    
    
    
    123,085
    
    
    
    91,057
    
    
    
    101,584Mortgage banking forward commitments
    
    
    304
    
    
    
    304
    
    
    
    (538
    )
    
    
    (538
    )Mortgage interest rate lock commitments
    
    
    (11
    )
    
    
    (11
    )
    
    
    475
    
    
    
    475Financial Liabilities:Deposits
    
    
    52,384,554
    
    
    
    50,288,880
    
    
    
    37,977,706
    
    
    
    35,807,178Borrowings and other debt obligations
    
    
    26,849,717
    
    
    
    27,410,954
    
    
    
    18,720,897
    
    
    
    18,788,464Interest rate derivative instruments
    
    
    19,173
    
    
    
    19,173
    
    
    
    11,355
    
    
    
    11,355Precious metal forward settlement arrangements
    
    
    12,039
    
    
    
    12,039
    
    
    
    46,430
    
    
    
    46,430Precious metal forward sale agreements
    
    
    (11,763
    )
    
    
    (11,763
    )
    
    
    (47,982
    )
    
    
    (47,982
    )Unrecognized Financial Instruments: (1)Commitments to extend credit
    
    
    149,645
    
    
    
    149,525
    
    
    
    122,554
    
    
    
    122,487
 
 (1)
    
    The amounts shown under carrying value represent accruals or deferred income arising from those unrecognized financial instruments.  Cash and amounts due from depository institutions and interest-earning deposits.
 Investment securities available for sale.
 Investment securities held to maturity.
 Loans.
 Mortgage servicing rights.
 Mortgage interest rate lock commitments.
 Deposits.
 Borrowings and other debt obligations.
 93




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 20  Fair Value of Financial Instruments (Continued)
 Commitments to extend credit.
 Precious metals customer forward settlement arrangements and precious metals forward sale
agreements.
 Interest rate derivative instruments.
 Note 21  Derivative Instruments and Hedging Activities
    Fair Value Hedges.
   Cash Flow Hedges.
 Other Derivative Activities.
 94




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 21  Derivative Instruments and Hedging Activities (Continued)
   Weighted AverageNotional
    
    
    
    
    
    
    
    
    
    
    Receive
    
    
    Pay
    
    
    LifeAmount
    
    
    Asset
    
    
    Liability
    
    
    Rate
    
    
    Rate
    
    
    (Years)December 31, 2006Fair value hedges:Receive fixed  pay variable interest rate swaps
    
    $
    1,344,000
    
    
    $
    
    
    
    $
    22,806
    
    
    
    4.16
    %
    
    
    5.25
    %
    
    
    1.8Cash flow hedges:Pay fixed  receive floating interest rate swaps
    
    
    8,500,000
    
    
    
    19,174
    
    
    
    45,842
    
    
    
    5.37
    %
    
    
    5.09
    %
    
    
    2.4Total derivatives used in SFAS 133 hedging
relationships
    
    $
    9,844,000
    
    
    $
    19,174
    
    
    $
    68,648
    
    
    
    5.20
    %
    
    
    5.11
    %
    
    
    2.3December 31, 2005Fair value hedges:Receive fixed  pay variable interest rate swaps
    
    $
    2,440,000
    
    
    $
    
    
    
    $
    52,885
    
    
    
    4.05
    %
    
    
    4.54
    %
    
    
    3.4Cash flow hedges:Pay fixed  receive floating interest rate swaps
    
    
    3,650,000
    
    
    
    21,295
    
    
    
    2,730
    
    
    
    4.38
    %
    
    
    4.17
    %
    
    
    2.0Total derivatives used in SFAS 133 hedging
relationships
    
    $
    6,090,000
    
    
    $
    21,295
    
    
    $
    55,615
    
    
    
    4.25
    %
    
    
    4.32
    %
    
    
    2.5
 95




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 21  Derivative Instruments and Hedging Activities (Continued)
  AT DECEMBER 31,2006
    
    
    2005Net Asset
    
    
    Net Asset(Liability)
    
    
    (Liability)Mortgage banking derivatives:Forward commitmentsTo sell loans
    
    $
    304
    
    
    $
    (538
    )Interest rate lock commitments
    
    
    (11
    )
    
    
    475Total mortgage banking risk management
    
    
    293
    
    
    
    (63
    )Swaps receive fixed
    
    
    2,380
    
    
    
    (4,955
    )Swaps pay fixed
    
    
    26,431
    
    
    
    27,919Market value hedge
    
    
    1,490
    
    
    
    Net Customer related swaps
    
    
    30,301
    
    
    
    22,964Precious metals forward sale agreements
    
    
    (11,763
    )
    
    
    (47,982
    )Precious metals forward arrangements
    
    
    12,039
    
    
    
    46,430Foreign exchange
    
    
    (89
    )
    
    
    740Total activity
    
    $
    30,781
    
    
    $
    22,089
 96




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 21  Derivative Instruments and Hedging Activities (Continued)
  Income StatementBalance Sheet Effect
    
    Effect For Theat
    
    Twelve Months EndedDerivative Activity
    
    December 31, 2006
    
    December 31, 2006Receive fixed-pay variable
interest rate swaps
    
    Decrease to CDs of $22.8 million and an increase to other liabilities of $22.8 million.
    
    Resulted in an
decrease of net
interest income of
$18.2 million.Pay fixed-receive floating
interest rate swaps
    
    Increase to other assets, other liabilities, and a decrease to deferred taxes of $19.2
million, $45.8 million, and $9.3 million, respectively, and a decrease to
stockholders equity of $17.3 million.
    
    Resulted in an
increase in net
interest income of
$29.6 million.Forward commitments to sell loans
    
    Increase to other assets of $0.3 million.
    
    Increase to
mortgage banking
revenues of $0.8
million.Interest rate lock commitments
    
    Decrease to mortgage loans of $11 thousand.
    
    Decrease to
mortgage banking
revenues of $0.5
million.Net Customer Related Swaps
    
    Increase to other assets of $30.3 million.
    
    Increase in capital
markets revenue of
$7.9 million.Forward commitments to sell
precious metals inventory, net
    
    Increase to other assets of
$0.3 million.
    
    Increase to
commercial banking
revenues of $1.8
million.Foreign Exchange
    
    Increase to other liabilities of
$90 thousand.
    
    Decrease in
commercial banking
revenue of $0.8
million.
  Income StatementBalance Sheet Effect
    
    Effect For Theat
    
    Twelve Months EndedDerivative Activity
    
    December 31, 2005
    
    December 31, 2005Receive fixed-pay variable
interest rate swaps
    
    Decrease to borrowings and CDs of $24.0
million and $28.9 million, respectively, and
an increase to other liabilities of $52.9
million.
    
    Resulted in an
increase of net
interest income of
$9.3 million.Pay fixed-receive floating
interest rate swaps
    
    Increase to other assets, other liabilities,
and stockholders equity of $21.3 million,
$2.7 million, and $12.1 million,
respectively, and a decrease to deferred
taxes of $6.5 million.
    
    Resulted in a
decrease in net
interest income of
$0.1 million.Forward commitments to sell loans
    
    Increase to other liabilities of $0.5 million.
    
    Increase to
mortgage banking
revenues of $0.1
million.Interest rate lock commitments
    
    Increase to mortgage loans of $0.5 million.
    
    Increase to
mortgage banking
revenues of $0.3
million.Net Customer Related Swaps
    
    Increase to other assets of $23.0 million.
    
    Increase in capital
markets revenue of
$2.2 million.Forward commitments to sell
precious metals inventory, net
    
    Decrease to other assets of
$1.6 million.
    
    Decrease to
commercial banking revenues of $31.3
million.Foreign Exchange
    
    Increase in other liabilities of $0.7 million.
    
    Increase in
commercial banking
revenue of $0.9
million.
   97




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 22  Asset Securitizations and Variable Interest Entities
     2006PrincipalTotal
    
    
    90 Days
    
    
    Net CreditPrincipal
    
    
    Past Due
    
    
    LossesMortgage Loans
    
    $
    17,480,841
    
    
    $
    101,448
    
    
    $
    8,782Home Equity Loans and Lines of Credit
    
    
    9,574,735
    
    
    
    125,253
    
    
    
    448,526
    (1)Automotive Floor Plan Loans
    
    
    1,389,164
    
    
    
    
    
    
    
    Total Owned and Securitized
    
    $
    28,444,740
    
    
    $
    226,701
    
    
    $
    457,308Less:Securitized Mortgage Loans
    
    
    76,111
    
    
    
    383
    
    
    
    17Securitized Home Equity Loans
    
    
    131,175
    
    
    
    14,907
    
    
    
    3,322Securitized Automotive Floor Plan Loans
    
    
    855,000
    
    
    
    
    
    
    
    Total securitized loans
    
    
    1,062,286
    
    
    
    15,290
    
    
    
    3,339Net Loans
    
    $
    27,382,454
    
    
    $
    211,411
    
    
    $
    453,969
 2005PrincipalTotal
    
    
    90 Days
    
    
    Net CreditPrincipal
    
    
    Past Due
    
    
    LossesMortgage Loans
    
    $
    12,545,445
    
    
    $
    55,275
    
    
    $
    932Home Equity Loans and Lines of Credit
    
    
    9,966,031
    
    
    
    102,112
    
    
    
    22,253Automotive Floor Plan Loans
    
    
    1,468,176
    
    
    
    832
    
    
    
    Total Owned and Securitized
    
    $
    23,979,652
    
    
    $
    158,219
    
    
    $
    23,185Less:Securitized Mortgage Loans
    
    
    82,643
    
    
    
    1,071
    
    
    
    154Securitized Home Equity Loans
    
    
    172,907
    
    
    
    20,635
    
    
    
    5,989Securitized Automotive Floor Plan Loans
    
    
    1,021,698
    
    
    
    
    
    
    
    Total securitized loans
    
    
    1,277,248
    
    
    
    21,706
    
    
    
    6,143Net Loans
    
    $
    22,702,404
    
    
    $
    136,513
    
    
    $
    17,042
 
 (1)
    
    Includes previously mentioned charge of $382.5 million related to correspondent home equity
loans classified as held for sale at December 31, 2006. 98




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 22  Asset Securitizations and Variable Interest Entities (Continued)
  AT DECEMBER 31, 2006AutomotiveFloor PlanComponents of Retained Interest and Servicing Rights:Accrued interest receivable
    
    $
    6,721Subordinated interest retained
    
    
    43,996Interest only strips
    
    
    1,010Cash reserve
    
    
    4,381Total Retained Interests and Servicing Rights
    
    $
    56,108Key Economic Assumptions:Weighted average life (in years)
    
    
    .35
    %Expected credit losses
    
    
    .25
    %Residual cash flows discount rate
    
    
    8.0
    %
  FOR THE YEAR ENDEDDECEMBER 31,2006
    
    
    2005Proceeds from collections reinvested in revolving-period securitizations
    
    $
    5,803,535
    
    
    $
    4,476,993Servicing fees received
    
    
    11,320
    
    
    
    8,022Other cash flows received on retained interests
    
    
    27,410
    
    
    
    53,649Purchases of delinquent or foreclosed assets
    
    
    
    
    
    
    
 99




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 22  Asset Securitizations and Variable Interest Entities (Continued)
  Home Equity
    
    
    AutoLoans &
    
    
    FloorMortgage Loans
    
    
    Lines of Credit
    
    
    Plan Loans
    
    
    TotalComponents of Retained Interest and
Servicing Rights:Accrued interest receivable
    
    $
    
    
    
    $
    
    
    
    $
    6,721
    
    
    $
    6,721Subordinated interest retained
    
    
    20,092
    
    
    
    
    
    
    
    43,996
    
    
    
    64,088Servicing rights
    
    
    1,105
    
    
    
    273
    
    
    
    
    
    
    
    1,378Interest only strips
    
    
    
    
    
    
    6,603
    
    
    
    1,010
    
    
    
    7,613Cash reserve
    
    
    
    
    
    
    
    
    
    
    4,381
    
    
    
    4,381Total Retained Interests and Servicing Rights
    
    $
    21,197
    
    
    $
    6,876
    
    
    $
    56,108
    
    
    $
    84,181As of December 31, 2006Weighted-average life (in yrs)
    
    
    .61
    
    
    
    1.40
    
    
    
    .35Prepayment speed assumption (annual rate)As of December 31, 2006
    
    
    40
    %
    
    
    19
    %
    
    
    46
    %As of December 31, 2005
    
    
    40
    %
    
    
    23
    %
    
    
    45
    %As of the date of the securitization
    
    
    40
    %
    
    
    22
    %
    
    
    50
    %Impact on fair value of 10% adverse change
    
    $
    (5
    )
    
    $
    (57
    )
    
    $
    (117
    )Impact on fair value of 20% adverse change
    
    $
    (6
    )
    
    $
    (102
    )
    
    $
    (192
    )Expected credit losses (Cumulative rate for
all except for Auto Floor Plan Loans which
is an annual rate)As of December 31, 2006
    
    
    .12
    %
    
    
    1.95
    %
    
    
    .25
    %As of December 31, 2005
    
    
    .12
    %
    
    
    1.74
    %
    
    
    .25
    %As of the date of the securitization
    
    
    .12
    %
    
    
    0.75
    %
    
    
    .25
    %Impact on fair value of 10% adverse change
    
    $
    (5
    )
    
    $
    (169
    )
    
    $
    (39
    )Impact on fair value of 20% adverse change
    
    $
    (10
    )
    
    $
    (350
    )
    
    $
    (78
    )Residual cash flows discount rate (annual)As of December 31, 2006
    
    
    9
    %
    
    
    12
    %
    
    
    8
    %As of December 31, 2005
    
    
    9
    %
    
    
    12
    %
    
    
    8
    %As of the date of the securitization
    
    
    9
    %
    
    
    12
    %
    
    
    8
    %Impact on fair value of 10% adverse change
    
    $
    (7
    )
    
    $
    (102
    )
    
    $
    (97
    )Impact on fair value of 20% adverse change
    
    $
    (13
    )
    
    $
    (203
    )
    
    $
    (194
    )
   100




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 23  Earnings Per Share
  YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Calculation of income for EPS:Net Income as reported and for basic EPS
    
    $
    136,911
    
    
    $
    676,160
    
    
    $
    453,552Less preferred dividend
    
    
    7,908
    
    
    
    
    
    
    
    Net income available to common stockholders
    
    
    129,003
    
    
    
    676,160
    
    
    
    453,552Contingently convertible trust preferred interest expense, net of tax
    
    
    
    
    
    
    25,427
    
    
    
    21,212Net income for diluted EPS available to common stockholders
    
    $
    129,003
    
    
    $
    701,587
    
    
    $
    474,764Calculation of shares:Weighted average basic shares
    
    
    433,908
    
    
    
    381,838
    
    
    
    338,403Dilutive effect of:Warrants
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    6,761
    
    
    
    6,197Warrants on contingently convertible debt
    
    
    
    
    
    
    27,397
    
    
    
    23,210Weighted average fully diluted shares
    
    
    433,908
    
    
    
    415,996
    
    
    
    367,810Earnings
per share(1)(2):Basic
    
    $
    0.30
    
    
    $
    1.77
    
    
    $
    1.34Diluted
    
    $
    0.30
    
    
    $
    1.69
    
    
    $
    1.29
  
 (1)
    
    Prior period earnings per share have been restated to reflect the 5% stock dividend paid to
shareholders of record on June 15, 2006.(2)
    
    Basic and diluted earnings per share are the same for 2006. Stock based compensation and
warrants on contingently convertible debt were not considered for diluted earnings per share as
their impact was anti-dilutive. Note 24  Comprehensive Income
  YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Net income
    
    $
    136,911
    
    
    $
    676,160
    
    
    $
    453,552Net unrealized gain/(loss) on derivative instruments for the period
    
    
    (29,404
    )
    
    
    12,105
    
    
    
    19,070Net unrealized gain/(loss) on investment securities available-for-sale for the period
    
    
    (7,633
    )
    
    
    (79,249
    )
    
    
    (77,214
    )Impact of adoption of SFAS No. 158
    
    
    (6,111
    )
    
    
    
    
    
    
    Add unrealized loss resulting from HTM to AFS reclass, net of tax
    
    
    (25,625
    )
    
    
    
    
    
    
    Less reclassification adjustments:Derivative instruments
    
    
    (12,049
    )
    
    
    (12,051
    )
    
    
    (12,225
    )Investments available for sale
    
    
    (202,775
    )
    
    
    7,613
    
    
    
    9,249Net unrealized gain/(loss) recognized in other comprehensive income
    
    
    146,051
    
    
    
    (62,706
    )
    
    
    (55,168
    )Comprehensive income
    
    $
    282,962
    
    
    $
    613,454
    
    
    $
    398,384
  101




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 25  Parent Company Financial Information
  BALANCE SHEET
 AT DECEMBER 31,2006
    
    
    2005AssetsCash and due from banks
    
    $
    16,526
    
    
    $
    17,753Available for sale investment securities
    
    
    55,426
    
    
    
    35,336Investment in subsidiaries:Bank subsidiary
    
    
    6,833,626
    
    
    
    6,756,145Non-bank subsidiaries
    
    
    3,707,705
    
    
    
    650,289Other assets
    
    
    304,711
    
    
    
    174,262Total Assets
    
    $
    10,917,994
    
    
    $
    7,633,785Liabilities and Stockholders EquityBorrowings:Borrowings and other debt obligations
    
    $
    2,033,664
    
    
    $
    1,674,078Borrowings from non-bank subsidiaries
    
    
    118,034
    
    
    
    118,165Other liabilities
    
    
    121,897
    
    
    
    30,843Total liabilities
    
    
    2,273,595
    
    
    
    1,823,086Stockholders Equity
    
    
    8,644,399
    
    
    
    5,810,699Total Liabilities and Stockholders Equity
    
    $
    10,917,994
    
    
    $
    7,633,785
 STATEMENT OF OPERATIONS
 YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Dividends from Bank subsidiary
    
    $
    600,000
    
    
    $
    750,000
    
    
    $
    130,000Dividends from non-bank subsidiary
    
    
    57,896
    
    
    
    
    
    
    
    Interest income
    
    
    12,240
    
    
    
    6,375
    
    
    
    3,459Other income
    
    
    259
    
    
    
    139
    
    
    
    4,764Total income
    
    
    670,395
    
    
    
    756,514
    
    
    
    138,223Interest expense
    
    
    145,264
    
    
    
    99,675
    
    
    
    110,140Other expense
    
    
    92,010
    
    
    
    50,205
    
    
    
    109,532Total expense
    
    
    237,274
    
    
    
    149,880
    
    
    
    219,672Income/(loss) before income taxes and equity in earnings of subsidiaries
    
    
    433,121
    
    
    
    606,634
    
    
    
    (81,449
    )Income tax benefit
    
    
    (98,073
    )
    
    
    (83,674
    )
    
    
    (81,849
    )Income before equity in earnings of subsidiaries
    
    
    531,194
    
    
    
    690,308
    
    
    
    400Dividends in excess of current year earnings:Bank subsidiary
    
    
    (363,473
    )
    
    
    (22,647
    )
    
    
    Non-bank subsidiaries
    
    
    (30,810
    )
    
    
    
    
    
    
    Equity in undistributed earnings/(loss) of:Bank subsidiary
    
    
    
    
    
    
    
    
    
    
    429,004Non-bank subsidiaries
    
    
    
    
    
    
    8,499
    
    
    
    24,148Net income
    
    $
    136,911
    
    
    $
    676,160
    
    
    $
    453,552
 102




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 25  Parent Company Financial Information (Continued)
 STATEMENT OF CASH FLOWS
 YEAR ENDED DECEMBER 31,2006
    
    
    2005
    
    
    2004Cash Flows from Operating Activities:Net income
    
    $
    136,911
    
    
    $
    676,160
    
    
    $
    453,552Adjustments to reconcile net income to net cash provided by operating activities:Undistributed (earnings)/loss of:Bank subsidiary
    
    
    
    
    
    
    
    
    
    
    (429,004
    )Non-bank subsidiaries
    
    
    
    
    
    
    (8,499
    )
    
    
    (24,148
    )Dividends in excess of current year earnings:Bank subsidiary
    
    
    363,473
    
    
    
    22,647
    
    
    
    Non-bank subsidiaries
    
    
    30,810
    
    
    
    
    
    
    
    Loss on retirement borrowings and other debt obligations (1)
    
    
    
    
    
    
    
    
    
    
    81,186Loss on economic hedges
    
    
    11,387
    
    
    
    
    
    
    
    Stock based compensation expense
    
    
    35,475
    
    
    
    30,404
    
    
    
    22,428Allocation of Employee Stock Ownership Plan
    
    
    2,377
    
    
    
    2,311
    
    
    
    2,371Other, net
    
    
    (28,454
    )
    
    
    (42,251
    )
    
    
    (204,166
    )Net cash (used in) provided by operating activities
    
    
    551,979
    
    
    
    680,772
    
    
    
    (97,781
    )Cash Flows from Investing Activities:Net capital returned from/(contributed to) subsidiaries
    
    
    212,545
    
    
    
    (965,808
    )
    
    
    (214,394
    )Net cash (paid) received from acquisitions
    
    
    (3,595,673
    )
    
    
    280,210
    
    
    
    (208,237
    )Net purchases and sales of investment securities
    
    
    
    
    
    
    1,096
    
    
    
    Net cash used in investing activities
    
    
    (3,383,128
    )
    
    
    (684,502
    )
    
    
    (422,631
    )Cash Flows from Financing Activities:Net change in borrowings:Repayment of other debt obligations
    
    
    (400,000
    )
    
    
    (350,000
    )
    
    
    (796,401
    )Net proceeds received from senior notes and senior credit facility
    
    
    725,000
    
    
    
    797,805
    
    
    
    997,710Net change in borrowings from non-bank subsidiaries
    
    
    (131
    )
    
    
    3,196
    
    
    
    11,338Sale (acquisition) of treasury stock
    
    
    400,612
    
    
    
    (470,215
    )
    
    
    (5,837
    )Cash dividends paid to preferred stockholders
    
    
    (7,908
    )
    
    
    
    
    
    
    Cash dividends paid to common stockholders
    
    
    (126,105
    )
    
    
    (61,017
    )
    
    
    (37,222
    )Net proceeds from the issuance or exercise of warrants
    
    
    
    
    
    
    
    
    
    
    285,435Net proceeds from the issuance of preferred stock
    
    
    195,445
    
    
    
    
    
    
    
    Net proceeds from issuance of common stock
    
    
    2,043,009
    
    
    
    33,383
    
    
    
    34,080Net cash (used in) provided by financing activities
    
    
    2,829,922
    
    
    
    (46,848
    )
    
    
    489,103Increase (decrease) in cash and cash equivalents
    
    
    (1,227
    )
    
    
    (50,578
    )
    
    
    (31,309
    )Cash and cash equivalents at beginning of period
    
    
    17,753
    
    
    
    68,331
    
    
    
    99,640Cash and cash equivalents at end of period
    
    $
    16,526
    
    
    $
    17,753
    
    
    $
    68,331
 
 (1)
    
    The debt extinguishment loss for 2004 does not equal the loss on the consolidated
statement of operations since a portion of the debt retired in 2004 was hedged at Sovereign Bank.
At the time of this extinguishment, the hedge was in a gain position that was realized and recorded
at Sovereign Bank and not the Parent Company. 103




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 26  Business Segment Information
    DECEMBER 31, 2006MetroMid-Atlantic
    
    
    New England
    
    
    New York
    
    
    Shared
    
    
    SharedBanking
    
    
    Banking
    
    
    Banking
    
    
    Services
    
    
    ServicesDivision
    
    
    Division
    
    
    Division
    
    
    Consumer
    
    
    Commercial
    
    
    Other (2)
    
    
    TotalNet interest income (expense)
    
    $
    318,565
    
    
    $
    656,493
    
    
    $
    454,083
    
    
    $
    323,801
    
    
    $
    237,447
    
    
    $
    (168,841
    )
    
    $
    1,821,548Fees and other income
    
    
    82,595
    
    
    
    168,054
    
    
    
    107,905
    
    
    
    16,782
    
    
    
    148,926
    
    
    
    73,274
    
    
    
    597,536Provision for credit losses
    
    
    11,055
    
    
    
    12,659
    
    
    
    22,138
    
    
    
    411,872
    
    
    
    26,737
    
    
    
    
    
    
    
    484,461General and administrative expenses
    
    
    284,844
    
    
    
    490,896
    
    
    
    314,175
    
    
    
    119,769
    
    
    
    138,744
    
    
    
    (58,439
    )
    
    
    1,289,989Depreciation/Amortization
    
    
    10,923
    
    
    
    17,115
    
    
    
    16,228
    
    
    
    27,585
    
    
    
    6,878
    
    
    
    142,230
    
    
    
    220,959Income (loss) before income taxes
    
    
    105,261
    
    
    
    320,992
    
    
    
    200,247
    
    
    
    (207,247
    )
    
    
    220,796
    
    
    
    (620,918
    )
    
    
    19,131Intersegment revenues (expense) (1)
    
    
    205,583
    
    
    
    667,238
    
    
    
    251,403
    
    
    
    (1,174,514
    )
    
    
    (537,137
    )
    
    
    587,427
    
    
    
    Total Average Assets
    
    $
    4,657,882
    
    
    $
    5,899,065
    
    
    $
    10,719,221
    
    
    $
    26,144,890
    
    
    $
    11,797,996
    
    
    $
    20,276,341
    
    
    $
    79,495,395
 DECEMBER 31, 2005MetroMid-Atlantic
    
    
    New England
    
    
    New York
    
    
    Shared
    
    
    SharedBanking
    
    
    Banking
    
    
    Banking
    
    
    Services
    
    
    ServicesDivision
    
    
    Division
    
    
    Division
    
    
    Consumer
    
    
    Commercial
    
    
    Other (2)
    
    
    TotalNet interest income (expense)
    
    $
    329,978
    
    
    $
    664,356
    
    
    $
    252,606
    
    
    $
    337,124
    
    
    $
    236,099
    
    
    $
    (188,074
    )
    
    $
    1,632,089Fees and other income
    
    
    78,792
    
    
    
    160,780
    
    
    
    50,163
    
    
    
    103,105
    
    
    
    138,481
    
    
    
    59,270
    
    
    
    590,591Provision for credit losses
    
    
    17,571
    
    
    
    8,422
    
    
    
    4,717
    
    
    
    52,685
    
    
    
    6,605
    
    
    
    
    
    
    
    90,000General and administrative expenses
    
    
    261,770
    
    
    
    467,754
    
    
    
    144,646
    
    
    
    129,920
    
    
    
    135,868
    
    
    
    (50,754
    )
    
    
    1,089,204Depreciation/Amortization
    
    
    10,162
    
    
    
    16,264
    
    
    
    4,909
    
    
    
    31,270
    
    
    
    5,840
    
    
    
    98,817
    
    
    
    167,262Income (loss) before income taxes
    
    
    129,533
    
    
    
    348,959
    
    
    
    153,406
    
    
    
    237,220
    
    
    
    232,105
    
    
    
    (209,103
    )
    
    
    892,120Intersegment revenues (expense) (1)
    
    
    200,319
    
    
    
    589,440
    
    
    
    248,934
    
    
    
    (809,135
    )
    
    
    (318,424
    )
    
    
    88,866
    
    
    
    Total Average Assets
    
    $
    4,612,140
    
    
    $
    5,623,854
    
    
    $
    1,716,073
    
    
    $
    21,636,368
    
    
    $
    9,929,938
    
    
    $
    17,213,601
    
    
    $
    60,731,974
 104




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Notes to Consolidated Financial Statements
 Note 26  Business Segment Information (Continued)
 DECEMBER 31, 2004MetroMid-Atlantic
    
    New England
    
    New York
    
    Shared
    
    SharedBanking
    
    Banking
    
    Banking
    
    Services
    
    ServicesDivision
    
    Division
    
    Division
    
    Consumer
    
    Commercial
    
    Other (2)
    
    TotalNet interest income (expense)
    
    $
    226,721
    
    
    $
    508,434
    
    
    $
    218,687
    
    
    $
    301,784
    
    
    $
    187,361
    
    
    $
    (6,397
    )
    
    $
    1,436,590Fees and other income
    
    
    72,057
    
    
    
    149,932
    
    
    
    46,136
    
    
    
    33,075
    
    
    
    88,715
    
    
    
    46,381
    
    
    
    436,296Provision for credit losses
    
    
    21,633
    
    
    
    16,739
    
    
    
    10,890
    
    
    
    46,609
    
    
    
    31,129
    
    
    
    
    
    
    
    127,000General and administrative expenses
    
    
    194,621
    
    
    
    424,538
    
    
    
    146,224
    
    
    
    97,538
    
    
    
    129,386
    
    
    
    (49,646
    )
    
    
    942,661Depreciation/Amortization
    
    
    7,624
    
    
    
    14,696
    
    
    
    6,173
    
    
    
    30,504
    
    
    
    4,425
    
    
    
    98,388
    
    
    
    161,810Income (loss) before income taxes
    
    
    86,802
    
    
    
    222,517
    
    
    
    109,862
    
    
    
    188,018
    
    
    
    126,569
    
    
    
    (152,546
    )
    
    
    581,222Intersegment revenues (expense)(1)
    
    
    133,286
    
    
    
    443,490
    
    
    
    218,384
    
    
    
    (516,617
    )
    
    
    (158,139
    )
    
    
    (120,404
    )
    
    
    Total Average Assets
    
    $
    3,074,719
    
    
    $
    4,518,691
    
    
    $
    1,474,086
    
    
    $
    15,557,198
    
    
    $
    7,860,453
    
    
    $
    18,073,460
    
    
    $
    50,558,607
 
 (1)
    
    Intersegment revenues (expense) represent charges or credits for funds
used or provided by each of the segments and are included in net
interest income (expense).(2)
    
    Included in Other in 2006, 2005 and 2004 were net merger and
integration charges of $42.4 million, $12.7 million and $46.4 million,
respectively. Included in Other in 2004 are debt extinguishment losses
of $63.8 million. The 2006 and 2005 results also include $78.7
million and $4.0 million of restructuring and other employee severance
charges and $14.3 million and $5.8 million for proxy and professional
costs. See Note 28 for further details.
  Mid-Atlantic
    
    New England Banking
    
    Shared Services
    
    Shared ServicesBanking Division
    
    Division
    
    Consumer
    
    Commercial
    
    Metro New York
    
    TotalGoodwill at December 31,2006
    
    $
    688,079
    
    
    $
    658,006
    
    
    $
    634,012
    
    
    $
    341,601
    
    
    $
    2,683,487
    
    
    $
    5,005,1852005
    
    $
    1,156,736
    
    
    $
    657,944
    
    
    $
    559,498
    
    
    $
    342,648
    
    
    $
    
    
    
    $
    2,716,8262004
    
    $
    556,905
    
    
    $
    680,338
    
    
    $
    559,498
    
    
    $
    328,340
    
    
    $
    
    
    
    $
    2,125,081
 Note 27  Merger Related and Integration Charges, Net
  2006
    
    2005
    
    2004Merger related and integration charges
    
    $
    42,420
    
    
    $
    12,744
    
    
    $
    46,359
     105




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Notes to Consolidated Financial Statements
 Note 28  Employee Severance Charges and Other Restructuring Costs
  Note 29  Related Party Transactions
  Related party loans at December 31, 2005
    
    $
    58,014Additions
    
    
    49,193Reductions
    
    
    (47,430
    )Related party loans at December 31, 2006
    
    $
    59,777
       106




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
  Internal Control  Integrated Framework Internal Control  Integrated Framework,
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
   
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management.
  Description of the Investment Agreement with Banco Santander Central Hispano, S.A.
   107




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Obligations and Rights During the Term of the Agreement (to May 31, 2011)
  Restrictions on Transfers of Shares by Santander
  
    
    pursuant to a business combination transaction approved by a majority of Unaffiliated
Directors, or a self-tender offer made by Sovereign;
    
    to an Affiliate of Santander that agrees to be bound by the Investment Agreement; or
    
    pursuant to a bona fide pledge to a financial institution.
  
    
    in a sale to the public (either registered under the Securities Act or pursuant to
Rule 144 under the Securities Act) that would not be expected to cause any material
disruption in the market for the common stock and minimizes the possibility that any
purchaser will become a 5% holder; or
    
    in a sale to a third party other than (x) a deposit-taking institution that holds
more than 50% of its aggregate U.S. deposits in states in which Sovereign was operating
at the time of the Investment Agreement or (y) a person listed on the prohibited
purchaser list (subject to our right of first offer and right of last look (each as
described below).
 Standstill Restrictions
  
    
    acquire additional Voting Securities, except as specifically permitted by the Agreement;
    
    make an Acquisition Proposal, except as specifically permitted by the Agreement; or
    
    participate in a Proxy Solicitation.
   Notification, First Look and Match Rights
  108




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Board Representation
     Approval Rights
  Certain Actions
  Voting Arrangements
  Public announcements
  Exchange of Management
  Public Subsidiary Stock
  109




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Obligations During the First Standstill Period (through May 31, 2008)
  Obligations During the Second Standstill Period (June 1, 2008 to May 31, 2009)
    Obligations During the Third Standstill Period (June 1, 2009 to May 31, 2011)
    110




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Post Acquisition Obligations of Santander
  Sovereign Headquarters
  Exclusive Acquisition Vehicle
  Sovereigns Right of First Offer and Right of Last Look
   
 Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accountant Fees and Services
  111




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PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 (a) 1. Financial Statements.
  
    
    Consolidated Balance Sheets
    
    Consolidated Statements of Operations
    
    Consolidated Statements of Stockholders Equity
    
    Consolidated Statements of Cash Flows
    
    Notes to Consolidated Financial Statements
 2. Financial Statement Schedules.
  (b) Exhibits.
 (3.1)
    
    Articles of Incorporation, as amended and restated, of Sovereign Bancorp, Inc.
(Incorporated by reference to Exhibit 3.1 to Sovereigns Registration Statement on Form S-8,
SEC File No. 333-134976.)(3.2)
    
    By-Laws, as amended and restated, of Sovereign Bancorp, Inc. (Incorporated by reference
to Exhibit 3.2 to Sovereigns Registration Statement on Form S-3ASR, SEC File No. 333-133514.)(4.1)
    
    Sovereign Bancorp, Inc. has certain debt obligations outstanding. None of the instruments
evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of
Sovereign Bancorp, Inc. and its subsidiaries on a consolidated basis; therefore, copies of such
instruments are not included as exhibits to this Annual Report on Form 10-K. Sovereign Bancorp,
Inc. agrees to furnish copies to the Commission on request.(10.1)
    
    Sovereign Bancorp, Inc. Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit C to Sovereigns definitive proxy statement, SEC File No. 001-16581, dated March 22,
2004.)(10.2)
    
    Employment Agreement dated as of March 1, 1997, between Sovereign Bancorp, Inc.,
Sovereign Bank and Jay S. Sidhu. (Incorporated by reference to Exhibit 10.1 to Sovereigns
Quarterly Report on Form 10-Q/A, SEC File No. 000-16533, for the fiscal quarter ended March 31,
1997.)(10.3)
    
    Retirement-Resignation and Transition Agreement, effective October 10, 2006, between
Sovereign Bancorp, Inc., Sovereign Bank, and Jay S. Sidhu. (Incorporated by reference to
Exhibit 10.1 of Sovereigns Current Report on Form 8-K, SEC File No. 001-16581, filed October
13, 2006.)(10.4)
    
    Employment Agreement, dated as of September 25, 1997, between Sovereign Bancorp, Inc.
and Lawrence M. Thompson, Jr. (Incorporated by reference to Exhibit 10.5 to Sovereigns Annual
Report on Form 10-K, SEC File No. 000-16533, for the fiscal year ended December 31, 1997.)(10.5)
    
    Agreement to Amend, dated May 30, 2006, between Sovereign Bancorp, Inc. and Lawrence M.
Thompson, Jr. (Incorporated by reference to Exhibit 10.2 of Sovereigns Current Report on Form
8-K, SEC File No. 001-16581, filed December 21, 2006.)(10.6)
    
    Second Amended and Restated Rights Agreement, (the Rights Agreement), dated as of
January 19, 2005, between Sovereign Bancorp, Inc. and Mellon Investor Services LLC.
(Incorporated by reference to Exhibit 4.1 of Sovereigns Current Report on Form 8-K/A No. 3,
SEC File No. 001-16581, filed January 24, 2005.)(10.7)
    
    Amendment to the Rights Agreement, dated as of October 24, 2005, between Sovereign
Bancorp, Inc. and Mellon Investor Services LLC. (Incorporated by reference to Exhibit 4.2 to
Sovereigns Current Report on Form 8-K/A No. 4, SEC File No. 001-16581, filed on October 28,
2005.)(10.8)
    
    Form of Rights Certificate. (Incorporated by reference to Exhibit B to the Rights
Agreement.) Pursuant to the Rights Agreement, Rights will not be distributed until after the
Distribution Date (as defined in the Rights Agreement).
 112




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(10.9)
    
    Sovereign Bancorp, Inc. Non-Employee Directors Services Compensation Plan.(10.10)
    
    Sovereign Bancorp, Inc. 1993 Stock Option Plan (the 1993 Plan).(10.11)
    
    Sovereign Bancorp, Inc. 1997 Non-Employee Directors Stock Option Plan. (Incorporated
by reference to Exhibit A to Sovereigns definitive proxy statement, SEC File No. 333-32109,
dated March 16, 1998.)(10.12)
    
    Sovereign Bancorp, Inc. 1996 Stock Option Plan (the 1996 Plan).(10.13)
    
    Employment Agreement, dated as of January 30, 2003, between Sovereign Bancorp, Inc. and
Joseph P. Campanelli. (Incorporated by reference to Exhibit 10.14 to Sovereigns Annual Report
on Form 10-K, SEC File No. 001-16581, for the fiscal year ended December 31, 2002.)(10.14)
    
    Agreement to Amend, dated May 30, 2006, between Sovereign Bancorp, Inc. and Joseph P.
Campanelli. (Incorporated by reference to Exhibit 10.2 to Sovereigns Current Report on Form
8-K, SEC File No. 001-16581, filed November 14, 2006.)(10.15)
    
    Amendment #2 to Employment Agreement, dated as of October 10, 2006, between Sovereign
Bancorp, Inc. and Joseph P. Campanelli. (Incorporated by reference to Exhibit 10.3 to
Sovereigns Current Report on Form 8-K, SEC File No. 001-16581, filed November 14, 2006.)(10.16)
    
    Employment Agreement dated as of May 20, 2005, between Sovereign Bancorp, Inc. and Mark
R. McCollom. (Incorporated by reference to Exhibit 10.1 to Sovereigns Current Report on Form
8-K/A, SEC File No. 001-16581, filed on May 20, 2005.)(10.17)
    
    Agreement to Amend dated May 30, 2006, between Sovereign Bancorp, Inc. and Mark R
McCollom.(10.18)
    
    Employment Agreement dated as of September 16, 2002, between Sovereign Bancorp, Inc.
and James J. Lynch. (Incorporated by reference to Exhibit 10.1 to Sovereigns Quarterly Report
on Form 10-Q, SEC File No. 001-16581, for the fiscal quarter ended September 30, 2002.)(10.19)
    
    Agreement to Amend, dated May 30, 2006, between Sovereign Bancorp, Inc. and James J.
Lynch.(10.20)
    
    Change in Control Agreement, dated
January 1, 2001, between Sovereign Bancorp, Inc. and M.
Robert Rose. On February 13, 2007, Sovereigns Board of
Directors took action to provide that the period described in
Section 2(a) of this Agreement will in no event expire before
December 31, 2007.(10.21)
    
    Sovereign Bancorp, Inc. 2001 Stock
Incentive Plan (the 2001 Plan).(10.22)
    
    Sovereign Bancorp, Inc. 2006 Non-Employee Director Compensation Plan.(10.23)
    
    Sovereign Bancorp, Inc. 2004 Broad-Based Stock Incentive Plan (the 2004 Plan).(10.24)
    
    Form of Incentive Stock Option Agreement under the 2004 Plan. (Incorporated by
reference to Exhibit 10.2 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581,
filed February 18, 2005.)(10.25)
    
    Form of Nonqualified Stock Option Agreement under the 2004 Plan. (Incorporated by
reference to Exhibit 10.3 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581,
filed February 18, 2005.)(10.26)
    
    Form of Restricted Stock Agreement under the 2004 Plan. (Incorporated by reference to
Exhibit 10.4 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581, filed February
18, 2005.)(10.27)
    
    Form of Incentive Stock Option Agreement under the 2001 Plan. (Incorporated by
reference to Exhibit 10.5 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581,
filed February 18, 2005.)(10.28)
    
    Form of Nonqualified Stock Option Agreement under the 2001 Plan. (Incorporated by
reference to Exhibit 10.6 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581,
filed February 18, 2005.)
 113




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(10.29)
    
    Form of Restricted Stock Agreement under the 2001 Plan. (Incorporated by reference to
Exhibit 10.7 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581, filed February
18, 2005.)(10.30)
    
    Form of Nonqualified Stock Option Agreement under the Sovereign Bancorp, Inc. 1997
Non-Employee Directors Stock Option Plan. (Incorporated by reference to Exhibit 10.8 to
Sovereigns Current Report on Form 8-K, SEC File No. 001-16581, filed February 18, 2005.)(10.31)
    
    Form of Incentive Stock Option Agreement under the 1996 Plan. (Incorporated by
reference to Exhibit 10.9 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581,
filed February 18, 2005.)(10.32)
    
    Form of Nonqualified Stock Option Agreement under the 1996 Plan. (Incorporated by
reference to Exhibit 10.10 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581,
filed February 18, 2005.)(10.33)
    
    Form of Incentive Stock Option Agreement under the 1993 Plan. (Incorporated by
reference to Exhibit 10.11 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581,
filed February 18, 2005.)(10.34)
    
    Form of Nonqualified Stock Option Agreement under the 1993 Plan. (Incorporated by
reference to Exhibit 10.12 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581,
filed February 18, 2005.)(10.35)
    
    Form of Incentive Stock Option Agreement under the Sovereign Bancorp, Inc. 1986 Stock
Option Plan. (Incorporated by reference to Exhibit 10.13 to Sovereigns Current Report on Form
8-K, SEC File No. 001-16581, filed February 18, 2005.)(10.36)
    
    Sovereign Bancorp, Inc. 2007 Deferred Compensation Plan.(10.37)
    
    Sovereign Bancorp, Inc. 2006 Leaders Incentive Plan. (Incorporated by reference to
Exhibit 10.1 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581, filed February
22, 2006.)(10.38)
    
    Investment Agreement, dated as of October 24, 2005 (the Investment Agreement) between
Sovereign Bancorp, Inc. and Banco Santander Central Hispano, S.A. (Incorporated by reference
to Exhibit 10.1 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581, filed
October 27, 2005.)(10.39)
    
    Amendment to Investment Agreement, made as of November 22, 2005, between Sovereign
Bancorp, Inc. and Banco Santander Central Hispano, S.A. (Incorporated by reference to Exhibit
10.2 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581, filed November 23,
2005.)(10.40)
    
    Second Amendment to Investment Agreement, dated as of May 31, 2006, between Sovereign
Bancorp, Inc. and Banco Santander Central Hispano, S.A. (Incorporated by reference to Exhibit
10.3 to Sovereigns Current Report on Form 8-K, SEC File No. 001-16581, filed June 6, 2006.)(10.41)
    
    Voting Trust Agreement, dated as of May 31, 2006, by and among Banco Santander Central
Hispano, S.A., Sovereign Bancorp, Inc. and The Bank of New York. (Incorporated by reference to
Exhibit 5 to Santanders Schedule 13D filed June 9, 2006.)(10.42)
    
    Settlement Agreement, dated as of March 22, 2006, by and among Relational Holdings LLC,
Relational Group LLC, Relational Investors LLC, Ralph W. Whitworth, David H. Batchelder,
certain investor partnerships controlled by Relational Investors LLC, and Sovereign Bancorp,
Inc. (Incorporated by reference to Exhibit 10.1 to Sovereigns Current Report on Form 8-K, SEC
File No. 001-16581, filed March 24, 2006.)(21)
    
    Subsidiaries of Registrant.(23.1)
    
    Consent of Ernst & Young LLP.(31.1)
    
    Chief Executive Officer certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended.(31.2)
    
    Chief Financial Officer certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended.
 114




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(32.1)
    
    Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(32.2)
    
    Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 115




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Signatures
  Sovereign Bancorp, Inc.
   By:
    /s/ Joseph P. CampanelliJoseph P. Campanelli,  Presidentand Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Emilio Botin
 Emilio
Botin
    
    Director
    
    March 1, 2007/s/ P. Michael Ehlerman
 P.
Michael Ehlerman
    
    Chairman of the Board and Director
    
    March 1, 2007/s/ Marian L. Heard
 Marian
L. Heard
    
    Director
    
    March 1, 2007/s/ Andrew C. Hove, Jr.
 Andrew
C. Hove, Jr.
    
    Director
    
    March 1, 2007/s/ William J. Moran
 William
J. Moran
    
    Director
    
    March 1, 2007/s/ Maria F. Ramirez
 Maria
F. Ramirez
    
    Director
    
    March 1, 2007
 116




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Signature
    
    Title
    
    Date/s/ Ralph W. Whitworth
 Ralph
W. Whitworth
    
    Director
    
    March 1, 2007/s/ Joseph P. Campanelli
 Joseph
P. Campanelli
    
    President and
Chief Executive Officer
(Principal Executive Officer)
    
    March 1, 2007/s/ Cameron C. Troilo, Sr.
 Cameron
C. Troilo, Sr.
    
    Director
    
    March 1, 2007/s/ Mark R. McCollom
 Mark
R. McCollom
    
    Chief Financial Officer
and Executive Vice President
(Principal Financial Officer)
    
    March 1, 2007/s/ Thomas D. Cestare
 Thomas
D. Cestare
    
    Chief Accounting Officer
and Executive Vice President
(Principal Accounting Officer)
    
    March 1, 2007
 117