Wednesday, Sovereign Bancorp, Inc. (SOV), parent company of Sovereign Bank, posted a 13.6% drop in second-quarter profit, but the net interest margin expanded for the sixth consecutive quarter. The stock is trading up 76 cents or 8.72% at $9.48, after closing Tuesday's trade at $8.72. SOV has erased nearly 60% of its value in the last year, on rising loan defaults, and investor fears of a potential failure after the IndyMac collapse.
Investor confidence in regional bank stocks is on the wane after federal regulators took control of IndyMac Bancorp. early July, in one of the largest bank debacles in the U.S. history. IndyMac, one of the biggest independent mortgage lenders in the nation with $32 billion in assets -- failed on mounting losses and the inability to borrow during the credit crunch. The bank specialized in Alt-A loans that allowed buyers to borrow with little documentation of their finances.
Sovereign's net income for the quarter was $127.44 million or $0.22 per diluted share, down from year-ago $147.45 million or $0.29 per share. Analysts were looking for earnings of 16 cents a share.
Net interest income or NII -- the difference between the money the bank receives from interest on assets like commercial loans, personal mortgages etc. and the money that the bank pays out for interest on liabilities like personal bank accounts - rose to $506.13 million from $453.38 million last year.
For the sixth consecutive quarter, Sovereign's net interest margin - the difference between net interest income and net interest expenses - has expanded and now stands at 3.06%, up 18 basis points from the previous quarter and up 35 basis points from the year-ago period.
Non-interest income which includes consumer banking and commercial banking fees, revenue from mortgage banking and capital markets and bank owned life insurance income and other items -- rose to $207.12 million from $190.3 million in the previous year.
Consumer and commercial banking fees rose 4.2% to $134.7 million, due to increased sales of annuity products from the company's investment services group and higher commercial and consumer deposit fees. Mortgage banking revenues for the quarter were $37.9 million, higher than $26.5 million in the prior year period, while Capital markets revenue rose to $7.21 million from $5.98 million and bank owned life insurance income declined to $19.1 million from $20.3 million.
Sovereign's provision for credit losses -- the provision set aside for bad loans - more than doubled to $132 million from $51 million last year.
Net charge-offs more than tripled to $86.9 million in the second quarter from $25.7 million in the prior year period. Charge-offs are loans written off as bad debt or loans not being repaid. Net charge-offs are gross amount of loans charged off as bad debt, less recoveries collected from earlier charge-offs. provision for credit losses cover charge-offs.
Non-performing loans or loans that are in default or close to being in default - increased to $490.5 million at June 30, 2008 from $282.4 million at June 30, 2007.
To offset the rising loan losses, Sovereign raised $1.39 billion during the quarter by issuing common stock.
Commenting on the results, Sovereign CEO Joseph Campanelli said, "Sovereign is on solid financial footing as we manage through the current uncertain economic climate. Given the challenging operating environment, I am pleased with our results for the second quarter of 2008, which are consistent with our expectations. They reflect the prudent and proactive strategies we employed in the last year and demonstrate progress in reducing our risk profile, improving the quality of our earnings, and strengthening our operating metrics."
Recently, the central bank of Norway disclosed in a regulatory filing that it owns 33.6 million shares or 5.08% stake in Sovereign. The bank had to report the stake as it exceeded the 5% threshold. Spain's Banco Santander SA owns about 25% stake in Sovereign and wrote off 737 million euros of its investment in February.
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