SOVEREIGN BANCORP INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarter ended March 31, 2003
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to
Commission File Number: 001-16581

SOVEREIGN BANCORP, INC.

(Exact name of Registrant as specified in its charter)


Pennsylvania (State or other jurisdiction of incorporation or organization)		23-2453088 (I.R.S. Employer Identification No.)


1500 Market Street, Philadelphia, Pennsylvania (Address of principal executive offices)		19103 (Zip Code)

Registrant’s telephone number: (215) 557-4630

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at May 2, 2003

Common Stock (no par value)		261,162,656 shares

FORWARD LOOKING STATEMENTS

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Sovereign Bancorp, Inc. (“Sovereign”). Sovereign may from time to time make forward-looking statements in Sovereign’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the Exhibits hereto), in its reports to shareholders (including its 2002 Annual Report) and in other communications by Sovereign, which are made in good faith by Sovereign, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Some of the disclosure communications by Sovereign, including any statements preceded by, followed by or which include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “will,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “strive,” “hopefully,” “try,” “assume” or similar expressions constitute forward-looking statements.

These forward-looking statements include statements with respect to Sovereign’s vision, mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business of Sovereign, including statements relating to:

• 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;

• book value and tangible book value per share; and

• loan and deposit portfolio compositions, employee retention, deposit retention, asset quality and reserve adequacy.

These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements. Although Sovereign believes that the expectations reflected in these forward-looking statements are reasonable, these statements involve risks and uncertainties which are subject to change based on various important factors (some of which are beyond Sovereign’s control). The following factors, among others, could cause Sovereign’s financial performance to differ materially from its goals, plans, objectives, intentions, expectations, forecasts and projections (and the underlying assumptions) expressed in the forward-looking statements:

• 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;

FORWARD LOOKING STATEMENTS
(continued)

• 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;

• 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, regulations, and practices including laws, regulations, policies and practices concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles;

• technological change;

• changes in consumer spending and savings habits;

• terrorist attacks in the United States or upon United States interests abroad, or armed conflicts relating to these attacks;

• armed conflicts involving the United States military;

• regulatory or judicial proceedings;

• changes in asset quality; and

• Sovereign’s success in managing the risks involved in the foregoing.

If one or more of the factors affecting Sovereign’s forward-looking information and statements proves incorrect, then its actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Therefore, Sovereign cautions you not to place undue reliance on any forward-looking information and statements.

Sovereign does not intend to update any forward-looking information and statements, whether written or oral, to reflect any change. All forward-looking statements attributable to Sovereign are expressly qualified by these cautionary statements.

TABLE OF CONTENTS


		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 6 — Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBITS INDEX
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER

INDEX


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2003 and December 31, 2002		5
	Consolidated Statements of Operations for the three-month periods ended March 31, 2003 and 2002		6
	Consolidated Statements of Stockholders’ Equity for the three-month period ended March 31, 2003		8
	Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2003 and 2002		10
	Notes to Consolidated Financial Statements		12 - 22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23 - 42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		42
Item 4.	Controls and Procedures		42
PART II. OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K		43
SIGNATURES			44
CERTIFICATIONS			45 - 46
EXHIBITS INDEX			47

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


				March 31,			December 31,
				2003			2002

				(in thousands, except
				per share data)
ASSETS
	Cash and amounts due from depository institutions			$	1,172,529		$	972,614
	Investment securities:
		Available-for-sale			11,208,359			10,733,564
		Held-to-maturity			569,261			632,513
	Loans (including loans held for sale at $385,138 and $382,055 at March 31, 2003 and December 31, 2002, respectively)				23,984,329			23,127,325
		Allowance for loan losses			(309,398	)		(298,750	)

		Net loans			23,674,931			22,828,575

	Premises and equipment				277,509			281,427
	Accrued interest receivable				167,737			175,291
	Goodwill				1,025,292			1,025,292
	Core deposit intangibles, net				324,211			343,305
	Bank owned life insurance				775,862			765,534
	Other assets				1,668,677			1,766,078

			TOTAL ASSETS	$	40,864,368		$	39,524,193

LIABILITIES AND STOCKHOLDERS’ EQUITY
	Deposits and other customer accounts			$	26,675,751		$	26,784,980
	Borrowings and other debt obligations				10,110,562			8,829,289
	Advance payments by borrowers for taxes and insurance				16,309			17,158
	Other liabilities				608,873			531,491

			TOTAL LIABILITIES		37,411,495			36,162,918

Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding junior subordinated debentures of Sovereign (“Trust Preferred Securities”)					395,461			396,331

Minority interests					201,080			200,626

STOCKHOLDERS’ EQUITY
	Common stock; no par value; 400,000,000 shares authorized; 266,406,726 shares issued at March 31, 2003 and 265,548,293 shares issued at December 31, 2002				1,586,421			1,580,282
	Warrants and stock options				103,131			101,892
	Unallocated common stock held by the Employee Stock Ownership Plan at cost; 3,878,855 shares at March 31, 2003 and 3,342,521 shares at December 31, 2002				(28,465	)		(21,313	)
	Treasury stock at cost; 1,551,858 shares at March 31, 2003 and 582,262 shares at December 31, 2002				(23,614	)		(6,060	)
	Accumulated other comprehensive income				68,133			28,009
	Retained earnings				1,150,726			1,081,508

			TOTAL STOCKHOLDERS’ EQUITY		2,856,332			2,764,318

			TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	40,864,368		$	39,524,193

See accompanying notes to consolidated financial statements.

- 5 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


				Three-Month Period
				Ended March 31,

				2003		2002 (1)

				(in thousands, except
				per share data)
INTEREST INCOME:
	Interest-earning deposits			$	675	$	1,940
	Investment securities:
		Available-for-sale			158,231		140,698
		Held-to-maturity			8,443		13,533
	Interest on loans				333,615		338,656

			TOTAL INTEREST INCOME		500,964		494,827

INTEREST EXPENSE:
	Deposits and customer accounts				93,651		111,010
	Borrowings and other debt obligation				104,273		111,888

			TOTAL INTEREST EXPENSE		197,924		222,898

NET INTEREST INCOME					303,040		271,929
Provision for loan losses					43,357		44,500

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES					259,683		227,429

NON-INTEREST INCOME:
	Consumer banking fees				48,225		38,563
	Commercial banking fees				25,198		22,751
	Mortgage banking revenues				8,033		9,466
	Capital markets revenue				7,749		3,337
	Bank owned life insurance				10,332		10,289
	Miscellaneous income				3,522		2,564

			TOTAL FEES AND OTHER INCOME		103,059		86,970
Gain on investment securities and related derivatives transactions					17,531		20,566

			TOTAL NON-INTEREST INCOME		120,590		107,536

GENERAL AND ADMINISTRATIVE EXPENSES:
	Compensation and benefits				93,182		86,011
	Occupancy and equipment expenses				53,342		50,287
	Technology expense				17,939		16,640
	Outside services				13,473		11,452
	Other administrative expenses				33,152		29,649

			TOTAL GENERAL AND ADMINISTRATIVE EXPENSES		211,088		194,039

- 6 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(continued)


			Three-Month Period
			Ended March 31,

			2003		2002 (1)

			(in thousands, except
			per share data)
OTHER EXPENSES:
	Amortization of core deposit intangibles		$	19,095	$	20,234
	Trust Preferred Securities and other minority interest expense			16,043		15,558
	Merger-related and integration charges			—		15,871
	Loss on debt extinguishment			28,981		—

		TOTAL OTHER EXPENSES		64,119		51,663

INCOME BEFORE INCOME TAXES				105,066		89,263
Income tax provision				29,210		23,845

NET INCOME			$	75,856	$	65,418

EARNINGS PER SHARE:
	Basic		$	.29	$	.26

	Diluted		$	.27	$	.24

DIVIDENDS DECLARED PER COMMON SHARE			$	.025	$	.025

(1)

Amounts have been adjusted for the adoption of SFAS No. 123 in the third quarter of 2002. (See footnote 14)

See accompanying notes to consolidated financial statements.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands)


			Common						Warrants &			Unallocated
			Shares Out-			Common			Stock			Common Stock			Treasury
			standing			Stock			Options			Held by ESOP			Stock

Balance, December 31, 2002				261,624		$	1,580,282		$	101,892		$	(21,313	)	$	(6,060	)
Comprehensive income:
	Net income			—			—			—			—			—
	Change in unrecognized gain/(loss), net of tax:
		Investments available for sale		—			—			—			—			—
		Derivative financial instruments		—			—			—			—			—
Total comprehensive income				—			—			—			—			—
Purchase payout Network Capital				143			224			—			—			1,776
Exercise of stock options				689			3,799			(37	)		—			—
Stock option expense				—			—			1,276			—			—
Stock issued under Dividend Reinvestment Plan and Employee Stock Purchase Plan				92			1,165			—			—			—
Dividends paid on common stock				—			—			—			—			—
Stock repurchased				(1,125	)		—			—			—			(19,225	)
Stock issued for Director’s compensation				12			(3	)		—			—			175
Restricted stock grants				77			954			—			—			(280	)
Purchase of shares for Employee Stock Ownership Plan				(536	)		—			—			(7,152	)		—

Balance March 31, 2003				260,976		$	1,586,421		$	103,131		$	(28,465	)	$	(23,614	)

- 8 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited)
(continued)
(in thousands)


			Accumulated
			Other
			Comprehensive		Retained			Total Stock-
			Income		Earnings			Holders' Equity

Balance, December 31, 2002			$	28,009	$	1,081,508		$	2,764,318

Comprehensive income:
	Net income			—		75,856			75,856
	Change in unrecognized gain/(loss), net of tax:
		Investments available for sale		35,410		—			35,410
		Derivative financial instruments		4,714		—			4,714

Total comprehensive income				—		—			115,980

Purchase payout Network Capital				—		—			2,000
Exercise of stock options				—		—			3,762
Stock option expense				—		—			1,276
Stock issued under Dividend Reinvestment Plan and Employee Stock Purchase Plan				—		—			1,165
Dividends paid on common stock				—		(6,638	)		(6,638	)
Stock repurchased				—		—			(19,225	)
Stock issued for Director’s compensation				—		—			172
Restricted stock grants				—		—			674
Purchase of shares for Employee Stock Ownership Plan				—		—			(7,152	)

Balance March 31, 2003			$	68,133	$	1,150,726		$	2,856,332

See accompanying notes to consolidated financial statements.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


			Three-month Period
			Ended March 31,

			2003			2002

			(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income		$	75,856		$	65,418
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses		43,357			44,500
		Deferred taxes		(7,711	)		(10,920	)
		Depreciation and amortization		38,916			33,256
		Net amortization of premium/discount on investment securities and loans		2,028			7,413
		Gain on sale of investment securities and related derivatives		(17,531	)		(20,566	)
		Loss on real estate owned and fixed assets		344			143
		Loss on debt extinguishment		28,981			—
		Stock-based compensation		3,965			4,251
	Net change in:
		Loans held for sale		(3,083	)		131,969
		Accrued interest receivable		7,554			65,215
		Other assets and bank owned life insurance		38,746			15,898
		Other liabilities		79,382			44,598

		Net cash provided by operating activities		290,804			381,175

CASH FLOWS FROM INVESTING ACTIVITIES:
	Proceeds from sales of investment securities:
		Available-for-sale		1,309,660			2,002,985
	Proceeds from repayments and maturities of investment securities:
		Available-for-sale		1,146,358			689,919
		Held-to-maturity		63,447			72,906
	Purchases of investment securities:
		Available-for-sale		(2,854,883	)		(2,452,392	)
		Held-to-maturity		(34	)		—
	Proceeds from sales of loans			938,202			741,282
	Purchase of loans			(1,509,892	)		(655,805	)
	Net change in loans other than purchases and sales			(297,197	)		(662,279	)
	Proceeds from sales of premises and equipment			257			7
	Purchases of premises and equipment			(6,109	)		(7,067	)
	Proceeds from sale of real estate owned			3,125			7,993
	Cash received from acquired bank, net of cash paid			—			207,704

	Net cash used in investing activities			(1,207,066	)		(54,747	)

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)


		Three-month Period
		Ended March 31,

		2003			2002

		(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net increase/(decrease) in deposits and other customer accounts		(108,101	)		257,633
	Net increase (decrease) in borrowings and other debt obligations		1,108,799			(524,605	)
	Proceeds from senior secured credit facility and senior and subordinated notes		775,210			20,000
	Repayments of senior secured credit facility and senior and subordinated notes		(631,640	)		(20,000	)
	Net (decrease) increase in advance payments by borrowers for taxes and insurance		(849	)		1,987
	Cash dividends paid to stockholders		(6,638	)		(6,195	)
	Proceeds from issuance of common stock		5,879			4,429
	Purchase of shares for ESOP		(7,152	)		—
	Termination of ESOP		—			7,768
	Other net changes in treasury stock		(19,331	)		69

	Net cash provided by (used in) financing activities		1,116,177			(258,914	)

	Net change in cash and cash equivalents		199,915			67,514
	Cash and cash equivalents at beginning of period		972,614			907,279

	Cash and cash equivalents at end of period	$	1,172,529		$	974,793

SUPPLEMENTAL DISCLOSURES:
Income taxes paid		$	1,438		$	4,136
Interest paid		$	196,974		$	215,776

Non cash transaction:

On March 8, 2002, Sovereign Bancorp, Inc. issued 11,367,000 shares as partial consideration for the acquisition of Main Street Bancorp, Inc.

See accompanying notes to consolidated financial statements.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands except share data, unless otherwise noted)

(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements of Sovereign Bancorp, Inc. and Subsidiaries (“Sovereign” or the “Company”) include the accounts of the parent company, Sovereign Bancorp, Inc. and its subsidiaries, including the following wholly-owned subsidiaries: Sovereign Bank, Sovereign Delaware Investment Corporation, Sovereign Capital Trust I, Sovereign Capital Trust II, Sovereign Capital Trust III, MBNK Capital Trust I and ML Capital Trust I. All intercompany balances and transactions have been eliminated in consolidation.

These financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments necessary to present fairly the consolidated balance sheet, statements of operations and cash flows for the periods indicated, and contain adequate disclosure to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the Company’s latest annual report on Form 10-K.

The preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain amounts in the financial statements of prior periods have been reclassified to conform with the presentation used in current period financial statements. These reclassifications have no effect on net income or total shareholders’ equity.

The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year.

Sovereign adopted the expense recognition provisions of SFAS No. 123 “Accounting for Stock Based Compensation” for stock based employee compensation awards during 2002. Sovereign continues to account for all options granted prior to January 1, 2002 in accordance with the intrinsic value model of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Sovereign estimates the fair value of option grants issued subsequent to January 1, 2002 using a Black-Scholes option pricing model and expenses this value over the vesting periods as required in SFAS No. 123. Reductions to compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

The following table reconciles the required disclosure under SFAS No. 148, which summarizes the amount of stock-based compensation expense, net of related tax effects, included in the determination of net income if the expense recognition provisions of SFAS No. 123 had been applied to all stock option awards:


	Three-months ended March 31,

	2003			2002

Net income as reported	$	75,856		$	65,418
Add: Stock-based employee compensation expense included in reported net income, net of related tax benefits		829			1,524
Deduct: Total stock-based employee expense determined under the fair value based method for all awards, net of related tax benefits		(2,985	)		(7,343	)

Pro-forma net income	$	73,700		$	59,599

Basic earnings per share	$	0.29		$	0.26
Diluted earnings per share	$	0.27		$	0.24
Pro-forma basic earnings per share	$	0.28		$	0.24
Pro-forma diluted earnings per share	$	0.26		$	0.22

(2) EARNINGS PER SHARE

Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding, excluding options and warrants. The dilutive effect of options and warrants is calculated using the treasury stock method for purposes of weighted average dilutive shares. The following table presents the computation of earnings per share for the periods indicated.


		Three-Month Period
		Ended March 31,

		2003		2002

CALCULATION OF INCOME FOR BASIC AND DILUTED EPS:
Net income		$	75,856	$	65,418

WEIGHTED AVERAGE SHARES OUTSTANDING:
Weighted average basic shares			261,322		250,619
Dilutive effect of:
	Warrants		16,852		16,125
	Stock options		3,191		2,237

Weighted average diluted shares			281,365		268,981

EARNINGS PER SHARE:
Basic		$	.29	$	.26
Diluted		$	.27	$	.24

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

(3) INVESTMENT SECURITIES AVAILABLE-FOR-SALE

The following table presents the composition and fair value of investment securities available-for-sale at the dates indicated:


		March 31, 2003

		Amortized		Unrealized		Unrealized		Fair
		Cost		Appreciation		Depreciation		Value

Investment Securities:
	U.S. Treasury and government agency securities	$	34,376	$	41	$	41	$	34,376
	Corporate debt and asset-backed securities		908,347		35,863		175		944,035
	Equities (1)		1,069,482		7,829		422		1,076,889
	State and municipal securities		18,404		57		965		17,496
Mortgage-backed securities:
	U.S. government agencies		7,259,925		219,685		57		7,479,553
	Non-agencies		1,623,529		32,491		10		1,656,010

Total investment securities available-for-sale		$	10,914,063	$	295,966	$	1,670	$	11,208,359


		December 31, 2002

		Amortized		Unrealized		Unrealized		Fair
		Cost		Appreciation		Depreciation		Value

Investment Securities:
	U.S. Treasury and government agency securities	$	31,274	$	96	$	—	$	31,370
	Corporate debt and asset-backed securities		958,094		20,553		10,625		968,022
	Equities (1)		1,035,431		5,043		193		1,040,281
	State and municipal securities		23,497		57		—		23,554
Mortgage-backed securities:
	U.S. government agencies		5,990,521		174,991		38		6,165,474
	Non-agencies		2,456,522		48,349		8		2,504,863

Total investment securities available-for-sale		$	10,495,339	$	249,089	$	10,864	$	10,733,564

(1)

Equity investments consist principally of FHLB, FHLMC, and FNMA common and preferred stock.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

(4) INVESTMENT SECURITIES HELD-TO-MATURITY

The following table presents the composition and fair value of investment securities held-to-maturity at the dates indicated:


		March 31, 2003

		Amortized		Unrealized		Unrealized		Fair
		Cost		Appreciation		Depreciation		Value

Investment Securities:
	U.S. Treasury and government agency securities	$	1,705	$	60	$	—	$	1,765
	State and municipal securities		2,054		33		3		2,084
Mortgage-backed securities:
	U.S. government agencies		561,796		18,710		88		580,418
	Non-agencies		3,706		17		51		3,672

Total investment securities held-to-maturity		$	569,261	$	18,820	$	142	$	587,939


		December 31, 2002

		Amortized		Unrealized		Unrealized		Fair
		Cost		Appreciation		Depreciation		Value

Investment Securities:
	U.S. Treasury and government agency securities	$	1,705	$	60	$	—	$	1,765
	State and municipal securities		2,069		33		3		2,099
Mortgage-backed securities:
	U.S. government agencies		624,793		17,613		130		642,276
	Non-agencies		3,946		19		55		3,910

Total investment securities held-to-maturity		$	632,513	$	17,725	$	188	$	650,050

- 15 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

(5) COMPOSITION OF LOAN PORTFOLIO

The following table presents the composition of the loan portfolio by type of loan and by fixed and adjustable rates at the dates indicated:


			March 31, 2003					December 31, 2002

			Amount		Percent			Amount		Percent

Commercial real estate loans			$	4,125,570		17.2	%	$	4,132,644		17.9	%
Commercial and industrial loans				4,961,473		20.7			4,757,822		20.6
Other				1,350,308		5.6			1,370,181		5.9

Total Commercial Loans				10,437,351		43.5			10,260,647		44.4

Home equity loans				5,451,304		22.7			5,165,834		22.3
Auto loans				3,063,074		12.8			3,038,976		13.1
Other				316,252		1.3			314,356		1.4

Total Consumer Loans				8,830,630		36.8			8,519,166		36.8

Residential Real Estate Loans				4,716,348		19.7			4,347,512		18.8

		Total Loans	$	23,984,329		100.0	%	$	23,127,325		100.0	%

Total Loans with:
	Fixed rate		$	14,231,091		59.3	%	$	13,599,898		58.8	%
	Variable rate			9,753,238		40.7			9,527,427		41.2

		Total Loans	$	23,984,329		100.0	%	$	23,127,325		100.0	%

Loans are recorded net of loan origination fees, direct origination costs and discounts and premiums purchased. Components of recorded balances are as follows at the dates indicated:


	March 31, 2003		December 31, 2002

Principal value	$	23,867,030	$	23,026,026
Direct origination costs, net of deferred loan fees		47,036		41,858
Purchase premiums, net of discounts		70,263		59,441

Total Loans	$	23,984,329	$	23,127,325

Loans to related parties include loans made to certain officers, directors and their affiliated interests. At March 31, 2003 and December 31, 2002, loans made by Sovereign Bank to these parties totaled $31.7 million and $31.2 million, respectively.

- 16 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

(6) DEPOSIT PORTFOLIO COMPOSITION

The following table presents the composition of deposits and other customer accounts at the dates indicated:


	March 31, 2003								December 31, 2002

						Weighted								Weighted
						Average								Average
Account Type	Amount		Percent			Rate			Amount		Percent			Rate

Demand deposit accounts	$	4,133,600		15	%		—	%	$	4,067,784		15	%		—	%
NOW accounts		5,818,879		22			1.00			5,889,582		22			1.45
Customer repurchase agreements		983,501		4			.88			1,078,391		4			.92
Savings accounts		3,075,393		12			.97			2,971,779		11			.99
Money market accounts		5,933,506		22			1.32			5,757,423		22			1.32
Certificates of deposit		6,730,872		25			2.96			7,020,021		26			3.17

Total Deposits	$	26,675,751		100	%		1.40	%	$	26,784,980		100	%		1.58	%

(7) BORROWINGS AND OTHER DEBT OBLIGATIONS

The following table presents information regarding borrowings and other debt obligations at the dates indicated:


	March 31, 2003					December 31, 2002

			Weighted					Weighted
			Average					Average
	Balance		Rate			Balance		Rate

Securities sold under repurchase agreements	$	2,545,390		.72	%	$	1,538,300		.82	%
FHLB advances		5,525,545		3.98			5,395,116		4.22
Senior secured credit facility		120,000		4.07			120,000		3.91
Asset-backed floating rate notes		821,000		1.68			821,000		1.80
Senior notes		603,217		9.86			904,573		9.75
Subordinated notes		495,210		5.13			49,995		8.05
Other		200		7.11			305		8.36

Total borrowings and other debt obligations	$	10,110,562		3.38	%	$	8,829,289		3.99	%

During the first quarter, Sovereign completed a tender offer for the 8.625% Senior Notes (“8.625% notes”) due March 2004 and the 10.25% Senior Notes (“10.25% notes”) due May 2004. In connection with the tender, Sovereign repurchased $139.2 million of the 8.625% notes and $162.4 million of the 10.25% notes incurring a loss on this debt extinguishment of $29 million, $18.8 million net of tax, which equated to $0.07 per diluted share. Sovereign funded the purchase of the notes with cash on hand and from dividends to the Company from Sovereign Bank. Additionally, approximately $50 million of 8% subordinated notes matured in the first quarter of 2003 and were repaid with cash on hand.

- 17 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

During the first quarter, Sovereign Bank issued $500 million of subordinated notes (the “subordinated notes”), at a discount, which have a coupon of 5.125%. These notes are due in March 2013 and are not subject to redemption prior to that date except in the case of the insolvency or liquidation of Sovereign Bank, and then only with prior regulatory approval. These notes qualify as Tier 2 regulatory capital for Sovereign Bank as of March 31, 2003. Under the current OTS rules, 5 years prior to maturity, 20% of the subordinated notes will no longer qualify as Tier 2 capital. In each successive year prior to maturity, an additional 20% of the subordinated notes will no longer qualify as Tier 2 capital.

(8) COMPREHENSIVE INCOME

The following table presents the components of comprehensive income, net of related tax, for the periods indicated:


		Three-Month Period
		Ended March 31,

		2003		2002

Net income		$	75,856	$	65,418
Change in accumulated losses on derivatives			4,714		13,731
Change in unrealized gains on investment securities available-for-sale			46,805		(18,432	)
Less reclassification adjustment:
	Investments available-for-sale		11,395		13,360

Comprehensive income		$	115,980	$	47,357

Accumulated other comprehensive income, net of related tax, consisted of net unrealized gains on securities of $192 million and net accumulated losses on derivatives of $124 million at March 31, 2003 and net unrealized gains on securities of $157 million and net accumulated losses on derivatives of $129 million at December 31, 2002.

(9) DERIVATIVES

Sovereign’s primary market risk is interest rate risk. Management uses derivative instruments to mitigate the impact of interest rate movements on the value of certain liabilities, assets and on probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environment.

Fair Value Hedges. Sovereign has entered into pay-variable receive-fixed interest rate swaps to hedge changes in fair values of certain brokered certificates of deposits and senior notes. Sovereign includes all components of each derivatives gain or loss in the assessment of hedge effectiveness. For the three-months ended March 31, 2003 and March 31, 2002, no hedge ineffectiveness was recognized in earnings associated with fair value hedges.

- 18 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

Cash Flow Hedges. Sovereign hedges exposures to changes in cash flows associated with forecasted interest payments on variable-rate liabilities, through the use of pay-fixed, receive variable interest rate swaps. Sovereign includes all components of each derivatives gain or loss in the assessment of hedge effectiveness. For the three months ended March 31, 2003 and 2002, no hedge ineffectiveness was recognized in earnings associated with cash flow hedges. No gains or losses deferred in accumulated other comprehensive income were reclassified into earnings during the three months ended March 31, 2003 or 2002 as a result of the discontinuance of cash flow hedges. As of March 31, 2003, Sovereign expects approximately $43 million of the deferred net after-tax loss on derivative instruments included in accumulated other comprehensive income to be reclassified to earnings during the next twelve months.

Other Derivative Activities. Sovereign’s derivative portfolio includes derivative instruments not designated in SFAS No. 133 hedge relationships. Those derivatives include mortgage banking interest rate lock commitments and forward sale commitments used for risk management purposes and derivatives executed with commercial banking customers, primarily interest rate swaps and foreign currency contracts.

Net gains generated from derivative instruments executed with customers are included as capital markets revenue on the income statement and totaled $2.5 million for the three-months ended March 31, 2003 compared with $2.2 million for the three-months ended March 31, 2002.

(10) MERGER RELATED AND RESTRUCTURING ITEMS

The status of restructuring activities is summarized as follows:


Reserve balance at December 31, 2002	$	13,483
Payments		(2,140	)
Changes in estimates		(2,785	)

Reserve balance at March 31, 2003	$	8,558

During the first quarter, we determined that certain reserves established in connection with the Main Street Bancorp acquisition were no longer required. Of the amount above, $2 million was applied against goodwill with the remaining balance recorded in other expense of the Consolidated Statement of Operations. The remaining reserve balance primarily relates to operating leases of closed branch and office consolidations incurred as part of the Main Street Bancorp acquisition.

(11) GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS

The estimated aggregate amortization expense related to core deposit intangibles for each of the five succeeding calendar years ending December 31 is:


	Calendar				Remaining
	Year		Recorded		Amount
Year	Amount		To Date		To Record

2003	$	73,835	$	19,095	$	54,740
2004		66,856		—		66,856
2005		57,945		—		57,945
2006		51,047		—		51,047
2007		44,104		—		44,104

- 19 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

(12) BUSINESS SEGMENT INFORMATION

The following tables present certain information regarding the Company’s segments:


For the three month period
ended March 31, 2003	Consumer Bank		Corporate Bank			Treasury and Other			Total

Net interest income	$	225,131	$	73,018		$	4,891		$	303,040
Provision for loan losses		10,692		22,066			10,599			43,357
Fees and other income (1)		68,621		21,744			12,694			103,059
General and administrative expenses		164,470		34,990			11,628			211,088
Depreciation/Amortization		14,814		480			23,622			38,916
Income (Loss) before income taxes		118,590		37,706			(51,230	)		105,066
Intersegment revenues (expense) (2)		116,640		(62,613	)		(54,027	)		—
Total Average Assets	$	13,903,172	$	10,877,217		$	15,691,773		$	40,472,162


For the three month period
ended March 31, 2002	Consumer Bank		Corporate Bank			Treasury and Other			Total

Net interest income (expense)	$	216,010	$	58,124		$	(2,205	)	$	271,929
Provision for loan losses		11,581		24,284			8,635			44,500
Fees and other income (1)		59,120		14,839			13,011			86,970
General and administrative expenses		156,146		30,708			7,185			194,039
Depreciation/Amortization		10,406		184			22,666			33,256
Income (Loss) before income taxes	$	107,403	$	17,971		$	(36,111	)	$	89,263
Intersegment revenues (expense) (2)		119,492		(75,530	)		(43,962	)		—
Total Average Assets	$	12,590,496	$	9,140,238		$	13,519,803		$	35,250,357

(1)		Corporate Banking fees in the accompanying Statements of Operations include fees on commercial deposits. For management reporting purposes, these fees are included in the Consumer Bank results above.

(2)		Intersegment revenues represent charges or credits for funds used or provided by each of the segments and are included in net interest income.

(13) RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” This interpretation provides guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds a variable interest in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. The new accounting provisions of this interpretation became effective upon issuance for all new VIE’s created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The Company has not entered into any new transactions involving VIE’s on or after February 1, 2003. This pronouncement also must be applied effective July 1, 2003, to existing VIE’s acquired by Sovereign prior to February 1, 2003. Based on current guidance, the only potential variable interest entities with which the Company is associated with are: (1) lessee of certain properties pursuant to a structured real estate transaction (see Note 21 and Note 24 included in the December 31, 2002 Form 10-K) and (2) limited partnership interests in certain investments. Management

- 20 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

is evaluating whether these entities are variable interest entities and whether the Company is the primary beneficiary, which would require the VIE’s to be consolidated in Sovereign’s financial statements. However, the impact of application of this pronouncement to existing VIE’s on July 1, 2003 is not expected to have a material effect on the Company’s financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of this interpretation, including, among others, guarantees related to commercial letters of credit, loan commitments, and subordinated interests in an SPE. Other guarantees are subject to the disclosure requirements of FIN 45 but not to the financial statement recognition provisions and include, among others, a guarantee accounted for as a derivative instrument under SFAS 133, a parent’s guarantee of debt owed to a third party by its subsidiary or vice versa, and a guarantee which is based on performance not price. The disclosure requirements of FIN 45 were effective for Sovereign as of December 31, 2002, and required disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The financial statement recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Significant guarantees that have been entered into by the Company are disclosed in the management’s discussion and analysis section of this document. The adoption of FIN 45 did not have a material impact on our results of operations or financial position.

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, No. 44 and No. 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” and SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” The statement generally requires gains and losses from debt extinguishments to be classified as income from operations rather than as extraordinary items. The Company adopted this statement on January 1, 2003 and recorded the pre-tax cost of the debt extinguishment charges incurred in the first quarter of 2003 in other expenses.

- 21 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)

(14) ADOPTION OF SFAS NO. 123 IN 2002

Sovereign adopted the expense recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation”, for stock based employee compensation awards during the third quarter of 2002. Sovereign continues to account for all options granted prior to January 1, 2002 in accordance with the intrinsic value model of APB Opinion No. 25, “Accounting for Stock Issued to Employees.”

The recognition transition provisions of SFAS No. 123 provides that it be applied to all awards granted at the beginning of the fiscal year in which the statement is first applied. Previously reported results for the quarter ended March 31, 2002 have been adjusted in accordance with the existing transition provisions of SFAS No. 123. As a result, Sovereign recorded additional compensation expense of $2.1 million ($1.5 million after-tax) for the three-month period ended March 31, 2002. The following table reflects the impact resulting from the adoption of SFAS No. 123 on our financial results for the first quarter of 2002.


	March 31, 2002		March 31, 2002
(dollars in millions, except per share amounts)	As Reported		As Adjusted

Other assets	$	1,376.8	$	1,377.4
Total assets		36,833.4		36,834.0
Retained earnings		826.3		824.8
Stockholders’ equity		2,402.9		2,403.4
Compensation and benefits		83.9		86.0
Net income		66.9		65.4
Diluted EPS		0.25		0.24
Weighted average diluted shares (in millions)		269.9		269.0

- 22 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

General

Net income, including special charges discussed below, was $75.9 million, or $.27 per share, for the three-month period ended March 31, 2003, as compared to $65.4 million, or $.24 per share, for the same period in 2002. During the first quarter, Sovereign completed a tender offer for the 8.625% notes due March 2004 and the 10.25% notes due May 2004. In connection with the tender, Sovereign repurchased $139.2 million of the 8.625% notes and $162.4 million of the 10.25% notes incurring a loss on this debt extinguishment of $29 million, ($18.8 million net of tax or $0.07 per diluted share).

In the first quarter of 2002, Sovereign closed the acquisition of Main Street Bancorp (“Main Street”). In connection with this acquisition, Sovereign recorded charges against its earnings for the three-month period ended March 31, 2002 for an additional loan loss provision of $6 million pretax ($3.9 million net of tax) to conform Main Street’s allowance for loan losses to Sovereign’s reserve policies and merger related expenses of $15.9 million pretax ($10.3 million net of tax). The impact of these two charges reduced earnings per share by $0.05.

- 23 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT NET INTEREST MARGIN ANALYSIS
THREE-MONTH PERIOD ENDED MARCH 31, 2003 AND 2002

(in thousands)


				2003								2002

							Tax Equivalent		Yield/						Tax Equivalent		Yield/
				Average Balance			Interest		Rate			Average Balance			Interest		Rate

EARNING ASSETS INVESTMENTS				$	12,294,287		$	171,299		5.57	%	$	10,088,524		$	159,700		6.34	%
LOANS:
		Commercial loans			10,290,307			136,532		5.31	%		8,772,839			133,763		6.14	%
		Consumer loans			8,611,316			130,028		6.12	%		6,988,497			120,084		6.97	%
		Residential loans			4,374,139			68,275		6.24	%		4,978,654			86,050		6.91	%

		Total loans			23,275,762			334,835		5.79	%		20,739,990			339,897		6.60	%
		Allowance for loan losses			(300,141	)		—		—			(278,598	)		—		—

			NET LOANS		22,975,621			334,835		5.86	%		20,461,392			339,897		6.69	%

			TOTAL EARNING ASSETS		35,269,908			506,134		5.76	%		30,549,916			499,597		6.58	%
		Other assets			5,202,254			—		—			4,700,621			—		—

			TOTAL ASSETS	$	40,472,162		$	506,134		5.02	%	$	35,250,537		$	499,597		5.70	%

FUNDING LIABILITIES
Deposits and other customer related accounts:
		Core deposits and other customer related accounts		$	19,404,801		$	44,737		.93	%	$	16,263,149		$	42,405		1.06	%
		Time deposits			6,888,521			48,914		2.88	%		7,304,783			68,605		3.81	%

			TOTAL		26,293,322			93,651		1.44	%		23,567,932			111,010		1.91	%

BORROWED FUNDS:
		FHLB advances			5,626,752			75,403		5.38	%		5,939,169			76,007		5.13	%
		Fed funds and repurchase agreements			2,325,965			2,760		.47	%		341,002			2,654		3.11	%
		Other borrowings			1,986,990			26,110		5.26	%		1,990,840			33,227		6.69	%

			TOTAL BORROWED FUNDS		9,939,707			104,273		4.21	%		8,271,011			111,888		5.42	%

	TOTAL FUNDING LIABILITIES				36,233,029			197,924		2.20	%		31,838,943			222,898		2.82	%
		Other liabilities			1,423,647			—		—			1,134,377			—		—

			TOTAL LIABILITIES		37,656,676			197,924		2.12	%		32,973,320			222,898		2.73	%
STOCKHOLDERS’ EQUITY					2,815,486			—		—			2,277,217			—		—

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY				$	40,472,162		$	197,924		1.97	%	$	35,250,537		$	222,898		2.55	%

NET INTEREST INCOME							$	308,210							$	276,699

NET INTEREST SPREAD (1)										3.05	%							3.15	%

NET INTEREST MARGIN (2)										3.50	%							3.64	%

(1)		Represents the difference between the yield on total assets and the cost of total liabilities and stockholders’ equity.

(2)		Represents taxable equivalent net interest income divided by average interest-earning assets

- 24 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Net Interest Income

Net interest income for the three-month period ended March 31, 2003 was $303.0 million compared to $271.9 million for the same period in 2002. This increase was attributable to an increase in the average balance of earning assets, principally loans and investments. Net interest margin was 3.50% for the three-month period ended March 31, 2003 compared to 3.64% for the same period in 2002. Net interest margin has contracted from March 31, 2002 due to the flattening of the yield curve and the continued repricing of short duration consumer and commercial loans. Partially offsetting this decline was downward repricing of deposits, favorable funding costs on short-term repurchase agreements and a partial quarter benefit from the redemption of high coupon senior notes.

Interest on investment securities and interest earning deposits was $167.3 million for the three-month period ended March 31, 2003 compared to $156.2 million for the same period in 2002. The average balance of investment securities was $12.3 billion with an average tax equivalent yield of 5.57% for the three-month period ended March 31, 2003 compared to an average balance of $10.1 billion with an average yield of 6.34% for the same period in 2002.

Interest on loans was $333.6 million for the three-month period ended March 31, 2003 compared to $338.7 million for the same period in 2002. The average balance of loans was $23.3 billion with an average yield of 5.79% for the three-month period ended March 31, 2003 compared to an average balance of $20.7 billion with an average yield of 6.60% for the same period in 2002. Average balances of commercial and consumer loans in 2003 increased $1.5 billion and $1.6 billion, respectively, as compared to 2002 primarily due to loan originations, loan purchases and the full quarter effect of the Main Street acquisition. Average residential loans declined $604.5 million primarily due to scheduled payments and prepayments. These changes in loan balances are consistent with Sovereign’s strategy to emphasize commercial and consumer lending. The decrease in loan rates is due to declining market interest rates and the aforementioned shift in the components of the loan portfolio, which now includes more variable rate and shorter maturity assets.

Interest on deposits was $93.7 million for the three-month period ended March 31, 2003 compared to $111.0 million for the same period in 2002. The average balance of deposits was $26.3 billion with an average cost of 1.44% for the three month period ended March 31, 2003 compared to an average balance of $23.6 billion with an average cost of 1.91% for the same period in 2002. The increase in the balance of deposits is due to the success of product initiatives to grow core deposits and the full quarter effect of the Main Street acquisition. The decrease in average cost year to year is due primarily to declining market interest rates.

- 25 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Interest on borrowed funds was $104.3 million for the three-month period ended March 31, 2003 compared to $111.9 million for the same period in 2002. The average balance of borrowings was $9.9 billion with an average cost of 4.21% for the three month period ended March 31, 2003 compared to an average balance of $8.3 billion with an average cost of 5.42% for the same period in 2002. The decline in the yield is due to the previously mentioned tender offer which paid off higher cost debt, the decline in market interest rates, as well as favorable short-term funding alternatives that Sovereign has recently experienced.

Provision for Loan Losses

The provision for loan losses is based upon credit loss experience and on the estimation of losses inherent in the current loan portfolio. The provision for loan losses for the three-month period ended March 31, 2003 was $43.4 million compared to $44.5 million for the same period in 2002.

The provision for the first quarter of 2002 included a special charge of $6 million to conform the acquired Main Street Bancorp loan portfolio to Sovereign’s reserve policy. The first quarter of 2002 also included a provision and concurrent charge-off of approximately $14 million related to one large commercial loan. The provision for loan losses in the first quarter of 2003 includes a higher level of provision due to loan growth. In addition, the Company increased certain percentages used as class reserves based on recent loss experience.

Over the last few years, through several strategic acquisitions and internal restructuring initiatives, Sovereign has diversified its lending efforts and increased its emphasis on providing its customers with small business loans and an expanded line of commercial and consumer products, such as middle market asset-based lending and automobile loans. As a result of the increased risk inherent in these loan products and as Sovereign continues to place emphasis on commercial business and consumer lending in future periods, management will regularly evaluate Sovereign’s loan portfolios, and its allowance for loan losses, and will adjust the loan loss allowance and related class reserves as is necessary.

Sovereign’s net charge-offs for the three-month period ended March 31, 2003 were $32.7 million and consisted of charge-offs of $40.8 million and recoveries of $8.1 million. This compared to net charge-offs of $37.0 million consisting of charge-offs of $45.2 million and recoveries of $8.1 million for the three-month period ended March 31, 2002. The decreased level of charge-offs was driven by the events discussed above. Additionally, a $2.3 million charge-off was recorded in the first quarter of 2002 related to the accelerated disposition of a $20.5 million portfolio of non-performing residential mortgages.

- 26 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

The following table presents the activity in the allowance for possible loan losses for the periods indicated:


		Three-month Period Ended March 31,

		2003		2002

Allowance, beginning of period		$	298,750	$	264,667
Charge-offs:
	Residential		888		3,784
	Commercial		24,137		24,876
	Consumer		15,790		16,499

	Total Charge-offs		40,815		45,159

Recoveries:
	Residential		95		131
	Commercial		2,109		1,307
	Consumer		5,902		6,692

	Total Recoveries		8,106		8,130

Charge-offs, net of recoveries			32,709		37,029
Provision for possible loan losses			43,357		44,500
Main Street Bancorp allowance for loan losses			—		14,877

Allowance, end of period		$	309,398	$	287,015

Non-Interest Income

Total non-interest income was $120.6 million for the three-month period ended March 31, 2003 compared to $107.5 million for the same period in 2002. Excluding securities and related derivatives transactions, total fees and other income for the three-month period ended March 31, 2003 were $103.1 million as compared to $87.0 million for the same period in 2002.

Consumer banking fees were $48.2 million for the three-month period ended March 31, 2003 as compared to $38.6 million for the same period in 2002. Average core deposit balances have grown 19% since March 31, 2002 due primarily to the success of product initiatives. The increases in consumer banking fees of $9.7 million for the three-month period ended March 31, 2003 are attributed to the increase in the number of core deposit accounts and balances, as well as new fee products.

Commercial banking fees were $25.2 million for the three-month period ended March 31, 2003 as compared to $22.8 million for the same period in 2002. This increase of $2.4 million was primarily due to higher loan volumes, increased market share and increased cash management fee income.

Mortgage banking revenue was $8.0 million for the three-month period ended March 31, 2003, as compared to $9.5 million for the same period in 2002. Mortgage servicing revenues, net of amortization and provisions from impairment of mortgage servicing assets was a loss of $10.2 million for the period ended March 31, 2003, compared to a gain of $0.8 million for the same period last year. The reason for the decline in mortgage servicing revenues was due to the increased prepayment speeds experienced in our mortgage servicing portfolio with the continued low mortgage rates which contributed to a first quarter impairment charge of $7.4 million. The first quarter of 2002 did not include an impairment charge. At March 31, 2003, Sovereign serviced approximately $6.2 billion of mortgage loans for others and our net mortgage servicing asset was $52 million compared to $4.7 billion of loans serviced for others and a net mortgage servicing asset of $55.4 million at March 31, 2002.

- 27 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Mortgage production revenues were $18.3 million for the period ended March 31, 2003, compared with $8.7 million for the same period in the prior year. Mortgage production revenues is primarily composed of sales of mortgage loans, sale of mortgage backed investment securities that were related to originated or purchased mortgage loan product and gains or losses from derivative instruments. The overall increase in mortgage production revenues was due to higher origination levels and refinancing activity. Included in mortgage production revenues in the first quarter of 2003 were gains of $3.7 million from the sale of mortgage-backed securities that were securitized in the fourth quarter of 2002. No gains were recorded in the prior period related to sales of mortgage backed investment securities. Additionally, the 2003 quarter included gains related to derivatives of $1.3 million compared with a loss of $1.2 million in the prior year period.

Capital markets revenues totaled $7.7 million for the three-month period ended March 31, 2003 compared with $3.3 million for the same period in 2002. The increase from the prior year is due to an expanded customer base and increased service and product offerings, principally fixed income distribution capabilities.

Gain on investment securities and related derivatives transactions were $17.5 million for the three-month period ended March 31, 2003 compared to $20.6 million for the same period in 2002. Included in this line item in the first quarter of 2003 was a $1.1 million other than temporary impairment charge related to one of our investment securities.

General and Administrative Expenses

General and administrative expenses for the three-month period ended March 31, 2003 were $211.1 million, compared to $194.0 million for the same period in 2002, representing an increase of $17.1 million. General and administrative expenses increased due to certain increased technology costs, higher headcount, and the full quarter effect of the Main Street acquisition. The Company expects to experience higher costs associated with converting its item processing, ATM and data processing platforms principally in 2003 and 2004, with the majority of the related benefits occurring in the years following conversion. The expected range of costs for these projects in 2003 and 2004 are not expected to be material to the Company’s financial position.

Other Expenses

Other expenses were $64.1 million for the three-month period ended March 31, 2003 compared to $51.7 million for the same period in 2002. The three-month period ended March 31, 2003, includes a loss of $29 million ($18.8 million or $.07 per share, net of tax) on the extinguishment of debt. Merger-related and integration charges of $15.9 million ($10.3 million or $0.04 per share, net of tax) related to the Main Street acquisition were recorded in the three-month period ended March 31, 2002.

Income Tax Provision

The income tax provision was $29.2 million for the three-month period ended March 31, 2003 compared to $23.8 million for the same period in 2002. The effective tax rate for the three-month period ended March 31, 2003 was 27.8%, compared to 26.7% for the same period in 2002. The current year tax rate differs from the statutory rate of 35% due to income from tax-exempt investments and income related to bank-owned life insurance. The effective tax rate for the first quarter of 2003 is higher than the prior year rate due to a reduction in the proportion of permanent favorable tax differences to pre-tax book income in 2003 compared to 2002.

- 28 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Line of Business Results. The Company’s reportable segments include the Consumer Bank, the Corporate Bank and Treasury & Other. For additional discussion of these business lines, see Note 12 of the accompanying Notes to the Consolidated Financial Statements. The Company’s business lines are focused principally around the customers Sovereign serves. The Consumer Bank provides a wide range of products and services to consumers including mortgage, automobile and other consumer loans and lines of credits. The Consumer Bank also attracts deposits within its primary market area by offering a variety of deposit instruments including demand and NOW accounts, money market and savings accounts, certificates of deposit and retirement savings plans. The Corporate Bank originates small business and middle market commercial and asset-based loans and provides cash management and capital markets services to customers in Sovereign’s market area. Treasury & Other includes earnings from the investment portfolio, interest expense on Sovereign’s borrowings and debt, expense on Sovereign’s trust preferred securities and other minority interest expense, amortization of intangible assets, merger-related and restructuring charges and certain unallocated corporate income and expenses.

Segment results are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The provision for credit losses recorded by each segment is primarily based on the net charge-offs of each line of business. The difference between the provision for credit losses recognized by the Company on a consolidated basis and the provision recorded by the business lines at the time of charge-off is included in Treasury & Other. Other income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct expenses as well as certain allocated corporate expenses are accounted for within each segment’s financial results. Designations, assignments and allocations may change from time to time as management accounting and business unit profitability reporting systems are enhanced or product lines change. During 2002, certain organization and allocation methodology changes were made which enhanced the Company’s management reporting systems and the information provided to the chief executive officer. In addition, designations, assignments and allocations may continue to change from time to time. Where practical, the results are adjusted to present consistent methodologies for the segments. Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business.

Consumer Bank net interest income increased $9.1 million to $225.1 million in the first quarter of 2003 compared to the corresponding period in the preceding year. The increase in net interest income was principally due to loan growth, as well as an increase in low-cost deposits. The average balance of Consumer Bank loans was $13.0 billion with a yield of 6.16% versus $12.0 billion at a yield of 6.94% during the first quarter of 2002. The average balance of deposits was $26.3 billion at a cost of 1.44% in the first quarter of 2003 compared to $23.6 billion at an average cost of 1.91% in the same quarter a year ago. The increase in non-interest income of $9.5 million to $68.6 million was generated by deposit fees, which grew in tandem with the level of deposits. The provision for loan losses declined modestly in 2003 compared to the same period a year ago to $10.7 million. General and administrative expenses (including allocated corporate and direct support costs) increased from $156.1 million to $164.5 million. The increase in general and administrative expenses is due principally to Sovereign’s continued investment in people and processes to support its expanding franchise.

- 29 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Corporate Bank net interest income increased $14.9 million to $73.0 million in the first quarter of 2003 compared to the corresponding period in the preceding year. The increase in net interest income was principally due to loan growth. The average balance of Corporate Bank loans was $10.3 billion with a yield of 5.31% in the first quarter of 2003 versus $8.8 billion at a yield of 6.14% during the first quarter of 2002. Non-interest income has increased by $6.9 million to $21.7 million related to an increase in loan fees and capital markets revenues. The provision for loan losses decreased by $2.2 million to $22.1 in 2003 compared to the corresponding period in the preceding year. The decline was due, in part, to a large charge-off of a commercial loan of $14 million in the first quarter of 2002.

The effect of this charge-off was offset by an increase in the provision required as a result of loan growth and the current economic environment. General and administrative expenses (including allocated corporate and direct support costs) increased from $30.7 million in the first quarter of 2002 to $35.0 million in the first quarter of 2003. The increase was due in part to increased costs to support the Corporate Bank’s loan growth, as well as growth of the cash management and capital markets businesses.

The net loss before income taxes for Treasury & Other increased from $36.1 million in the first quarter of 2002 to $51.2 million in the first quarter of 2003. Net interest income increased from net expense of $2.2 million to net income of $4.9 million. The Treasury & Other segment includes net gains on security and derivative transactions of $17.5 million in the first quarter of 2003, as compared to $20.6 million recorded in 2002. The 2003 results also include a pre-tax loss of $29 million on the extinguishment of debt while the 2002 results include special charges of $15.9 million for merger and integration charges associated with the Main Street acquisition.

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the December 31, 2002 consolidated financial statements filed on Form 10-K. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. We have identified accounting for the allowance for credit losses, securitizations, and goodwill as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis and the December 31, 2002 Management’s Discussion and Analysis filed on Form 10-K.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FINANCIAL CONDITION

Loan Portfolio

At March 31, 2003, commercial loans totaled $10.4 billion representing 44% of Sovereign’s loan portfolio, compared to $10.3 billion or 44% of the loan portfolio at December 31, 2002 and $9.4 billion or 43% of the loan portfolio at March 31, 2002. The consumer loan portfolio (including home equity loans and lines of credit, automobile loans, and other consumer loans) totaled $8.8 billion at March 31, 2003, representing 37% of Sovereign’s loan portfolio, compared to $8.5 billion or 37% of the loan portfolio at December 31, 2002 and $7.6 billion or 35% of the loan portfolio at March 31, 2002. The increase in the commercial and consumer portfolios is due to our increased emphasis on these loan types.

Residential mortgage loans increased $368.8 million to $4.7 billion at March 31, 2003 and represent 19% of Sovereign’s loan portfolio as compared to $4.3 billion and 19% at December 31, 2002 and $4.8 billion or 22% of the loan portfolio at March 31, 2002. The increase is due principally to bulk loan purchases in the last three quarters of 2002 and the first quarter of 2003 and was offset in part by increased prepayment levels due to declining mortgage interest rates. This is consistent with the Company’s strategy to manage the size of this portfolio relative to the consumer and commercial portfolios.

Non-Performing Assets

At March 31, 2003 Sovereign’s non-performing assets decreased by $7.1 million to $249.9 million compared to $257.1 million at December 31, 2002. This decrease is due to decreases in non-performing commercial loans, offset by a slight increase in residential non-performing loans during the period. Non-performing assets as a percentage of total assets was .61% at March 31, 2003 and .65% at December 31, 2002. Sovereign generally places all commercial loans and residential loans with loan to values greater than 50% on non-performing status at 90 days or sooner, if management believes the loan has become impaired (unless return to current status is expected imminently). All other loans continue to accrue until they are 120 days delinquent, at which point they are either charged-off or placed on non-accrual status and anticipated losses are fully reserved, unless they are residential real estate loans evaluated to be well secured based on appraisals and are in the process of collection. At 180 days delinquent, anticipated losses on residential real estate loans are fully reserved or charged off.

- 31 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

The following table presents the composition of non-performing assets at the dates indicated:


		March 31,			December 31,
		2003				2002

Non-accrual loans:
	Commercial	$	111,593			$	122,504
	Commercial real estate		36,419				38,302
	Consumer		30,524				32,844
	Residential		41,465				36,849

Total non-accrual loans			220,001				230,499
Restructured loans			1,557				893

Total non-performing loans			221,558				231,392
Other real estate owned			23,668				19,007
Other repossessed assets			4,709				6,663

Total non-performing assets		$	249,935			$	257,062

Past due 90 days or more as to interest or principal and accruing interest		$	34,457			$	40,500
Non-performing assets as a percentage
of total assets			.61	%			.65	%
Non-performing loans as a percentage of total loans			.92	%			1.00	%
Non-performing assets as a percentage of total loans and real estate owned			1.04	%			1.11	%
Allowance for loan losses as a percentage of total non-performing assets			123.8	%			116.2	%
Allowance for loan losses as a percentage of total non-performing loans			139.6	%			129.1	%

Loans ninety (90) days or more past due and still accruing interest fell by $6 million from December 31, 2002 to March 31, 2003. All of this decline was contained within the residential loan portfolio.

Potential problem loans (loans for which management has doubts as to the borrowers ability to comply with present repayment terms, principally commercial loans delinquent more than 30 days but less than 90 days, although not currently classified as non-performing loans) amounted to approximately $71.2 million and $70.3 million at March 31, 2003 and December 31, 2002, respectively.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Allowance for Loan Losses

The following table presents the allocation of the allowance for loan losses and the percentage of each loan type to total loans at the dates indicated:


	March 31, 2003					December 31, 2002

			% of Loans					% of Loans
			to					to
	Amount		Total Loans			Amount		Total Loans

Allocated allowance:
Commercial loans	$	191,930		44	%	$	193,528		44	%
Consumer loans		82,407		37			72,366		37
Residential real estate mortgage loans		15,787		19			16,539		19
Unallocated allowance		19,274		n/a			16,317		n/a

Total allowance for loan losses	$	309,398		100	%	$	298,750		100	%

The adequacy of Sovereign’s allowance for loan losses is regularly evaluated. Management’s evaluation of the adequacy of the allowance to absorb loan losses takes into consideration the risks inherent in the loan portfolio, past loan loss experience, specific loans which have loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originations and other relevant factors. Management also considers loan quality, changes in the size and character of the loan portfolio, amount of non-performing loans, and industry trends.

Sovereign maintains an allowance for loan losses that management believes is sufficient to absorb inherent losses in the loan portfolio. Because historical losses are not necessarily indicative of future charge-off levels, Sovereign gives consideration to other risk indicators when determining the appropriate allowance level.

The allowance for loan losses consists of two elements: (i) an allocated allowance, which for non-homogeneous loans is comprised of allowances established on specific classified loans, and class allowances for both homogeneous and non-homogeneous loans based on risk ratings, historical loan loss experience and current trends, and (ii) unallocated allowances based on both general economic conditions and other risk factors in Sovereign’s individual markets and portfolios, and to account for a level of imprecision in management’s estimation process.

The specific allowance element of the allocated allowance is based on a regular analysis of criticized loans where internal credit ratings are below a predetermined classification. This analysis is performed at the relationship manager level, and periodically reviewed by the loan workout department. The specific allowance established for these criticized loans is based on a careful

- 33 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity.

The class allowance element of the commercial loan allowance is determined by an internal loan grading process in conjunction with associated allowance factors. These class allowance factors are updated as required and are based primarily on actual historical loss experience, consultation with regulatory authorities, and peer group loss experience. The Company has the ability to revise the class allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan pool classification.

Regardless of the extent of the Company analysis of customer performance, portfolio evaluations, trends or risk management processes established, certain inherent, but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions; customer fraud, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends; volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits; and the sensitivity of assumptions utilized to establish allocated allowances for homogeneous groups of loans among other factors. The Company maintains an unallocated allowance to recognize the existence of these exposures. These other risk factors and any related estimates are continuously reviewed and revised by management where conditions indicate that the estimates initially applied are different from actual results.

A comprehensive analysis of the allowance for loan losses is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted on an annual basis. The Company has an Asset Review Committee, which has the responsibility of affirming allowance methodology and assessing the general and specific allowance factors in relation to estimated and actual net charge-off trends. This Committee is also responsible for assessing the appropriateness of the allowance for loan losses for each loan pool classification at Sovereign.

Commercial Portfolio. The portion of the allowance for loan losses related to the commercial portfolio has decreased from $193.5 million at December 31, 2002 to $191.9 million at March 31, 2003. This decrease is warranted by the decrease in non-performing and adversely classified loans in this sector.

Consumer Portfolio. The allowance for the consumer loan portfolio increased from $72.4 million at December 31, 2002, to $82.4 million at March 31, 2002 due to increases in loan balances and revised class allowance reserve ratios discussed earlier.

Residential Portfolio. The allowance for the residential mortgage portfolio decreased from $16.5 million at December 31, 2002 to $15.8 million at March 31, 2003.

- 34 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Unallocated Allowance. The unallocated allowance for loan losses increased to $19.3 million at March 31, 2003 from $16.3 million at December 31, 2002. Management continuously evaluates current economic conditions and loan portfolio trends. However, this balance is subject to significant changes each reporting period due to certain inherent but undetected losses which are probable of being realized within the loan portfolio.

Investment Securities

Investment securities consist primarily of mortgage-backed securities, U.S. Treasury and government agency securities, corporate debt securities and stock in the Federal Home Loan Bank of Pittsburgh (“FHLB”), Freddie Mac and Fannie Mae. Mortgage-backed securities consist of pass-throughs and collateralized mortgage obligations issued by federal agencies or private label issuers. Sovereign’s mortgage-backed securities are generally either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by Standard and Poor’s and Moody’s at the date of issuance. Sovereign purchases classes which are senior positions backed by subordinate classes. The subordinate classes absorb the losses and must be completely eliminated before any losses flow through the senior positions. The effective duration of the total investment portfolio at March 31, 2003 was 2.3 years.

Total investment securities available-for-sale were $11.2 billion at March 31, 2003 and $10.7 billion at December 31, 2002. Investment securities held-to-maturity were $569.3 million at March 31, 2003 compared to $632.5 million at December 31, 2002. For additional information with respect to Sovereign’s investment securities, see Notes 3 and 4 in the Notes to Consolidated Financial Statements.

Deposits

Sovereign attracts deposits within its primary market area with an offering of deposit instruments including demand accounts, NOW accounts, money market accounts, savings accounts, customer repurchase agreements, certificates of deposit and retirement savings plans. Total deposits at March 31, 2003 were $26.7 billion compared to $26.8 billion at December 31, 2002. Sovereign continues to emphasize strategies to grow core deposits and limit higher priced time deposits.

Borrowings and Other Related Debt Obligations

Sovereign utilizes borrowings and other debt obligations as a source of funds for its asset growth and its asset/liability management. Collateralized advances are available from the FHLB provided certain standards related to creditworthiness have been met. Sovereign also utilizes reverse repurchase agreements, which are short-term obligations collateralized by securities fully guaranteed as to principal and interest by the U.S. Government or an agency thereof, and federal funds lines with other financial institutions. Total borrowings at March 31, 2003 and December 31, 2002 were $10.1 billion and $8.8 billion, respectively. See Note 7 in the Notes to Consolidated Financial Statements for additional information.

As discussed earlier, Sovereign completed a tender offer for its 8.265% notes and its 10.25% notes during March 2003. Additionally, in March 2003, Sovereign Bank completed the issuance of $500 million of subordinated notes with a coupon of 5.125% which are due in March 2013.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Securitization Transactions

Securitization transactions contribute to Sovereign’s overall funding and regulatory capital management. These transactions involve periodic transfers of loans or other financial assets to special purpose entities (“SPEs”). The SPEs are either consolidated in or excluded from Sovereign’s consolidated financial statements depending on whether the transactions qualify as a sale of assets in accordance with SFAS No. 140, “Transfers of Financial Assets and Liabilities” (“SFAS No. 140”).

In certain transactions, Sovereign has transferred assets to SPEs qualifying for non-consolidation (“QSPE”) and has accounted for the transaction as a sale in accordance with SFAS No. 140. Sovereign also has retained interests in the QSPEs. Off-balance sheet QSPEs had $1.5 billion of debt related to assets that Sovereign sold to the QSPEs which is not included in Sovereign’s consolidated Balance Sheet at March 31, 2003. Sovereign’s retained interests and servicing assets in such QSPEs were $124 million at March 31, 2003 and this amount represents our maximum exposure to credit losses related to these unconsolidated securitizations. Sovereign does not provide contractual legal recourse to third party investors that purchase debt or equity securities issued by the QSPEs beyond the credit enhancement inherent in Sovereign’s subordinated interests in the QSPEs.

Sovereign will periodically sell qualifying mortgage loans to FHLMC, GNMA, and FNMA in return for mortgage-backed securities issued by those agencies. Sovereign reclassifies the net book balance of the loans sold to such agencies from loans to investment securities held to maturity and available for sale. For those loans sold to the agencies in which Sovereign retains servicing rights, Sovereign allocates the net book balance transferred between servicing rights and investment securities based on their relative fair values. If Sovereign sells the mortgage-backed securities which relate to underlying loans previously held by the Company, the gain or loss on the sale is recorded in mortgage banking revenues in the accompanying consolidated statement of operations. The gain or loss on the sale of all other mortgage backed securities is recorded in gains on investment securities and related derivative transactions on the consolidated statement of operations.

Bank Regulatory Capital

The Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) requires institutions regulated by the Office of Thrift Supervision (OTS) to have a minimum leverage capital ratio equal to 3% of tangible assets and 4% of risk-adjusted assets, and a risk-based capital ratio equal to 8% as defined. The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires OTS regulated institutions to have a minimum tangible capital equal to 2% of total tangible assets.

FDICIA established five capital tiers: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution’s capital tier depends upon its capital levels in relation to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized or adequately-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.

- 36 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

The OTS Order, as amended, previously applicable to the approval of the New England Acquisition (the “OTS Order”) required Sovereign Bank to be “Well Capitalized” and also to meet certain additional capital ratio requirements above the regulatory minimums, and other conditions. Various agreements with Sovereign’s lenders also require Sovereign Bank to be “Well Capitalized” at all times and in compliance with all regulatory requirements. To be “Well Capitalized,” a thrift institution must maintain a Tier 1 Leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of 6% and total risk-based capital of 10%. Although OTS capital regulations do not apply to savings and loan holding companies, the OTS Order required Sovereign to maintain certain Tier 1 capital levels. The OTS order expired on January 1, 2003.

At March 31, 2003 and December 31, 2002, Sovereign and Sovereign Bank had met all quantitative thresholds necessary to be classified as well-capitalized under existing regulatory guidelines and the OTS Order in effect on these dates.

Federal banking laws, regulations and policies also limit Sovereign Bank’s ability to pay dividends and make other distributions to Sovereign Bancorp. Sovereign Bank is required to give prior notice to the OTS before paying any dividend. In addition Sovereign Bank must obtain prior OTS approval to declare a dividend or make any other capital distribution if, after such dividend or distribution, Sovereign Bank’s total distributions to Sovereign within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years, Sovereign Bank would not meet capital levels imposed by the OTS in connection with any order, or if Sovereign Bank is not adequately capitalized at the time. In addition, OTS prior approval would be required if Sovereign Bank’s examination or CRA ratings fall below certain levels or Sovereign Bank is notified by the OTS that it is a problem association or an association in troubled condition. The following schedule summarizes the actual capital balances of Sovereign Bank at March 31, 2003 and December 31, 2002 (in thousands):


					TIER 1			TIER 1			TOTAL
REGULATORY CAPITAL		TANGIBLE			LEVERAGE			RISK-BASED			RISK-BASED
		CAPITAL TO			CAPITAL TO			CAPITAL TO			CAPITAL TO
		TANGIBLE			TANGIBLE			RISK ADJUSTED			RISK ADJUSTED
		ASSETS			ASSETS			ASSETS			ASSETS

Sovereign Bank at March 31, 2003:
Regulatory capital		$	2,597,729		$	2,597,814		$	2,516,386		$	3,318,448
Minimum capital requirement (1)			787,849			1,575,700			1,183,644			2,367,288

	Excess	$	1,809,880		$	1,022,114		$	1,332,742		$	951,160

Capital ratio			6.59	%		6.59	%		8.50	%		11.21	%
Sovereign Bank at December 31, 2002:
Regulatory capital		$	2,880,088		$	2,880,290		$	2,799,425		$	3,084,999
Minimum capital requirement (1)			763,068			2,670,750			1,154,431			3,030,382

	Excess	$	2,117,020		$	209,540		$	1,644,994		$	54,617

Capital ratio			7.55	%		7.55	%		9.70	%		10.69	%

(1)

Minimum capital requirement as defined by OTS Regulations, or the OTS Order, whichever is higher. The OTS Order expired on January 1, 2003.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

The proceeds from the subordinated debt issuance by Sovereign Bank provided additional dividend capacity by the Bank to Sovereign Bancorp, Inc. Sovereign Bank paid dividends of $420 million to Sovereign Bancorp in the first quarter of 2003. These dividends had the effect of reducing the tangible capital to tangible assets, Tier 1 leverage capital to tangible assets and Tier 1 risk-based capital ratios. However, as a result of the subordinated debt issuance which qualifies as Tier 2 capital and the net income of Sovereign Bank, total risk-based capital increased during the first quarter of 2002.

Liquidity and Capital Resources

Liquidity represents the ability of Sovereign to obtain cost effective funding to meet the needs of customers, as well as Sovereign’s financial obligations. Sovereign’s primary sources of liquidity include retail deposit gathering, Federal Home Loan Bank (FHLB) borrowings, federal funds purchases, reverse repurchase agreements and wholesale deposit purchases. Other sources of liquidity include asset securitizations, liquid investment portfolio securities and debt and equity issuances.

Factors which impact the liquidity position of Sovereign Bank include loan origination volumes, loan prepayment rates, maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, Sovereign’s credit ratings, general market conditions, investment portfolio cash flows and maturity structure of wholesale funding, etc. These risks are monitored and centrally managed. This process includes reviewing all available wholesale liquidity sources. As of March 31, 2003, Sovereign had $4.9 billion in available overnight liquidity in the form of unused federal funds purchased lines, unused FHLB borrowing capacity and unencumbered investment portfolio securities. Sovereign also forecasts future liquidity needs and develops strategies to ensure that adequate liquidity is available at all times.

Sovereign Bancorp has the following major sources of funding to meet its liquidity requirements: dividends and returns of investment from its subsidiaries, a revolving credit agreement and access to the capital markets. Sovereign Bank may pay dividends to its parent subject to approval of the OTS, as discussed above. Year-to-date Sovereign Bank declared and paid dividends to Sovereign Bancorp of $420 million. Sovereign also has approximately $900 million of availability under a shelf registration statement on file with the Securities and Exchange Commission permitting access to the public debt and equity markets.

In first quarter, Sovereign Bank issued $500 million of subordinated notes which have a coupon of 5.125%. These notes are due in March 2013 and are not subject to redemption prior to that date except in the case of the insolvency or liquidation of Sovereign Bank, and then only with prior regulatory approval. These notes qualify as Tier 2 regulatory capital for Sovereign Bank as of March 31, 2003. Under the current OTS regulatory rules, 5 years prior to maturity, 20% of the subordinated notes will no longer qualify as Tier 2 capital. In each successive year prior to maturity, an additional 20% of the subordinated notes will no longer qualify as Tier 2 capital.

Cash and cash equivalents increased $200 million for 2003. Net cash provided by operating activities was $291 million for 2003. Net cash used by investing activities for 2003 was $1.2 billion and consisted primarily of the purchase of investments of $2.9 billion, and purchases of loans of $1.5 billion offset by sales, repayments and maturities of investments of $2.5 billion and proceeds from loan sales of $938 billion. Net cash provided by financing activities for 2003 was $1.1 billion which was primarily due to an increase in borrowings and other debt obligations.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Contractual Obligations and Commercial Commitments

Sovereign enters into contractual obligations in the normal course of business as a source of funds for its asset growth and its asset/liability management, to fund acquisitions, and to meet required capital needs. These obligations require Sovereign to make cash payments over time as detailed in the table below.


Contractual Obligations	Payments Due by Period
(in thousands of dollars)
			Less than		Over 1 yr		Over 3 yrs		Over
	Total		1 year		to 3 yrs		to 5 yrs		5 yrs

FHLB advances	$	5,525,545	$	1,733,000	$	13,450	$	200,300	$	3,578,795
Securities sold under repurchase agreements		2,545,390		2,390,390		155,000		—		—
Senior notes		603,228		35,793		37,568		529,867		—
Subordinated notes		500,000		—		—		—		500,000
Other debt		941,200		200		120,000		—		821,000
Trust Preferred securities		501,090		—		—		—		501,090
Certificates of deposit		6,730,872		5,064,271		1,404,145		175,369		87,087
Operating leases		739,201		111,655		263,449		101,222		262,875

Total contractual cash obligations	$	18,086,526	$	9,335,309	$	1,993,612	$	1,006,758	$	5,750,847

Certain of Sovereign’s contractual obligations require Sovereign to maintain certain financial ratios and to maintain a “well capitalized” regulatory status. Sovereign has complied with these covenants as of March 31, 2003 and expects to be in compliance with these covenants for the foreseeable future. However, if in the future Sovereign is not in compliance with these ratios or is deemed to be other than well capitalized by the OTS, and is unable to obtain a waiver from its lenders, the debt would be in default and callable by Sovereign’s lenders. Due to cross-default provisions in certain of Sovereign’s debt agreements, if more than $25 million of Sovereign’s debt is in default, the full amount of the senior secured credit facility and the senior notes then outstanding will become due in full.

Sovereign is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, loans sold with recourse, forward contracts and interest rate swaps, caps and floors. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these financial instruments reflect the extent of involvement Sovereign has in particular classes of financial instruments.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Sovereign’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and loans sold with recourse is represented by the contractual amount of those instruments. Sovereign uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate swaps, caps and floors and forward contracts, the contract or notional amounts do not represent exposure to credit loss. Sovereign controls the credit risk of its interest rate swaps, caps and floors and forward contracts through credit approvals, limits and monitoring procedures. Unless noted otherwise, Sovereign does not require and is not required to pledge collateral or other security to support financial instruments with credit risk.

Amount of Commitment Expiration Per Period


	Total
Other Commercial	Amounts		Less than		Over 1 yr		Over 3 yrs
Commitments	Committed		1 year		to 3 yrs		to 5 yrs		Over 5 yrs

Commitments to extend credit	$	8,279,785	$	4,975,886	$	1,156,119	$	439,819	$	1,707,961	(1)
Standby letters of credit		1,134,229		343,565		259,312		500,566		30,786
Loans sold with recourse		13,779		—		—		—		13,779
Forward buy commitments		766,974		766,974		—		—		—

Total commercial commitments	$	10,194,767	$	6,086,425	$	1,415,431	$	940,385	$	1,752,526

(1)

Of this amount, $1.6 billion represents unused home equity lines of credit.

Sovereign’s standby letters of credit meet the definition of a guarantee under FIN 45. These transactions are conditional commitments issued by Sovereign to guarantee the performance of a customer to a third party. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments is 2.7 years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a draw by the beneficiary that complies with the terms of the letter of credit, Sovereign would be required to honor the commitment. Sovereign has various forms of collateral, such as real estate assets and customer business assets. The maximum undiscounted exposure related to these commitments at March 31, 2003 was $766 million, and the approximate value of the underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $721 million. Substantially all the fees related to standby letters of credits are deferred and are immaterial to Sovereign’s financial statements at March 31, 2003. We believe that the utilization rate of these letters of credit will continue to be substantially less than the amount of these commitments, as has been our experience to date.

Asset and Liability Management

Interest rate risk arises primarily through Sovereign’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. In managing its interest rate risk, Sovereign seeks to minimize the variability of net interest income across various likely scenarios while at the same time maximizing its net interest income and net interest margin. To achieve these objectives, Sovereign works closely with each business line in the company and guides new business. Sovereign also uses

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

various other tools to manage interest rate risk including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitization/sale, and financial derivatives.

Interest rate risk is managed centrally by the Treasury Group with oversight by the Asset and Liability Committee. Management reviews various forms of analysis to monitor interest rate risk including net interest income sensitivity, market value sensitivity, repricing frequency of assets versus liabilities and scenario analysis. Numerous assumptions are made to produce these analyses including, but not limited to, assumptions on new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions, and competitor pricing.

Sovereign simulates the impact of changing interest rates on its expected future interest income and interest expense (net interest income sensitivity). This simulation is run monthly and it includes nine different stress scenarios. These scenarios shift interest rates up and down. Certain other scenarios shift short-term rates up while holding longer-term rates constant and vice versa. This scenario analysis helps management to better understand its short-term interest rate risk and is used to develop proactive strategies to ensure that Sovereign is not overly sensitive to the future direction of interest rates. At March 31, 2003 and December 31, 2002, the general level of interest rates represented a unique economic environment in which several of Sovereign’s declining interest rate simulation scenarios would not apply. At March 31, 2003, if interest rates dropped in parallel 100 basis points Sovereign estimates that net interest income would fall 3.3%. Alternatively, if interest rates rose in parallel 200 basis points, estimated net interest income would increase 7.7%

Sovereign also monitors the relative repricing sensitivities of its assets versus its liabilities. Management attempts to keep assets and liabilities in balance so that when interest rates do change, the net interest income of Sovereign will not experience any significant short-term volatility as a result of assets repricing more quickly than liabilities or vice versa. As of March 31, 2003, the one year cumulative gap was 8%, compared to 6% at December 31, 2002 indicating Sovereign could benefit from rising rates.

Finally, Sovereign calculates the market value of its balance sheet including all assets, liabilities and hedges. This market value analysis is very useful because it measures the present value of all estimated future interest income and interest expense cash flows of the company. Net Portfolio Value (NPV) is used to assess long-term interest rate risk. A higher NPV ratio indicates lower long-term interest rate risk and a more valuable franchise. As of March 31, 2003, the NPV as a percentage of the present value of assets was 9.56% as compared to 9.59% at December 31, 2002. Management reviews the sensitivity of NPV to changes in interest rates. As of March 31, 2003, a 200 basis point rise in interest rates would increase the NPV ratio by 1.33% as compared to 1.28% at December 31, 2002 and a 100 basis point decline in interest rates would decrease the NPV ratio by .90% as compared to 1.22% at December 31, 2002.

Because the assumptions used are inherently uncertain, Sovereign cannot precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume and characteristics of new business and behavior of existing positions, and changes in market conditions and management strategies, among other factors.

Pursuant to its interest rate risk management strategy, Sovereign enters into hedging transactions that involve interest rate exchange agreements (swaps, caps, and floors) for interest rate risk management purposes. Sovereign’s objective in managing its interest rate risk is to provide sustainable levels of

- 41 -

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

net interest income while limiting the impact that changes in interest rates have on net interest income.

Interest rate swaps are generally used to convert fixed rate assets and liabilities to variable rate assets and liabilities and vice versa. Sovereign utilizes interest rate swaps that have a high degree of correlation to the related financial instrument. At March 31, 2003, Sovereign’s principal hedging transactions were to convert liabilities from floating rate to fixed rate for interest rate risk management purposes.

As part of its mortgage banking strategy, Sovereign originates fixed rate residential mortgages. It sells the majority of these loans to FHLMC, FNMA, and private investors. The loans are exchanged for cash or marketable fixed rate mortgage-backed securities which are generally sold. This helps insulate Sovereign from the interest rate risk associated with these fixed rate assets. Sovereign uses forward sales, cash sales and options on mortgage-backed securities as a means of hedging loans in the mortgage pipeline that are originated for sale.

To accommodate customer needs, Sovereign enters into customer-related financial derivative transactions primarily consisting of interest rate swaps, caps, and floors. Risk exposure from customer positions is managed through transactions with other dealers.

Through the Company’s capital markets, mortgage-banking and precious metals activities, it is subject to trading risk. The Company employs various tools to measure and manage price risk in its trading portfolios. In addition, the Board of Directors has established certain limits relative to trading positions and activities. The level of price risk exposure at any given point in time depends on the market environment and expectations of future price and market movements, and will vary from period to period.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Incorporated by reference from Part I, Item 2. “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Asset and Liability Management” hereof.

Item 4. Controls and Procedures

Within 90 days prior to the date of filing this report, an evaluation was performed under the supervision and the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the date the Company completed its evaluation. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company completed its evaluation.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Items 1 through 5 not applicable or the responses are negative.

Item 6 — Exhibits and Reports on Form 8-K

(a)

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 No. 333-86961-01 on Form S-3)

(3.2)

By-Laws of Sovereign Bancorp, Inc., as amended and restated as of August 14, 2002 (incorporated by reference to Exhibits 3.2 to Sovereign’s quarterly report on Form 10-Q SEC file # 0011651), for the quarter ended September 30, 2002.

(99.1)

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.

(99.2)

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.

(b)

Reports on Form 8-K

On January 21, 2003, the Company filed a current report on Form 8-K dated January 21, 2003, reporting information under Items 7 and 9.

On February 26, 2003, the Company filed a current report on Form 8-K dated February 26, 2003, reporting information under Items 7 and 9.

On March 6, 2003, the Company filed a current report on Form 8-K dated March 5, 2003, reporting information under Items 7 and 9.

On March 7, 2003, the Company filed a current report on Form 8-K dated March 6, 2003, reporting information under Items 7 and 9.

On April 17, 2003, the Company files a current report on Form 8-K dated April 15, 2003, reporting information under Items 7 & 12.

- 43 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SOVEREIGN BANCORP, INC.
		(Registrant)

Date May 14, 2003		/s/ Jay S. Sidhu

		Jay S. Sidhu, Chairman,
		Chief Executive Officer and President
		(Authorized Officer)

Date May 14, 2003		/s/ James D. Hogan

		James D. Hogan
		Chief Financial Officer

- 44 -

CERTIFICATIONS

I, Jay S. Sidhu, Chief Executive Officer of Sovereign Bancorp, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sovereign Bancorp, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

/s/ Jay S. Sidhu

Jay S. Sidhu

Chief Executive Officer

- 45 -

I, James D. Hogan, Chief Financial Officer of Sovereign Bancorp, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sovereign Bancorp, Inc.;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES


EXHIBITS INDEX

(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 No. 333-86961-01 on Form S-3)

(3.2)		By-Laws of Sovereign Bancorp, Inc., as amended and restated as of August 14, 2002 (incorporated by reference to Exhibits 3.2 to Sovereign’s quarterly report on Form 10-Q SEC file #0011651), for the quarter ended September 30, 2002.

(99.1)		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.

(99.2)		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.

- 47 -

	•		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;

	•		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;

	•		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;

	•		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, regulations, and practices including laws, regulations, policies and practices concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles;

	•		technological change;

	•		changes in consumer spending and savings habits;

	•		terrorist attacks in the United States or upon United States interests abroad, or armed conflicts relating to these attacks;

	•		armed conflicts involving the United States military;

	•		regulatory or judicial proceedings;

	•		changes in asset quality; and

	•		Sovereign’s success in managing the risks involved in the foregoing.


Date: May 14, 2003

		/s/ Jay S. Sidhu

		Jay S. Sidhu
		Chief Executive Officer