Sovereign Bancorp said Monday that it is cutting 500 jobs, or 6% of its work force, as part of a restructuring that includes a realignment of its top executives along product lines as it continues to move beyond its traditional thrift roots.
The $35 billion-asset company, based in Wyomissing, Pa., is nearing the completion of its move into New England, where it bought nearly 300 branches and related deposits divested this year by FleetBoston Financial Corp.
This year it formed a Boston-based capital markets group, and it opened a trust company, brokerage, insurance agency, and Internet-only bank.
Now, Sovereign said it is eliminating redundancies in management as well as back-office operations. The cuts are expected to require $15 million of after-tax charges, most of which are to be recorded in the fourth quarter.
The company said it is reorganizing its office of the chief executive officer along products rather than geography. Lawrence Thompson is now president of the newly formed consumer banking group, and Joseph Campanelli is president of the commercial banking group. John Hamill has expanded his oversight of trust and private banking, while remaining chairman and chief executive officer of Sovereign Bank New England.
The company said Monday that it has targeted return on equity of 15% to 16% by the end of 2002. To that end, we see this streamlining as an absolute necessity, said Jay Sidhu, president and chief executive officer.
The cuts are to be spread throughout Sovereigns operations, but the three largest in Pennsylvania, Rhode Island, and Massachusetts will be most severely affected, said Dennis Marlo, chief financial officer.
We are in the process of notifying those individuals affected, Mr. Marlo said in an interview, indicating that this would take two to three days. Some layoffs will occur immediately; others, over an undetermined period. Mr. Marlo said no further cuts are planned but added that the company would continue to monitor its revenue and expense ratios as part of a business improvement plan it began in August.
Though the market tends to view cost-cutting efforts favorably, analysts reacted negatively to Sovereigns announcement. The company began accumulating a laundry list of special charges this year when it entered New England. During its third-quarter conference call with analysts, Sovereign pledged not to take any more charges related to the New England expansion.
Many Wall Street observers said that they are fed up with the host of one-time hits, which have included acquisition-related charges, extra loan-loss provisions, and securities losses related to a balance sheet restructuring.
It is not a positive, said Laurie H. Hunsicker, an analyst at Friedman Billings Ramsey & Co. It speaks to the managements credibility as we continue to see one-time charges. About a year ago, Sovereign estimated the total charges it would take as a result of its Northeast expansion at about $70 million.
Instead, the costs have risen to about $170 million, reflecting a need to divide the purchase of the Fleet branches and deposits into three stages and the need to raise about $17 million of additional capital.
Sovereign would not reveal expected gains from cost reductions for the job cuts. But the company insisted that it is not going back on its statements during the third-quarter conference call. It called the cost cuts a companywide initiative.
The company has no plan to touch Sovereigns 575 community banking offices throughout the Middle Atlantic states and New England.
Some analysts said the broad restructuring was a good move. I view it as a net positive for the stock, said John M. Kline, an analyst at Sandler ONeill & Partners. Sovereigns management is trying to position the company for good earnings growth going forward. Its just one of the many steps they really needed to take to get the companys earnings back on a growth track.