As Jay S. Sidhu edges toward the door at Sovereign Bancorp Inc., the company's new management is rolling back key elements of the strategy he put in place.
Among the changes: a smaller balance sheet, branch closings, and a reversal of the strategic decentralization designed by Mr. Sidhu.
"Long overdue," was how many analysts described the moves being made by Joseph P. Campanelli, who became the Philadelphia company's interim chief executive officer in mid-October when Mr. Sidhu resigned amid mounting criticism.
"This is a pretty aggressive restructuring, and it's entirely appropriate," said Kevin T. Timmons, an analyst with CL King & Associates Inc.
Under Mr. Sidhu, Sovereign grew from a small Pennsylvania thrift into one of the largest banking companies in the Northeast, its asset now standing at $90.4 billion. But on Thursday, Mr. Campanelli and Mark R. McCollom, the chief financial officer, said they would shrink the balance sheet by $9.5 billion and close more than 18 branches next year. Sovereign will step up loan sales to generate capital to fund new loans instead of relying of wholesale borrowing, Mr. McCollom said.
Last week Sovereign announced that it would eliminate 800 jobs, or 7% of its work force, and cut $100 million in costs. It also plans to stop originating mortgages in markets where it has no branches.
Mr. Sidhu is scheduled to relinquish the chairmanship at yearend. One candidate to succeed him as CEO is Mr. Campanelli, who joined Sovereign in 1997 and has been a close ally of Mr. Sidhu as one of his vice chairmen.
"This would be the quantum leap," Mr. Campanelli said of the decision, announced Thursday, to shave $9.5 billion of assets from the balance sheet.
Sovereign said these changes will cost $390 million to $415 million pretax this quarter, or 50 cents to 53 cents a share, and an additional $90 million to $100 million, or 11 to 13 cents a share, next year. That is in addition to an $8.5 million to $10 million charge related to the acquisition of Independence Community Bank Corp. of Brooklyn, N.Y., on June 1. Finally, the company plans to take a $28.9 million charge related to Mr. Sidhu's departure.
Mr. Sidhu was the architect of a controversial deal to sell a stake in Sovereign to Banco Santander Central Hispano SA in May and use the proceeds to buy Independence. He was at the center of a brutal proxy battle last year with shareholders furious over the way he handled the complicated deal.
Mr. Campanelli has been sounding the "new direction" theme since the release of third-quarter earnings in October. On Thursday, he said chief administrative officer Lawrence M. Thompson Jr. would leave Sovereign next year, because of Sovereign's decision to get out of the national mortgage lending business.
"We are reorganizing our whole leadership strategy," centralizing marketing and product development, Mr. Campanelli said during a conference call with investors. "The new model will have centralized strategy in retail and consumer banking with regional market-driven execution."
About two years ago Mr. Sidhu explained his decision to decentralize as a way to avoid "the diseases of bigness." But as Sovereign grew, centralizing at least some functions, such as marketing and product development, just made economic sense.
"Decentralization is a question of size," Mr. Timmons said. The downside of a complicated and costly decentralization can easily outweigh the upside, he said.
Analysts remain divided about Sovereign's near-term prospects as an independent company. Several said they think it is dressing itself up for sale. "We believe the restructuring should improve the company's desirability in the eyes of an acquirer," Janney Montgomery Scott LLC's Richard D. Weiss wrote in a research note published after Thursday's announcement.
But James M. Ackor of Royal Bank of Canada's RBC Capital Markets said it is doubtful Sovereign will sell soon. He said Mr. Campanelli could win the CEO post with his aggressive restructuring, which has impressed investors. "What they needed was somebody to roll up his sleeves and focus on the organization," Mr. Ackor said.
Since Mr. Campanelli took over as CEO, Sovereign's stock is up 5.1%.
Mr. McCollom said Sovereign will not exit more lines of business but may change the way it allocates capital within the company. Commercial banking ranks highest in returns right now, he said, but when credit quality worsens, consumer banking might be more profitable.
While Sovereign plans to open 18 branches next year, it plans to close more than that, Mr. Campanelli said. Sovereign has nearly 800 branches.
"We see significant opportunity to become more efficient," Mr. Campanelli said. "At the same time it is important that we recognize the opportunity to continue to stimulate organic growth" in specialty lending and consumer banking.
Mr. McCollom said the company is essentially liquidating its correspondent home equity portfolio, selling $4.5 billion of such loans, and is shedding $2.5 billion of mortgages. It will also sell $2 billion of multifamily loans, though it wants to build that business, which it acquired as part of the Independence purchase.
Selling some multifamily loans instead of holding them in the portfolio will free up capital to finance growth, the CFO said. Sovereign already sold about $500 million to Fannie Mae and is working to establish purchase relationships with others, including Freddie Mac, Mr. McCollom said.
At the same time, Sovereign will reduce its liabilities by $10 billion, including $1.5 billion of brokered money market funds, he said.
These moves will leave the company "meaningfully asset-sensitive," he said. "Our ultimate goal is to get that number back to fairly neutral, so we may be taking some steps as these trades settle to take our total risk position back to a neutral base."
