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Agreement and Plan of Merger - Sovereign Bancorp Inc. and Colonial State Bank

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                  AGREEMENT AND PLAN OF MERGER

                             between

                     SOVEREIGN BANCORP, INC.

                               and

                       COLONIAL STATE BANK

                         March 23, 1995
<PAGE>
                        TABLE OF CONTENTS

                                                            Page

                            ARTICLE I

PLAN OF MERGER, CLOSING AND EFFECTIVE DATE..................  2
     Section 1.1    Plan of Merger..........................  2
     Section 1.2    Closing.................................  2
     Section 1.3    Effective Date..........................  2

                           ARTICLE II

REPRESENTATIONS AND WARRANTIES OF COLONIAL..................  2
     Section 2.1  Organization and Standing.................  2
     Section 2.2  Authority.................................  2
     Section 2.3  No Violation..............................  3
     Section 2.4  Subsidiaries..............................  3
     Section 2.5  Capitalization............................  4
     Section 2.6  Certificate of Incorporation, Bylaws and
                  Minute Books..............................  4
     Section 2.7  Financial Statements......................  4
     Section 2.8  Absence of Changes........................  6
     Section 2.9  Dividends, Distributions and Stock
                  Purchases.................................  6
     Section 2.10 Taxes.....................................  6
     Section 2.11 Title To and Condition of Assets..........  6
     Section 2.12 Loan Portfolio; Portfolio Management......  7
     Section 2.13 Investment Securities.....................  8
     Section 2.14 Contracts and Required Consents...........  8
     Section 2.15 Litigation................................  9
     Section 2.16 Compliance with Laws; Governmental
                  Authorizations............................  9
     Section 2.17 Regulatory Reports of Examination......... 10
     Section 2.18 Insurance................................. 10
     Section 2.19 Fidelity Bonds............................ 10
     Section 2.20 Labor Relations........................... 11
     Section 2.21 Employee Benefit Plans.................... 11
     Section 2.22 Related Party Transactions................ 12
     Section 2.23 No Finder................................. 12
     Section 2.24 Significant Customers..................... 12
     Section 2.25 Environmental Matters..................... 12
     Section 2.26 Allowance for Loan Losses................. 13
     Section 2.27 Deleted................................... 13
     Section 2.28 Complete and Accurate Disclosure.......... 13

                           ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SOVEREIGN................. 14
     Section 3.1  Organization and Standing................. 14
     Section 3.2  Authority................................. 14
     Section 3.3  No Violation.............................. 14
     Section 3.4  Financial Statements...................... 15
     Section 3.5  Absence of Changes........................ 15
     Section 3.6  Liquidity................................. 15
     Section 3.7  No Finder................................. 15

                           ARTICLE IV

COVENANTS OF COLONIAL....................................... 16
     Section 4.01 Conduct of Business....................... 16
     Section 4.02 Best Efforts.............................. 19
     Section 4.03 Access and Confidentiality................ 19
     Section 4.04 Subsequent Financial Statements and
                  Regulatory Reports........................ 20
     Section 4.05 Update of Schedule I and Notice........... 20
     Section 4.06 Consents.................................. 20
     Section 4.07 Deleted................................... 20
     Section 4.08 Regulatory Applications................... 20
     Section 4.09 Shareholder Approval...................... 21
     Section 4.10 Fairness of Opinion....................... 21
     Section 4.11 Reserves and Accruals..................... 21
     Section 4.12 Financial Statement Review................ 21
     Section 4.13 No Other Bids............................. 21
     Section 4.14 Park Avenue Real Estate................... 22
     Section 4.15 Miscellaneous............................. 23
     Section 4.16 Colonial D&O Insurance.................... 23

                            ARTICLE V

COVENANTS OF SOVEREIGN...................................... 24
     Section 5.01 Best Efforts.............................. 24
     Section 5.02 Interim Banks............................. 24
     Section 5.03 Regulatory Notices and Applications....... 24
     Section 5.04 Management Following the Merger........... 24
     Section 5.05 Employees and Employee Benefits........... 25

                           ARTICLE VI

CONDITIONS PRECEDENT........................................ 26
     Section 6.01 Conditions to Colonial's Obligations
                  under this Agreement...................... 26
     Section 6.02 Conditions to Sovereign's Obligations
                  under this Agreement...................... 27

                           ARTICLE VII

TERMINATION................................................. 29
     Section 7.01 Termination............................... 29
     Section 7.02 Effect of Termination..................... 31

                          ARTICLE VIII

MISCELLANEOUS............................................... 32
     Section 8.01 Expenses.................................. 32
     Section 8.02 Non-Survival of Representations and
                  Warranties................................ 32
     Section 8.03 Amendment, Extension and Waiver........... 32
     Section 8.04 Public Announcements...................... 33
     Section 8.05 Entire Agreement.......................... 33
     Section 8.06 No Assignment............................. 33
     Section 8.07 Notices................................... 33
     Section 8.08 Captions.................................. 34
     Section 8.09 Counterparts.............................. 34
     Section 8.10 Severability.............................. 35
     Section 8.11 Governing Law............................. 35

Exhibits.................................................... 35
<PAGE>
                  AGREEMENT AND PLAN OF MERGER


          MADE this 23rd day of March 1995, by and between
SOVEREIGN BANCORP, INC., a Pennsylvania business corporation
having its administrative headquarters at 1130 Berkshire
Boulevard, P.O. Box 37, Reading, Pennsylvania 19603 ("Sovereign")
and COLONIAL STATE BANK, a New Jersey commercial bank having its
administrative headquarters at 521 Park Avenue, Freehold, New
Jersey 07728 ("Colonial").

                           Background:

          Sovereign is a savings and loan holding company. 
Colonial is a New Jersey commercial bank.  Sovereign wishes to
acquire all of the outstanding $5.00 par value common stock of
Colonial (the "Colonial Common Stock") and Colonial wishes to
affiliate itself with and to become a subsidiary of Sovereign. 
Subject to the terms and conditions of this Agreement, the
acquisition by Sovereign of all of the outstanding Colonial
Common Stock will be accomplished by means of a reverse
triangular merger under which:  (i) Sovereign will organize as a
wholly-owned subsidiary Sovereign Interim Bank, a non-operating
phantom federal savings bank ("Interim Bank"), (ii) Interim Bank
will be merged with and into Colonial (the "Merger"),
(iii) Colonial will survive the Merger as a wholly-owned
subsidiary of Sovereign, (iv) each outstanding share of Colonial
Common Stock will in consideration of the Merger be converted
into the right to receive $11.60 in cash from Sovereign, (v)
Sovereign will organize as a wholly-owned subsidiary Sovereign
Interim Bank II, a non-operating phantom Pennsylvania-chartered
savings bank ("Second Interim Bank"), (vi) Second Interim Bank
will convert from a Pennsylvania-chartered savings bank to a
federal savings bank (the "Charter Conversion"),
(vii) immediately following the Merger, Colonial will be merged
with and into Second Interim Bank (the "Second Merger"), and
(viii) Second Interim Bank will change its name to a name which
includes the term "Sovereign" and will survive the merger as a
federal savings bank and wholly-owned subsidiary of Sovereign.

          Prior to or contemporaneously with the execution and
delivery of this Agreement and as a condition and inducement to
Sovereign's execution of this Agreement:  (i) all of the
directors and certain of the officers and shareholders of
Colonial executed in favor of Sovereign a Letter Agreement dated
the date of this Agreement in the form attached hereto as
Exhibit E pursuant to which each such person has agreed, among
other things, to vote for and otherwise support the consummation
of the transactions contemplated in this Agreement, and (ii)
Colonial granted to Sovereign an option to acquire up to 19.9% of
Colonial's common stock pursuant to the terms of a Stock Option
Agreement between Sovereign and Colonial dated the date of this
Agreement (the "Sovereign Option Agreement").

                           WITNESSETH:

          NOW, THEREFORE, in consideration of the mutual
covenants hereinafter set forth and intending to be legally bound
hereby, the parties agree as follows:

                            ARTICLE I

           PLAN OF MERGER, CLOSING AND EFFECTIVE DATE

          Section 1.1    Plan of Merger.  Subject to the terms
and conditions of this Agreement, Interim Bank shall merge with
and into Colonial in accordance with the Plan of Merger attached
hereto as Exhibit A and Colonial shall survive such merger (the
"Merger").

          Section 1.2    Closing.  Provided that all conditions
precedent set forth in Article VI above shall have been satisfied
or waived, the parties shall hold a closing (the "Closing")
following the receipt of all required regulatory approvals and
the expiration of all applicable waiting periods on a date and at
a place to be agreed upon by the parties, at which time the
parties shall execute and deliver all such documents and
instruments as may be necessary or appropriate to effectuate the
purposes of this Agreement.

          Section 1.3    Effective Date.  The Merger shall be
effective on the date on which all filings with government
agencies as may be required under all applicable laws and
regulations for the Merger to become effective are made and
accepted by such agencies or, if later, on the date specified in
such filings (the "Effective Date").

                           ARTICLE II

           REPRESENTATIONS AND WARRANTIES OF COLONIAL

          Colonial represents and warrants to Sovereign, as of
the date of this Agreement and as of the date of the Closing, as
follows:

          Section 2.1  Organization and Standing.  Colonial is a
New Jersey commercial bank duly organized, validly existing and
in good standing under the laws of the State of New Jersey. 
Colonial is an insured bank under the provisions of the Federal
Deposit Insurance Act and is not a member of the Federal Reserve
System.  Colonial has full power and lawful authority to own and
hold its properties and to carry on its present business.

          Section 2.2  Authority.  Colonial has full corporate
power and authority to execute and deliver this Agreement and,
subject to the receipt of shareholder and required regulatory
approvals (and compliance with any conditions contained therein),
to consummate the transactions contemplated herein.  The
execution and delivery of this Agreement and the consummation of
the transactions contemplated herein have been authorized and
unanimously approved by the Board of Directors of Colonial and,
subject to the approval of this Agreement by its shareholders, no
other corporate action on its part is necessary to authorize this
Agreement or the consummation of the transactions contemplated
herein.  This Agreement has been duly executed and delivered by
and, assuming due authorization, execution and delivery by
Sovereign, constitutes a valid and binding obligation of
Colonial, enforceable against Colonial in accordance with its
terms, subject to applicable bankruptcy, insolvency,
conservatorship, receivership and similar laws affecting
creditors' rights generally and subject to the application of
equitable principles.  

          Section 2.3  No Violation.  Subject to the receipt of
shareholder and required regulatory approvals (and compliance
with any conditions contained therein), the execution, delivery
and performance of this Agreement and the consummation of the
transactions contemplated herein will not:  (i) violate or
conflict with any provision of the Certificate of Incorporation
or bylaws of Colonial; (ii) violate any statute, rule,
regulation, ordinance, judgment, order or decree applicable to
Colonial or by which Colonial or any of its properties is bound;
or (iii) violate, conflict with, or constitute a default (or be
an event which, with or without due notice or lapse of time, or
both, would constitute such a default) under, or cause or permit
the acceleration or termination of, any contract, note, bond,
mortgage, indenture, license, lease or other instrument,
agreement or commitment to which Colonial is a party or by which
Colonial or any of its properties are bound, except in the case
of clause (iii) for such violations, defaults, conflicts,
accelerations, and terminations as would not, individually or in
the aggregate, materially adversely affect the assets,
liabilities, business, financial condition or results of
operations of Colonial, or its ability to perform its obligations
under this Agreement.

          Section 2.4  Subsidiaries.  Colonial owns no
subsidiaries, either directly or indirectly, other than CSB
Building Corporation (the "Colonial Subsidiary"), which was
organized on February 21, 1995 for purposes of acquiring title to
the real estate located at 521 Park Avenue, Freehold, New Jersey
pursuant to the transaction described in Section 4.14 below.  The
Colonial Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the State of New
Jersey and has the corporate power and authority to carry on its
business and operations as now being conducted (and as proposed
to be conducted in connection with the transaction referred to in
Section 4.14 below) and to operate the properties and assets now
owned (or to be acquired pursuant to the transaction referred to
in Section 4.14 below) by it.  Colonial owns all of the
outstanding shares of capital stock of the Colonial Subsidiary,
free and clear of all liens, security interests, restrictions,
options, claims, charges, pledges and/or encumbrances of any kind
whatsoever.  There are no outstanding agreements, subscriptions,
obligations, options or rights of any kind relating to the
issuance of or entitling others to acquire shares of capital
stock of the Colonial Subsidiary and there are no outstanding
securities or other instruments of any kind convertible into
shares of capital stock of the Colonial Subsidiary.

          Section 2.5  Capitalization.  

               (a)  General.  The authorized capital of Colonial
consists exclusively of 2,550,000 shares of common stock of $5.00
par value per share (the "Colonial Common Stock"), of which
538,911 shares are validly issued and outstanding and are fully
paid and non-assessable, none of which are held as treasury
shares.  There are no outstanding agreements, subscriptions,
obligations, options or rights of any kind relating to the
issuance of or entitling others to acquire shares of Colonial
Common Stock and there are no outstanding securities or other
instruments of any kind convertible into shares of Colonial
Common Stock.

               (b)  Number of Shareholders and Ownership by
Management.  As of December 31, 1994, Colonial had
276 shareholders of record.  The Colonial Common Stock is not
required to be registered with the Securities and Exchange
Commission (the "SEC") under the provisions of Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and Colonial is not required to file periodic reports with the
SEC pursuant to Section 15(d) of the Exchange Act.  Except as
disclosed in Schedule I, to the knowledge of Colonial, no person
or "group" (as that term is defined in Section 13(d)(3) of the
Exchange Act) is the beneficial owner of 5% or more of the
outstanding shares of Colonial Common Stock.  Schedule I sets
forth the name and number of shares of Colonial Common Stock
beneficially owned by each such person and each such group as of
the date of this Agreement.  Schedule I also sets forth the name
of each director and officer of Colonial and the number of shares
of Colonial Common Stock owned beneficially by him as of the date
of this Agreement.

          Section 2.6  Certificate of Incorporation, Bylaws and
Minute Books.  The copies of the Certificate of Incorporation, as
amended, and of the bylaws, as amended, of Colonial which have
been delivered to Sovereign are true, complete and accurate in
all respects.  The minute books of Colonial which have been or
will be made available to Sovereign for inspection are true,
complete and accurate in all respects.

          Section 2.7  Financial Statements.  

               (a)  Colonial Regulatory Reports.  For purposes of
this Agreement, the term "Colonial Regulatory Reports" shall mean
the call reports, consolidated reports of condition and income,
and accompanying schedules filed, or to be filed, by Colonial
with the Federal Deposit Insurance Corporation (the "FDIC")
and/or with the NJDOB for each calendar quarter, beginning with
the quarter ended March 31, 1992 through the date of the Closing. 
Colonial has previously delivered (and in the case of
subsequently prepared reports, will deliver) to Sovereign the
Colonial Regulatory Reports.  The Colonial Regulatory Reports
have been (and in the case of subsequently prepared reports, will
be) prepared in accordance with applicable regulatory accounting
principles and practices applied on a consistent basis throughout
the periods covered by such statements and fairly present (and in
the case of subsequently prepared reports, will fairly present)
the financial condition, results of operations and changes in
shareholder's equity of Colonial at their respective dates and
for the respective periods then ended in accordance with
applicable regulatory accounting principles applied on a
consistent basis.

               (b)  Financial Statements.  For purposes of this
Agreement, the term "Colonial Financial Statements" shall mean
the financial statements of Colonial at and for the years ended
December 31, 1992, 1993 and 1994 as certified by KPMG Peat
Marwick.  Colonial has previously delivered to Sovereign the
Colonial Financial Statements.  The Colonial Financial Statements
have been prepared in accordance with generally accepted
accounting principles consistently applied during the periods
involved and fairly present the financial condition, results of
operations, cash flows and changes in shareholders' equity of
Colonial at their respective dates and for the respective periods
then ended in accordance with generally accepted accounting
principles consistently applied.

               (c)  Absence of Undisclosed Liabilities.  As of
the date of each balance sheet included in the Colonial
Regulatory Reports or in the Colonial Financial Statements,
Colonial did not have (and in the case of subsequently prepared
Colonial Regulatory Reports, will not have) any liabilities
(whether accrued, absolute, contingent or otherwise) which are
required to be reflected, noted or reserved against therein under
generally accepted accounting principles or which are in any case
or in the aggregate material, except as reflected, noted or
adequately reserved against therein.  Except with respect to the
real estate transaction referred to in Section 4.14 below, since
December 31, 1994, Colonial has not incurred and will not incur
any such liability, other than liabilities of the same nature as
those set forth in the balance sheet included in the Colonial
Financial Statement, at and for the year ended December 31, 1994,
all of which have been reasonably incurred in the ordinary course
of business consistent with past practice.

               (dStatements of Financial Accounting Standard Nos. 114 and 118,
effective January 1, 1995, and the adoption of such Statements
will not have a material adverse impact upon the financial
condition or results of operations of Colonial. 

          Section 2.8  Absence of Changes.  Since December 31,
1994, Colonial has conducted its business in the regular and
ordinary course (except with respect to the real estate
transaction referred to in Section 4.14 below) and has not
undergone any change in condition (financial or otherwise),
assets, liabilities, business or operations, other than changes
in the ordinary course of business consistent with past practice
which have not been, either in any case or in the aggregate,
materially adverse, except that the operation of its business was
affected by the terms and conditions of, and the restrictions
imposed by, the Memorandum of Understanding referred to in
Section 2.16 below during the period March 2, 1993 through
November 21, 1994.

          Section 2.9  Dividends, Distributions and Stock
Purchases.  Since December 31, 1994, Colonial has not: 
(i) declared, set aside, made or paid any dividend or other
distribution in respect of Colonial Common Stock, or
(ii) purchased, issued or sold any shares of Colonial Common
Stock.

          Section 2.10  Taxes.  Colonial has duly filed, and will
duly file, all federal, state, county, municipal and foreign tax
returns, reports, information returns and declarations which are
required to be filed by it (which returns, reports and
declarations are (and, in the case of subsequently filed returns,
will be complete, accurate and correct in all material respects
and free of any material omission, deficiency, error,
misstatement or misrepresentation) and has duly paid (and, in the
case of returns, reports and declarations to be filed by it after
the date of this Agreement, will duly pay) all taxes, penalties
and interest which have become due pursuant thereto or which
became due pursuant to assessments.  Colonial has not received
any notice of deficiency or assessment of additional taxes and no
tax audits are in process.  Colonial has not granted any waiver
of any statute of limitation with respect to any extension of a
period for the assessment of any federal, state, county,
municipal or foreign income tax.  The accruals and reserves for
taxes reflected in the balance sheet included in the Colonial
Financial Statements and in the Colonial Regulatory Reports at
and for the 12 months ended December 31, 1994 are adequate to
cover all taxes (including interest and penalties, if any,
thereon) payable or accrued as a result of its operations for all
periods prior thereto.

          Section 2.11  Title To and Condition of Assets. 
Colonial is the legal, equitable, beneficial and record owner of
and has good and marketable title to all real and personal
properties and assets, both tangible and intangible, reflected
(and in the case of subsequently prepared financial statements,
to be reflected) in the balance sheets set forth in the Colonial
Financial Statements and in the Colonial Regulatory Reports, or
acquired subsequent to December 31, 1994 (other than property and
assets disposed of for fair value in the ordinary course of
business), free and clear of all liens, security interests,
restrictions, options, claims, charges, pledges and/or
encumbrances of any kind whatsoever other than: (i) as reflected
in such balance sheets; (ii) liens of current taxes not yet due;
and (iii) such imperfections of title, encumbrances and
easements, if any, as are not substantial in character, amount or
extent and do not materially detract from the value, or
materially interfere with the present use, of the properties and
assets subject thereto.  Without limitation of the foregoing,
Colonial has (or the Colonial Subsidiary organized in connection
with the transaction referred to in Section 4.14 below, will
have) good and marketable title to the real property located at
521 Park Avenue, Freehold, New Jersey, which property is
insurable at ordinary rates by any nationally recognized title
company (including Fidelity Land Title Insurance Company and
Chicago Title Insurance Company, which are represented by
Alliance Title Agency), free and clear of all liens,
restrictions, options, claims, charges, pledges and encumbrances,
other than as described in clauses (i) through (iii) of the
preceding sentence or as described in Schedule I.  The structures
and other improvements to real estate, furniture, fixtures and
equipment reflected in the balance sheets included in the
Colonial Financial Statements and in the Colonial Regulatory
Reports or acquired subsequent to December 31, 1994, are in good
operating condition and repair, are fit for the purposes for
which they are used, and conform in all material respects with
all applicable laws, ordinances and regulations, including
without limitation, all building, zoning and other similar laws. 
Colonial owns, has a valid leasehold interest in or otherwise has
the right to use all real and personal properties and assets
necessary to the conduct of its business as now conducted.

          Section 2.12  Loan Portfolio; Portfolio Management. 
All evidences of indebtedness reflected as assets in the balance
sheets included in the Colonial Financial Statements and/or the
Colonial Regulatory Reports are and in the case of any such
assets reflected in subsequently prepared Colonial Regulatory
Reports, will be, (except with respect to those assets which have
been or will be disposed of for fair value in the ordinary course
of business) binding obligations of the respective obligors named
therein, except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of
creditors' rights generally, and except that the availability of
equitable remedies, including specific performance, is subject to
the discretion of the court before which any proceeding may be
brought, and the payment of no amount thereof is subject to any
defenses which have been threatened or asserted against Colonial. 
All such indebtedness which is secured by an interest in real
property is secured by a valid and perfected mortgage lien having
the priority specified in the latest title report included with
the loan documents theretofore made available to Sovereign. 
Colonial warrants that all loans originated by it were at the
time entered into and have been at all times since in compliance
in all material respects with all applicable laws and
regulations.  All loans purchased by Colonial:  (i) were, at the
time entered into in compliance in all material respects with all
applicable laws and regulations, and (ii) at all times since such
loans were purchased have been in compliance in all material
respects with all applicable laws and regulations.  Colonial
administers its loan and investment portfolios in all material
respects in accordance with all applicable laws and regulations. 
The records of Colonial regarding all loans outstanding on its
books are accurate in all material respects and the risk
classification system has been established in accordance with the
requirements of the FDIC.  Schedule I discloses all loans which,
as of December 31, 1994, have been classified by Colonial or by
any regulatory examiner as "Other Loans Specifically Mentioned,"
"Substandard," "Doubtful," or "Loss."

          Section 2.13  Investment Securities.  All securities
reflected as assets in the balance sheets included in the
Colonial Financial Statements and/or the Colonial Regulatory
Reports are (and in the case of securities reflected in
subsequently prepared financial statements and reports, will be)
owned legally, beneficially, equitably and of record by Colonial
free and clear of all mortgages, liens, security interests,
pledges, encumbrances and other restrictions, whether contractual
or statutory, which would impair the ability of Colonial freely
to dispose of any such security at any time.  With respect to all
repurchase agreements to which Colonial is, or will be, a party,
Colonial has, or will have, a valid, perfected first lien or
security interest in the government securities or other
collateral securing the repurchase agreement, and the value of
the collateral securing each such repurchase agreement equals or
exceeds, or will equal or exceed, the amount of the debt secured
by such collateral under such repurchase agreement.

          Section 2.14  Contracts and Required Consents.  

               (a)  Contracts.  Colonial has identified on
Schedule I:  (i) all written or oral contracts (other than
contracts with customers reasonably entered into by Colonial in
the ordinary course of business consistent with past practice)
which involve the payment or the receipt of consideration in
excess of $10,000 per year, including, without limitation, all
employment contracts, agreements, leases, licenses, and other
commitments to which Colonial is a party or by which Colonial or
any of its properties are bound, and (ii) all employment,
consulting, retirement, severance, bonus, deferred compensation
or similar agreements, whether written or oral, entered into by
Colonial with any past or present officer, director, employee or
shareholder of Colonial.  Except as disclosed in Schedule I, all
such contracts, agreements, leases, licenses and other
commitments are valid and in full force and effect and all
parties thereto have in all material respects performed all
obligations required to be performed by them to date and are not
in default in any material respect.  

               (b)  Consents.  Schedule I identifies all such
contracts, agreements, leases, licenses and other commitments
which require the consent, approval or waiver of any third party
to avoid a violation, the occurrence of an event of default or
the exercise of a right of termination by reason of the execution
and delivery of this Agreement or the consummation of the
transactions contemplated herein.  

          Section 2.15  Litigation.  There is no litigation,
investigation or proceeding pending, or to the knowledge of
Colonial, threatened involving Colonial or its properties which,
if determined adversely to Colonial, would materially adversely
affect the condition (financial or otherwise), assets,
liabilities, business or operations of Colonial or which
challenge the validity or propriety of the transactions
contemplated under this Agreement.  There are no outstanding
orders, writs, injunctions or decrees of any court, governmental
agency or arbitration tribunal against Colonial which materially
adversely affect the condition (financial or otherwise), assets,
liabilities, business or operations of Colonial, its right to
conduct its business as presently conducted or its ability to
perform its obligations under this Agreement.  Colonial is not
aware of any fact or condition presently existing which might
give rise to any litigation, investigation or proceeding which,
if determined adversely to Colonial, would materially adversely
affect the condition (financial or otherwise), assets,
liabilities, business or operations of Colonial.

          Section 2.16  Compliance with Laws; Governmental
Authorizations.  

               (a)  General Compliance.  Colonial is in
compliance in all material respects with all statutes, laws,
ordinances, rules, regulations, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses and other
governmental authorizations or approvals applicable to it or to
any of its properties.  All permits, concessions, grants,
franchises, licenses and other governmental authorizations and
approvals necessary for the lawful conduct of Colonial's business
have been duly obtained and are in full force and effect and
there are no proceedings pending or, to the knowledge of
Colonial, threatened which may result in the revocation,
cancellation, suspension or materially adverse modification of
any of them.

               (b)  Regulatory Compliance.  Except:  (i) as
directly related to the Memorandum of Understanding referred to
in the next sentence, (ii) for matters relating to the failure by
Colonial to comply in certain respects with the requirements of
the Community Reinvestment Act and with certain regulations
relating to consumer compliance (the complete facts and
circumstances of such  non-compliance having in each case been
fully disclosed by Colonial to Sovereign), and (iii) for matters
relating to the fact that Colonial's investment in bank premises
exceeded applicable regulatory limits, Colonial has not received
any notification or communication from any regulatory authority: 
(A) asserting that Colonial is not in substantial compliance with
any of the statutes, regulations or ordinances which such
regulatory authority enforces; (B) threatening to revoke any
license, franchise, permit or governmental authorization which is
material to Colonial; (C) requiring or threatening to require
Colonial, or indicating that Colonial may be required, to enter
into a cease and desist order, agreement or memorandum of
understanding or any other agreement restricting or limiting, or
purporting to restrict or limit, in any manner the operations of
Colonial, including without limitation, any restriction on the
payment of dividends; or (D) directing, restricting or limiting,
or purporting to direct, restrict or limit, in any manner the
operations of Colonial, including without limitation any
restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described in this
sentence herein referred to as a "Regulatory Agreement"). 
Colonial has never consented to or entered into any Regulatory
Agreement, except for a Memorandum of Understanding dated
March 2, 1993 (the "MOU") entered into by Colonial with the FDIC
and the New Jersey Department of Banking (the "NJDOB").  Colonial
has delivered to Sovereign a true, complete and accurate copy of
the MOU, including all amendments thereto.  The MOU was
terminated on November 21, 1994 and Colonial has not since that
time received any notification or communication from any
regulatory authority of the kind contemplated under clauses (A)
through (D) of the first sentence of this Section.

          Section 2.17  Regulatory Reports of Examination. 
Colonial will make available to Sovereign for inspection true,
complete and accurate copies of:  (i) all reports of examination
prepared by the FDIC and/or by the NJDOB from the date of its
organization through the date of the Closing, (ii) all
correspondence relating to the foregoing reports of examination
and to the MOU, and (iii) all agreements, memoranda of
understanding and other arrangements and understandings between
Colonial and the FDIC and/or the NJDOB entered into as a result
of matters raised in such reports of examination and
correspondence.

          Section 2.18  Insurance.  All policies of insurance,
including all policies of title insurance and fidelity bonds,
held by or on behalf of Colonial are listed on Schedule I.  All
such policies of insurance are in full force and effect and no
notices of cancellation have been received in connection
therewith.

          Section 2.19  Fidelity Bonds.  Colonial has
continuously since the date of its organization maintained in
full force and effect a fidelity bond insuring it against acts of
dishonesty by each of its employees in such amounts as are
disclosed on Schedule I.  No claim has been made under any such
bond and Colonial is not aware of any fact or condition presently
existing which might form the basis of a claim under any such
bond.  Colonial has no reason to believe that its present
fidelity bond will not be renewed by its carrier on substantially
the same terms as those now in effect.

          Section 2.20  Labor Relations.  Colonial is not a party
to or bound by any collective bargaining agreement.  Colonial
enjoys good working relationships with its employees and there
are no labor disputes pending or to the knowledge of Colonial,
threatened which might materially adversely affect the condition
(financial or otherwise), assets, liabilities, business or
operations of Colonial.

          Section 2.21  Employee Benefit Plans.  

               (a)  Plans and Plan Documents.  All employee
benefit plans, contracts or arrangements to which Colonial is a
party or by which it is bound which Colonial maintains for the
benefit of employees or former employees (including retired
employees), including, without limitation, all pension,
retirement, deferred compensation, incentive, bonus, profit
sharing, stock purchase, stock option, life insurance, death or
survivor's benefit, health insurance, sickness, disability,
medical, surgical, hospital, severance, layoff and vacation
plans, contracts or arrangements are identified in Schedule I. 
Colonial has delivered to Sovereign true, complete and accurate
copies of all plans identified on Schedule I.  Colonial has no
pension plan or other employee benefit plan which constitutes a
"qualified plan" under IRC Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "IRC").  

               (b)  Compliance.  All "employee benefit plans," as
defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), comply in all
material respects with ERISA.  As of December 31, 1994 Colonial
had no material liability under any such plan which is not
reflected, reserved against or accrued in the unaudited financial
statements of Colonial at and for the year ended December 31,
1994 previously delivered to Sovereign (or disclosed in the notes
thereto), including any liability under SFAS No. 106.  No
prohibited transaction (which shall mean any transaction
prohibited by ERISA Section 406 and not exempt under ERISA
Section 408) has occurred with respect to any employee benefit
plan maintained by Colonial which would result in the imposition,
directly or indirectly, of a material excise tax under IRC
Section 4975.  Colonial provides continuation coverage under
group health plans for separating employees in accordance with
the provisions of IRC Section 4980B(f).  Such group health plans
are in compliance with Section 1862(b)(1) of the Social Security
Act.  There have been no breaches of fiduciary duty by any
fiduciary under and with respect to any employee benefit plan to
which Colonial is a party or by which it is bound and no claim is
pending or threatened with respect to any such plan, other than
claims for benefits made in the ordinary course.

          Section 2.22  Related Party Transactions.  Except as
disclosed in Schedule I:  (i) no present or former officer or
director of Colonial, (ii) no spouse of any present or former
officer or director of Colonial, (iii) no shareholder owning five
percent or more of the outstanding Colonial Common Stock, (iv) no
child, parent, or sibling of any of the foregoing Persons, and
(v) no Person with respect to which any of the foregoing Persons
is an officer, director, partner, trustee or direct or indirect
beneficial owner of 10 percent or more of its equity interest, is
a party to (or has an interest in any property which is the
subject of) any contract, business arrangement or relationship of
any kind whatsoever with Colonial.  For purposes of this
Agreement: (a) the term "Person" shall mean any individual,
corporation, partnership, association, joint venture, limited
liability company, trust or other organization or entity, and
(b) the term "Colonial Affiliate" shall mean the Persons
identified in clauses (i) through (v) of the preceding sentence. 
All extensions of credit to Colonial Affiliates conform with all
applicable laws and regulations and no such extension of credit
is in default or has been in default, restructured, modified or
extended during the three year period preceding the date of this
Agreement, except for:  (i) a loan to Directors Limited
identified in Schedule I, and (ii) a loan to Robert J. Belon in
the principal amount of approximately $106,000, the details of
which have been fully disclosed to Sovereign.

          Section 2.23  No Finder.  Except with respect to its
engagement of Ryan, Beck & Co., Colonial has not paid or become
obligated to pay any fee or commission of any kind whatsoever to
any investment banker, broker, finder or other intermediary for,
on account of or in connection with the transactions contemplated
in this Agreement.  A true, complete and accurate copy of the
engagement letter entered into by Colonial with Ryan, Beck & Co.
(including all amendments thereto) has been delivered to
Sovereign.

          Section 2.24  Significant Customers.  All significant
customers of Colonial are identified in Schedule I.  For purposes
of this Agreement, a "significant customer" shall mean any
customer which as of February 28, 1995 had in the aggregate: 
(i) outstanding loans in the amount of $250,000 or more, or
(ii) deposits in the amount of $200,000 or more.  There has been
no material change in the identity of the significant customers
of Colonial or in the composition of these loans and/or, to the
best of Colonial's knowledge, deposits since February 28, 1995.

          Section 2.25  Environmental Matters.  For purposes of
this Agreement, the term "Environmental Laws" shall mean any
federal, state, local or foreign law, statute, ordinance, rule,
regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with
any Regulatory Authority relating to:  (i) the protection,
preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (ii) the use,
storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal
of any substance presently listed, defined, designated or
classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, whether by type or by quantity, including
any material containing any such substance as a component.  To
the knowledge of Colonial, neither Colonial nor any property
owned or operated by Colonial (including other real estate owned)
or any property which serves as collateral for any loan held by
Colonial has been or is in violation of or liable under any
Environmental Law, except for such violations or liabilities
that, individually or in the aggregate, would not have a material
adverse effect on the assets, business, financial condition or
results of operation of Colonial.  There are no actions, suits or
proceedings, or demands, claims, notices or investigations
(including without limitation notices, demand letters or requests
for information from any environmental agency) instituted or
pending, or, to the knowledge of Colonial, threatened relating to
the liability of any property owned or operated by Colonial
(including other real estate owned) or any property which serves
as collateral for any loan held by Colonial under any
Environmental Law.

          Section 2.26  Allowance for Loan Losses.  The allowance
for loan losses reflected in the Colonial Regulatory Reports and
shown on the balance sheets included in the Colonial Financial
Statements are (and in the case of allowances reflected in
subsequently prepared reports and financial statements, will be)
adequate, in accordance with the requirements of generally
accepted accounting principles and all applicable regulatory
criteria.  No regulatory authority has requested Colonial to
increase the allowance for loan losses since January 1, 1995.

          Section 2.27   Deleted.

          Section 2.28  Complete and Accurate Disclosure. 
Neither this Agreement nor any financial statement, schedule
(including, without limitation, Schedule I), certificate, or
other statement or document delivered (or to be delivered) by
Colonial to Sovereign in connection herewith contains (or will
contain) any untrue statement of a material fact or omits (or
will omit) to state a material fact necessary to make the
statements contained herein or therein (considered as a whole)
not misleading.  As of the date of this Agreement, there are no
material facts known to Colonial which materially adversely
affect, or which may in the future materially adversely affect,
the assets, liabilities, business, financial condition, results
of operations or future prospects of Colonial which have not been
previously disclosed by Colonial to Sovereign in writing.

                           ARTICLE III

           REPRESENTATIONS AND WARRANTIES OF SOVEREIGN

          Sovereign represents and warrants to Colonial, as of
the date of this Agreement and as of the date of the Closing, as
follows:

          Section 3.1  Organization and Standing.  Sovereign is a
Pennsylvania corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Pennsylvania. 
Sovereign is duly registered as a savings and loan holding
company under the Home Owners Loan Act of 1933, as amended. 
Sovereign has full power and lawful authority to own and hold its
properties and to carry on its present business.

          Section 3.2  Authority.  Sovereign has full corporate
power and authority to execute and deliver this Agreement and,
subject to the receipt of all required regulatory approvals (and
compliance with any conditions contained therein), to consummate
the transactions contemplated herein.  The execution and delivery
of this Agreement and the consummation of the transactions
contemplated herein have been authorized and approved by the
Board of Directors of Sovereign and no other corporate action on
its part is necessary to authorize this Agreement or the
consummation of the transactions contemplated herein.  This
Agreement has been duly executed and delivered by and, assuming
due authorization, execution and delivery by Colonial,
constitutes a valid and binding obligation of Sovereign,
enforceable against Sovereign in accordance with its terms,
subject to applicable bankruptcy, insolvency, conservatorship,
receivership and similar laws affecting creditors' rights
generally and subject to the application of equitable principles. 

          Section 3.3  No Violation.  Subject to the receipt of
all required regulatory approvals (and compliance with any
conditions contained therein), the execution, delivery and
performance of this Agreement and the consummation of the
transactions contemplated herein will not:  (i) violate or
conflict with any provision of the Articles of Incorporation or
bylaws of Sovereign, (ii) violate, conflict with, or constitute a
default, however defined (or be an event which, with or without
due notice or lapse of time, or both, would constitute such a
default) under, or cause or permit the acceleration of any
contract, note, bond, mortgage, indenture, license, lease or
other instrument, agreement or commitment to which Sovereign is a
party or by which Sovereign or any of its properties are bound,
or (iii) violate any statute, rule, regulation, ordinance,
judgment, order or decree applicable to Sovereign or by which
Sovereign or any of its properties is bound; except, however, in
the case of clauses (ii) and (iii) for such violations, defaults,
conflicts, accelerations, and terminations as would not,
individually or in the aggregate, materially adversely affect the
financial condition of Sovereign or its ability to perform its
obligations under this Agreement.

          Section 3.4  Financial Statements.  

               (a)  Financial Statements.  For purposes of this
Agreement, the term "Sovereign Financial Statements" shall mean: 
(i) the financial statements of Sovereign at and for the year
ended December 31, 1994 as certified by Ernst & Young, and
(ii) the unaudited financial statements of Sovereign for each
calendar quarter following the date of this Agreement included in
the Quarterly Reports on Form 10-Q to be filed by Sovereign with
the SEC.  Sovereign has previously delivered, or will deliver, to
Colonial the Sovereign Financial Statements.  The Sovereign
Financial Statements have been (and in the case of subsequently
prepared financial statements, will be) prepared in accordance
with generally accepted accounting principles consistently
applied during the periods involved and fairly present (and in
the case of subsequently prepared financial statements will
fairly present) the financial condition, results of operations,
cash flows and changes in shareholder's equity of Sovereign at
their respective dates and for the respective periods then ended
in accordance with generally accepted accounting principles
consistently applied.

               (b)  Absence of Undisclosed Liabilities.  As of
the date of each balance sheet included in the Sovereign
Financial Statements, Sovereign did not have (and in the case of
subsequently prepared financial statements, will not have) any
liabilities (whether accrued, absolute, contingent or otherwise)
which are required to be reflected, noted or reserved against
therein under generally accepted accounting principles or which
are in any case or in the aggregate material, except as
reflected, noted or adequately reserved against therein.  

          Section 3.5  Absence of Changes.  Since December 31,
1994, Sovereign has conducted its business in the regular and
ordinary course and has not undergone any change in condition
(financial or otherwise), assets, liabilities, business or
operations, other than changes in the ordinary course of business
consistent with past practice which have not been, either in any
case or in the aggregate, materially adverse.

          Section 3.6  Liquidity.  Sovereign will on the date of
the Closing have adequate liquidity to perform its obligations
under Sections 7.2 and 7.3 of the Plan of Merger attached hereto
as Exhibit A.

          Section 3.7  No Finder.  Sovereign has not paid or
become obligated to pay any fee or commission of any kind
whatsoever to any investment banker, broker, finder or other
intermediary for, on account of or in connection with the
transactions contemplated in this Agreement.

                           ARTICLE IV

                      COVENANTS OF COLONIAL

          From the date of this Agreement until the earlier of
the Effective Date or the termination of this Agreement in
accordance with the terms of Section 7.01 below, Colonial agrees
to do the following:

          Section 4.01  Conduct of Business.

               (a)  Ordinary Course.  From the date of this
Agreement to the date of the Closing, Colonial will conduct its
business and engage in transactions only in the ordinary course
and consistent with past practice, except as otherwise required
by this Agreement or with the written consent of Sovereign. 
Colonial will use its reasonable best efforts to:  (i) preserve
its business organization intact, (ii) maintain good
relationships with its employees, and (iii) preserve the goodwill
of its customers and others with whom business relationships
exist.

               (b)  Certain Negative Covenants.  Without
limitation of the covenants set forth in Section 4.01(a) above,
from the date hereof to the date of the Closing, except as
otherwise consented to or approved by Sovereign in writing or as
permitted or required by this Agreement, Colonial will not:

                    (i)  change any provision of its Articles of
     Incorporation or bylaws;

                    (ii)  change the number of authorized or
     issued shares of its capital stock or issue or grant any
     option, warrant, call commitment, subscription, right or
     agreement of any kind relating to its authorized or issued
     capital stock or any securities convertible into shares of
     such stock, combine or reclassify any shares of capital
     stock, or declare, set aside or pay any dividend or other
     distribution in respect of capital stock, or redeem or
     otherwise acquire any shares of capital stock;

                    (iii)  grant any severance or termination pay
     to, or enter into or amend any employment agreement with,
     any employee, officer or director of Colonial, or increase
     the rate of compensation of any officer, director or
     employee of Colonial;

                    (iv)  merge or consolidate Colonial with any
     other entity; sell or lease all or any substantial portion
     of the assets or business of Colonial; make any acquisition
     of all or any substantial portion of the business or assets
     of any other person, firm, association, corporation or
     business organization other than in connection with the
     collection of a loan or credit arrangement; enter into a
     purchase and assumption transaction with respect to its
     deposits and liabilities; revoke or surrender any
     certificate of authority to maintain, or file an application
     for the relocation of, any existing branch office, or file
     an application for a certificate of authority to establish a
     new branch office;

                    (v)  sell or otherwise dispose of any asset,
     other than in the ordinary course of business consistent
     with past practice; subject any asset of Colonial to a lien,
     pledge, security interest or other encumbrance, other than
     in the ordinary course of its banking business consistent
     with past practice; modify in any material respect the
     manner in which Colonial has heretofore conducted its
     business or enter into any new line of business; incur any
     indebtedness for borrowed money (or guarantee any
     indebtedness for borrowed money), except in the ordinary
     course of its banking business consistent with past
     practice;

                    (vi)  take any action which would result in
     any of the representations and warranties of Colonial set
     forth in this Agreement becoming untrue after the date
     hereof or any of the conditions set forth in Article V
     hereof not being satisfied;

                    (vii)  change any method, practice or
     principle of accounting; or change any assumption
     underlying, or any method of calculation of, depreciation of
     any type of asset or establishment of any reserve, except at
     the request of Sovereign pursuant to Section 4.14 below and
     except as may be required by any change in generally
     accepted accounting principles;

                    (viii)  waive, release, grant or transfer any
     rights of value or modify or change in any material respect
     any existing agreement to which Colonial is a party, other
     than in the ordinary course of business consistent with past
     practice;

                    (ix)  establish any new pension, retirement,
     profit sharing, bonus, welfare benefit or similar plan or
     arrangement or amend any such existing plan or arrangement,
     except for such amendments as may be required by law;

                    (x)  make any new loan or other credit
     facility commitment (including, without limitation, lines of
     credit and letters of credit) to:  (A) any borrower or group
     of affiliated borrowers in excess of $250,000 in the
     aggregate, or (B) any Colonial Affiliate;

                    (xi)  compromise, extend or restructure any
     loan with an unpaid principal balance exceeding $250,000,
     provided, however, that Sovereign agrees that it may
     withhold its consent to any such compromise, extension or
     restructuring only for reasons relating to credit
     considerations specifically applicable to the loan involved;

                    (xii)  sell, exchange or otherwise dispose of
     any investment securities or loans held for sale in an
     amount in excess of $100,000;

                    (xiii)  purchase any security for its
     investment portfolio not rated "A" or higher by both
     Standard & Poor's Corporation or Moody's Investor Services,
     Inc.;

                    (xiv)  offer, issue any commitment for, or
     approve any loan or other credit facility, except in the
     ordinary course of business and at rates and on terms and
     conditions which are consistent with past practice;

                    (xv)  originate deposits, except in the
     ordinary course of business and at rates and on other terms
     and conditions which are consistent with past practice;

                    (xvi)  make any loan or other credit facility
     commitment (including without limitation, lines of credit
     and letters of credit) to any Colonial Affiliate or
     compromise, extend, renew (other than the renewal of a home
     equity line of credit which is secured by a first mortgage
     lien and which has a loan to value ratio of not more than
     50%) or modify any such existing loan or commitment;
     provided, however, that Sovereign shall not unreasonably
     withhold its consent;

                    (xvii)  enter into, renew, extend or modify
     any other transaction with any Colonial Affiliate;

                    (xviii)  enter into or assume any material
     contract or commitment, except in the ordinary course of
     business consistent with past practice;

                    (xix)  take any action which would adversely
     affect the ability of Sovereign or Colonial to obtain any
     regulatory approval required in order to consummate the
     transactions contemplated in this Agreement;

                    (xx)  make any capital expenditure of $10,000
     or more;

                    (xxi)  enter into any contract or commitment
     (other than in the ordinary course of extending credit to
     customers as part of its banking business) involving an
     unbudgeted expense of $10,000 or more or involving a
     material financial commitment which extends beyond six
     months from the date hereof; 

                    (xxii)  elect or appoint any person to its
     Board of Directors who is not a director on the date of this
     Agreement; or

                    (xxiii)  agree to do any of the foregoing.

               (c)  Certain Affirmative Covenants.  Without
limitation of the covenants set forth in Section 4.01(a) above,
from the date hereof to the date of the Closing, except as
otherwise consented to or approved by Sovereign in writing or as
permitted or required by this Agreement, Colonial will:

                    (i)  maintain all furniture, fixtures,
     equipment and improvements to real estate in good condition
     and repair, except for ordinary wear and tear and damage by
     unavoidable casualty;

                    (ii)  maintain all insurance policies in
     effect;

                    (iii)  perform all of its obligations under
     all material agreements, contracts and other commitments to
     which it is a party or by which it or any of its assets are
     bound;

                    \DMS  maintain its books of accounts and
     other records in the ordinary course consistent with past
     practice; and

                    (v)  comply with all statutes, laws,
     ordinances, rules and regulations applicable to it and/or to
     the conduct of its business.

          Section 4.02  Best Efforts.  Colonial shall cooperate
with Sovereign and shall use its reasonable best efforts to do or
cause to be done all things necessary or appropriate on its part
in order to consummate the transactions contemplated by this
Agreement.

          Section 4.03  Access and Confidentiality.

               (a)  Access.  From the date of this Agreement
through the date of the Closing, Colonial shall afford to
Sovereign and its authorized agents and representatives
reasonable access during normal business hours to its properties,
books and records and personnel and Colonial shall make available
to Sovereign and its authorized agents and representatives all
such financial and operating data and other information relating
to Colonial and its business, properties, assets, liabilities and
personnel as they may from time to time reasonably request.

               (b)  Confidentiality.  In the event of the
termination of this Agreement, Sovereign shall return or destroy
(and deliver to Colonial an affidavit of destruction) all
documents and records obtained by it from Colonial and will
maintain the confidentiality of all information relating to
Colonial obtained by it pursuant to this Agreement, except to the
extent that such information becomes public through no fault of
Sovereign and except to the extent that disclosure of any such
information is legally required.

          Section 4.0Regulatory Reports.  Colonial shall promptly deliver to 
Sovereign all Colonial Financial Statements and all Colonial Regulatory
Reports required to be prepared by it subsequent to the date of
this Agreement.  In addition, Colonial agrees to deliver to
Sovereign all such other reports and other documents normally
prepared by Colonial which relate to its assets, liabilities or
otherwise to the conduct of its business as Sovereign may from
time to time reasonably request.

          Section 4.05  Update of Schedule I and Notice.

               (a)  Update of Schedule I.  Colonial shall update
Schedule I as promptly as possible after the occurrence of any
event or fact which, if such event or fact had occurred prior to
the date of this Agreement, would have been disclosed on
Schedule I.  The delivery of any update to Schedule I by Colonial
shall not relieve Colonial from liability for any breach or
violation of this Agreement.

               (b)  Notice.  Without limitation of the foregoing,
Colonial shall promptly notify Sovereign in writing of any
action, claim, investigation or other development which, if
pending or in existence on the date of this Agreement, would have
been required to be disclosed to Sovereign to assure the accuracy
of the representations and warranties set forth in this Agreement
or which otherwise materially affects the assets, liabilities,
business, financial condition or results of operation of Colonial
or its ability to perform its obligations under this Agreement.

          Section 4.06  Consents.  Colonial shall obtain in
writing all such consents, waivers and other documents
contemplated under Section 2.14(b) from third parties that may be
required in order to consummate the transactions contemplated in
this Agreement.

          Section 4.07  Deleted.  

          Section 4.08  Regulatory Applications.  Colonial shall,
with the cooperation and assistance of Sovereign, promptly
prepare and file with the NJDOB, with the FDIC and with all other
relevant regulatory authorities all notices and applications
necessary in order to secure (and use its best efforts to secure
as promptly as possible) all regulatory approvals and consents
required to be obtained or filed by it in order to consummate the
transactions contemplated in this Agreement.  All such notices
and applications shall be subject to review by and the approval
of Sovereign prior to filing, which approval shall not be
unreasonably withheld or delayed.

          Section 4.09  Shareholder Approval.  Colonial agrees to
hold a special meeting of its shareholders (the "Special
Meeting") as soon as practicable in order to obtain shareholder
approval of the Merger.  Colonial agrees to cause its Board of
Directors to recommend to the shareholders that the Merger be
approved.  Colonial further agrees to prepare and distribute to
its shareholders a proxy statement (the "Proxy Statement") in
connection with the Special Meeting in accordance with all
applicable laws and regulations, which proxy statement shall not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements contained
therein, in light of the circumstances under which made, not
misleading.

          Section 4.10  Fairness of Opinion.  Colonial shall use
its reasonable best efforts to obtain a written opinion from Ryan
Beck & Co. (or, in the event that Ryan Beck & Co. is for any
reason unable or unwilling to deliver the required opinion, from
another reputable investment banking firm engaged on terms and
conditions reasonably satisfactory to Sovereign) as to the
fairness of the Merger to the shareholders of Colonial from a
financial point of view, which opinion shall be dated a date not
more than ten (10) business days and not less than five
(5) business days prior to the date of mailing of the Proxy
Statement and shall be included in the Proxy Statement.

          Section 4.11  Reserves and Accruals.  Immediately prior
to the Closing, Colonial shall establish such additional accruals
and reserves as Sovereign may request in order to conform
Colonial's accounting reserve practices and methods (including
credit loss practices and methods) to those of Sovereign and its
subsidiaries and otherwise to reflect the expenses and costs
incurred by Colonial in connection with the consummation of this
Agreement.

          Section 4.12  Financial Statement Review.  If requested
to do so by Sovereign, Colonial shall at Sovereign's expense
cause KPMG Peat Marwick to perform a review of Colonial's
unaudited financial statements as of the end of a calendar
quarter designated by Sovereign in accordance with Statement of
Auditing Standards No. 36 and to issue their report hereon as
soon as practicable thereafter.

          Section 4.13  No Other Bids.  Colonial shall not, nor
shall it permit any officer, director, or employee of Colonial,
or any investment banker, attorney, accountant or other
representative retained by Colonial to, directly or indirectly,
solicit, encourage, initiate or engage in discussions or
negotiations with, or respond to requests for information,
inquiries, or other communications from, any person other than
Sovereign concerning the fact of, or the terms and conditions of,
this Agreement, or concerning any acquisition of Colonial, or any
assets or business of Colonial (except that Colonial's officers
may respond to inquiries from regulatory authorities and holders
of Colonial Common Stock in the ordinary course of business). 
Colonial shall notify Sovereign immediately if any such
discussions or negotiations are sought to be initiated with
Colonial by any person other than Sovereign or if by such
requests for information, inquiries, proposals or communications
are received from any person other than Sovereign. 
Notwithstanding the foregoing, Colonial, after written notice to
Sovereign, may respond to unsolicited inquiries from third
parties and/or engage in discussions with third parties if, in
each case Colonial shall have received a written opinion, from
Independent Counsel, to be selected by Colonial and approved by
Sovereign, to the effect that consummation of the Merger
constitutes a clear breach or failure on the part of the Board of
Directors of Colonial to perform the duties of their office, and
that such breach constitutes actionable misconduct for which a
majority of such directors are liable under New Jersey law.  For
purposes of this Agreement, the term "Independent Counsel" shall
mean a law firm which is experienced in matters involving the
fiduciary duties of directors and which has not within the
preceding five years been engaged to represent Colonial or any
director or officer of Colonial.

          Section 4.14   Park Avenue Real Estate.

               (a)  Background.  Sovereign acknowledges that
Colonial has sought regulatory approval from the NJDOB for a
transaction (the "Real Estate Transaction") under which it will
cause the Colonial Subsidiary to purchase:  (i) from Colonial the
fee interest in the real estate located at 521 Park Avenue,
Freehold, New Jersey, and (ii) from Directors Limited, a joint
venture, the improvements thereon erected.  Colonial has provided
to Sovereign a true,  complete and accurate copy of the
regulatory application filed with the NJDOB in connection with
the Real Estate Transaction and all correspondence relating
thereto (the "Application").  The Application completely and
accurately describes the terms of the Real Estate Transaction and
includes true, complete and accurate copies of all agreements,
loan commitments, appraisals and other documents and instruments
(including all amendments thereto) relating to the Real Estate
Transaction.

               (b)  Consents and Approvals.  Colonial shall not
consummate the Real Estate Transaction:  (i) without the prior
written consent of Sovereign, (ii) without the written approval
of the NJDOB, and (iii) except in strict compliance with the
terms and conditions of the approval of the NJDOB.  Sovereign
agrees that it will consent to the Real Estate Transaction,
provided that:  (i) the Real Estate Transaction is approved by
the NJDOB and such approval contains no terms or conditions which
Sovereign reasonably determines in the exercise of its sole
discretion to be burdensome or otherwise unacceptable, and
(ii) the financial and other terms of the Real Estate Transaction
are not amended, waived or otherwise changed in any material
respect from those set forth in the Application, and (iii) the
agreements of sale, mortgage, mortgage note, title policy, lease
and other documents pursuant to which the Real Estate Transaction
is consummated are in form and substance usual, reasonable and
customary for a transaction of that kind.

               (c)  No Violation of Other Covenants.  No action
taken by Colonial for purposes of consummating the Real Estate
Transaction in accordance with the terms of and as contemplated
by this Section 4.14 shall constitute a breach of any covenant
set forth in any other Section of this Article IV.

          Section 4.15  Miscellaneous.

               (a)  Environmental Audit.  Colonial agrees to
permit Sovereign, at Sovereign's expense and if Sovereign elects
to do so, to cause a Phase I and/or a Phase II environmental
audit to be performed at any real property owned or occupied by
Colonial (including other real estate owned) and at any property
which serves as collateral for any loan held by Colonial. 
Sovereign agrees to deliver to Colonial a copy of any report it
may receive in connection with any such environmental audit.

               (b)  Board of Director Meetings.  Colonial agrees
that a representative of Sovereign shall be permitted to attend:
(i) all meetings of the Board of Directors of Colonial, (ii) all
meetings of the executive committee of the Board of Directors of
Colonial, and (iii) all senior management level meetings of
Colonial involving policy matters or significant business
decisions; provided, however, that Sovereign acknowledges that
its representative will be asked to leave any meeting during any
discussion of matters relating to this Agreement.  Colonial
agrees to provide Sovereign with at least 48 hour's advance
written or oral notice of any such meeting, except that in the
case of an emergency meeting, Colonial shall provide the same
notice to Sovereign as it provides to its own directors and/or
officers.

          Section 4.16  Colonial D&O Insurance.  Colonial has
advised Sovereign that it has the ability to purchase a six year
policy of director and officer liability "tail" coverage
insurance on terms and conditions previously disclosed to
Sovereign at an aggregate cost which does not exceed $65,000. 
Colonial shall take all such steps as may be necessary or
appropriate to purchase such policy of "tail" coverage insurance
immediately before the Effective Date, provided that the cost of
such policy does not exceed $65,000.

                            ARTICLE V

                     COVENANTS OF SOVEREIGN

          From the date of this Agreement until the earlier of
the Effective Date or the termination of this Agreement in
accordance with the terms of Section 7.01 below, Sovereign
covenants and agrees to do the following:

          Section 5.01  Best Efforts.  Sovereign shall cooperate
with Colonial and shall use its reasonable best efforts to do or
cause to be done all things necessary or appropriate on its part
in order to consummate the transactions contemplated in this
Agreement.

          Section 5.02  Interim Banks.  Sovereign shall promptly
take all steps necessary or appropriate in order to organize
Interim Bank and Interim Bank II and shall cause Interim Bank and
Interim Bank II to take all actions which are necessary or
appropriate in order to effectuate the purposes of this
Agreement, including, without limitation, the Merger, the Charter
Conversion and the Second Merger.

          Section 5.03  Regulatory Notices and Applications. 
Sovereign shall promptly prepare and file all required notices
and applications required to be filed by it and by Interim Bank
and Interim Bank II for regulatory approval of the transactions
contemplated by this Agreement (which notices and applications
Sovereign will endeavor to file not later than April 30, 1995)
and shall use its reasonable best efforts to obtain such
approvals as promptly as possible.

          Section 5.04  Management Following the Merger.

               (a)  Board of Directors.  The Board of Directors
of Colonial following the Merger shall consist of:  (i) those
persons who are members of Colonial's Board of Directors
immediately prior to the Merger, each of whom shall serve after
the Merger at the pleasure of Sovereign and until his successor
is elected and has qualified, and (ii) such additional persons as
Sovereign in its discretion may cause to be elected or appointed
to the Board of Directors.  Notwithstanding the foregoing,
Sovereign agrees that each of the persons identified below shall
serve as a member of the Board of Directors of Colonial following
the Effective Date for the period indicated below opposite his
name, unless he resigns, dies or is removed from office for
cause:

                                      Period of Service After
          Name of Director              the Effective Date   

          Charles P. Kaempffer               3 Years
          Eli Kramer                         3 Years
          David I. Weiner                    3 Years
          Robert J. Belon                    2 Years
          Anthony R. Coppola                 2 Years
          Robert L. Coutts                   2 Years
          H. Daniel Harris                   1 Year
          Robert M. Kaye                     1 Year
          Charles R. Miller                  1 Year

Each person identified above shall be free to resign as a
director at any time.

               (b)  Laine Employment Contract and Amendment. 
Colonial has provided to Sovereign a true, complete and accurate
copy of an Employment Contract dated November 16, 1993, including
all amendments thereto (the "Employment Contract"), entered into
by and between Colonial and Stephen S. Laine ("Laine") under the
terms of which Colonial engaged Laine to serve as its President
and Chief Executive Officer for a three year period expiring on
November 15, 1996, subject, among other things, to the right of
Colonial to terminate such employment at any time, with or
without cause.  Colonial has in all material respects performed
all obligations required to be performed by it under the
Employment Contract and is not in default in any material respect
under the Employment Contract.  Colonial has also provided to
Sovereign a true, complete and accurate copy of an Agreement
dated March 20, 1995, including all amendments thereto (the
"Agreement"), entered into by and between Colonial and Laine
which, among other things, becomes effective on the Effective
Date and, upon becoming effective, supersedes the Employment
Contract in its entirety.  The execution and delivery of the
Agreement and the consummation of the transactions contemplated
therein have been authorized and unanimously approved by the
Board of Directors of Colonial.  The Agreement has been duly
executed and delivered by Colonial and by Laine and constitutes a
valid and binding obligation of Laine, enforceable against Laine
in accordance with its terms.

          Section 5.05  Employees and Employee Benefits.  It is
Sovereign's present intention to retain substantially all of the
officers and employees of Colonial following the Merger, with
appropriate changes in title so as to be consistent with
Sovereign's management and employee structure.  It is Sovereign's
present intention to provide to the employees of Colonial
following the Merger the standard employee benefits package which
Sovereign then makes available to its employees and to the
employees of its subsidiaries.  Employees of Colonial following
the Merger shall be entitled to full credit for each year of
service with Colonial for purposes of the eligibility and vesting
provisions of Sovereign's employee benefit plans, but not for
purposes of benefit accrual.  Sovereign agrees that Colonial's
existing severance policy (as reflected in the minutes of the
November 17, 1994 meeting of the Board of Directors of Colonial)
will be applicable to any Colonial employee whose employment is
terminated (or who resigns because he is required to work at a
location which is more than 20 miles from Freehold, New Jersey or
because his annual salary or hourly rate of pay is reduced)
within six months following the Merger, provided that such
employee is otherwise entitled to receive benefits under that
policy in accordance with its terms.  Nothing herein shall be
construed to limit in any way or prohibit the right of Sovereign
following the Merger to cause Colonial to amend or terminate any
Colonial employee benefit plan, except that Sovereign agrees that
it will honor Colonial's existing severance policy as and to the
extent contemplated in the fourth sentence of this Section.

                           ARTICLE VI

                      CONDITIONS PRECEDENT

          Section 6.01  Conditions to Colonial's Obligations
under this Agreement.  The obligations of Colonial hereunder
shall be subject to satisfaction at or prior to the Closing of
each of the following conditions, unless waived by Colonial
pursuant to Section 8.03 hereof:

               (a)  Corporate Proceedings.  All actions required
to be taken by, or on the part of, Sovereign and Interim Bank to
authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
hereby, shall have been duly and validly taken and Colonial shall
have received certified copies of the resolutions evidencing such
authorizations;

               (b)  Covenants and Representations.  The
obligations of Sovereign required by this Agreement to be
performed by Sovereign at or prior to the Closing shall have been
duly performed and complied with in all material respects and the
representations and warranties of Sovereign set forth in this
Agreement shall be true and correct in all material respects, as
of the date of this Agreement and as of the Closing, as though
made on and as of the Closing, except:  (i) as to any
representation or warranty which specifically relates to an
earlier date, or (ii) where the facts which cause the failure of
any representation or warranty to be so true and correct would
not, either individually or in the aggregate, constitute a
material adverse change in the assets, liabilities, business,
financial condition or results of operations of Sovereign and its
subsidiaries taken as a whole;

               (c)  Approvals of Regulatory Authorities.  The
approval or authorization of each federal and state regulatory
authority required in connection with the transactions
contemplated hereby, including without limitation the approval of
the OTS and the NJDOB, shall have been obtained, and all notice
and waiting periods required thereunder shall have expired or
been terminated;

               (d)  No Injunction.  There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;

               (e)  No Material Adverse Change.  Since
December 31, 1994, there shall not have occurred any material
adverse change in the consolidated assets, consolidated financial
condition or consolidated results of operations of Sovereign and
its subsidiaries taken as a whole;

               (f)  Officer's Certificate.  Sovereign shall have
delivered to Colonial a certificate, dated the date of the
Closing and signed, without personal liability, by its president
or by a vice president, to the effect that the conditions set
forth in Subsections (a) through (e) of this Section 6.01 have
been satisfied, to the best knowledge of the officer executing
the same;

               (g)  Opinion of Sovereign's Counsel.  Colonial
shall have received an opinion of Stevens & Lee, counsel to
Sovereign, dated the date of the Closing, in form and substance
reasonably satisfactory to Colonial and its counsel to the effect
set forth on Exhibit B attached hereto; and

               (h)  Approval of Colonial's Shareholders.  This
Agreement (including the Plan of Merger) shall have been approved
by the shareholders of Colonial by such vote as is required under
New Jersey law and by Colonial's Articles of Incorporation and
bylaws.

          Section 6.02  Conditions to Sovereign's Obligations
under this Agreement.  The obligations of Sovereign hereunder
shall be subject to satisfaction at or prior to the Closing of
each of the following conditions, unless waived by Sovereign
pursuant to Section 8.01 hereof:

               (a)  Corporate Proceedings.  All action required
to be taken by, or on the part of, Colonial to authorize the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, shall have
been duly and validly taken by Colonial and Sovereign shall have
received certified copies of the resolutions evidencing such
authorizations;

               (b)  Covenants; Representations.  The obligations
of Colonial required by this Agreement to be performed by it at
or prior to the Closing shall have been duly performed and
complied with in all material respects and the representations
and warranties of Colonial set forth in this Agreement shall be
true and correct in all material respects, as of the date of this
Agreement and as of the Closing, as though made on and as of the
Closing, except:  (i) as to any representation or warranty which
specifically relates to an earlier date, or (ii) where the facts
which cause the failure of any representation or warranty to be
so true and correct would not, either individually or in the
aggregate, constitute a material adverse change in the assets,
liabilities, business, financial condition or results of
operations of Colonial.

               (c)  Approvals of Regulatory Authorities.  The
approval or authorization of each federal and state regulatory
authority required in connection with the transactions
contemplated hereby, including without limitation the approvals
of the OTS and the NJDOB, shall have been obtained without the
imposition of any term or condition that Sovereign determines in
good faith and in the exercise of its reasonable discretion to be
unacceptable, and all notice and waiting periods required
thereunder shall have expired or been terminated;

               (d)  No Litigation.  There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby and there shall be no material
suit, action, or other proceeding threatened or pending before
any court or governmental agency seeking monetary damages or
other relief against Colonial in connection with this Agreement
or otherwise;

               (e)  No Material Adverse Change.  Since
December 31, 1994, there shall not have occurred any material
adverse change in the assets, liabilities, business, financial
condition or results of operations of Colonial (For purposes of
this Subsection (e), no "material adverse change" shall be deemed
to have occurred solely by reason of any increase by Colonial in
its allowance for loan losses, to the extent that such increase
is effected at the request of Sovereign pursuant to Section 4.11
of this Agreement.);

               (f)  Approval of Colonial's Shareholders.  This
Agreement (including the Plan of Merger) shall have been approved
by the shareholders of Colonial by such vote as is required under
New Jersey law and by Colonial's Articles of Incorporation and
bylaws;

               (g)  Officer's Certificate.  Colonial shall have
delivered to Sovereign a certificate, dated the date of the
Closing and signed, without personal liability, by its chairman
of the board or president, to the effect that the conditions set
forth in Subsections (a) through (f) of this Section 6.02 have
been satisfied, to the best knowledge of the officer executing
the same;

               (h)  Interim Bank II, Charter Conversion and
Second Merger.  Interim Bank II shall have been duly organized,
all regulatory approvals shall have been obtained, and all other
actions shall have been taken which are required in order to
effect the Charter Conversion and the Second Merger immediately
following the Merger.


               (i)  Tax Opinion.  Sovereign shall have received
an opinion of Stevens & Lee, counsel to Sovereign, substantially
to the effect set forth on Exhibit C attached hereto; 

               (j)  Opinion of Colonial's Counsel.  Sovereign
shall have received an opinion of counsel to Colonial dated the
date of the Closing in form and substance reasonably satisfactory
to Sovereign and its counsel to the effect set forth on Exhibit D
attached hereto;

               (k)  Comfort Letter.  If requested by Sovereign,
Sovereign shall have received, at Sovereign's expense, a
"comfort" letter from KPMG Peat Marwick dated shortly prior to
the Effective Date, covering such matters as are usual and
customary for transactions of the type contemplated by this
Agreement, which letter shall be reasonably satisfactory in form
and substance to Sovereign; 

               (l)  Dissenters' Rights.  The holders of fewer
than 26,945 shares of Colonial Common Stock shall have timely
served written notice of dissent upon Colonial.

                           ARTICLE VII

                           TERMINATION

          Section 7.01  Termination.  This Agreement may be
terminated on or at any time prior to the Closing, as follows:

               (a)  Mutual Consent.  This Agreement may be
terminated at any time by the mutual written consent of the
parties hereto.

               (b)  Unilateral Action by Sovereign.  This
Agreement may be terminated unilaterally by Sovereign upon
written notice given to Colonial:

                    (i)  Material Breach.  At any time if there
     shall have been any material breach of this Agreement by
     Colonial and such breach cannot be, or shall not have been,
     remedied within 30 days after receipt by Colonial of notice
     in writing specifying the nature of such breach and
     requesting that it be remedied;

                    (ii)  Environmental Matters.  At any time
     prior to the expiration of 60 days after the date of this
     Agreement if Sovereign reasonably determines in its sole
     discretion that the results of any environmental audit(s)
     performed by it pursuant to Section 4.15(a) above reflect so
     adversely upon the assets, liabilities, business, financial
     condition or results of operations of Colonial that
     Sovereign concludes that it would be inadvisable for
     Sovereign to consummate this Agreement;

                    (iii)  Adverse Determination.  At any time if
     Sovereign reasonably determines in its sole discretion that
     any change or development in state or federal law or
     regulatory policy so adversely affects the legal,
     regulatory, business and/or financial assumptions underlying
     the transactions contemplated by this Agreement that
     Sovereign concludes that it would be inadvisable for
     Sovereign to consummate this Agreement;

                    (iv)  Regulatory Disapproval.  At any time if
     either party has been informed in writing by a regulatory
     authority whose approval or consent is required that such
     approval or consent is unlikely to be granted, unless the
     failure of such occurrence shall be due to the failure of
     Sovereign to perform or observe its agreements set forth
     herein required to be performed or observed by it on or
     before the Closing; or

                    (v)  Failure to Close.  At any time if the
     Closing shall not have occurred prior to November 15, 1995,
     unless the failure of such occurrence shall be due to the
     failure of Sovereign to perform or observe its agreements
     set forth in this Agreement required to be performed or
     observed by it on or before the Closing.

               (c)  Unilateral Action by Colonial.  This
Agreement may be terminated unilaterally by Colonial upon written
notice given to Sovereign:

                    (i)  Material Breach.  At any time if there
     shall have been any material breach of this Agreement by
     Sovereign and such breach cannot be, or shall not have been,
     remedied within 30 days after receipt by Sovereign of notice
     in writing specifying the nature of such breach and
     requesting that it be remedied;

                    (ii)  Regulatory Disapproval.  At any time if
     either party has been informed in writing by a regulatory
     authority whose approval or consent is required that such
     approval or consent is unlikely to be granted, unless the
     failure of such occurrence shall be due to the failure of
     Colonial to perform or observe its agreements set forth
     herein required to be performed or observed by it on or
     before the Closing; or

                    (iii)  Failure to Close.  At any time if the
     Closing shall not have occurred prior to November 15, 1995,
     unless the failure of such occurrence shall be due to the
     failure of Colonial to perform or observe its agreements set
     forth in this Agreement required to be performed or observed
     by it on or before the Closing.

          Section 7.02  Effect of Termination.

               (a)  General.  If this Agreement is terminated
pursuant to Section 7.01 hereof, this Agreement shall forthwith
become void (other than Section 4.03(b), Section 7.02(b),
Section 7.02(c), and Section 8.01 hereof, each of which shall
remain in full force and effect), and there shall be no further
liability on the part of Sovereign or Colonial to the other,
except for any liability of Sovereign or Colonial under
Section 4.03(b), Section 7.02(b), Section 7.02(c) and
Section 8.01 hereof and except for any liability arising out of a
breach of any covenant or other agreement contained in this
Agreement.

               (b)  Colonial Fee.  If, within 18 months following
the date of termination of this Agreement by Sovereign pursuant
to Section 7.01(b)(i) on account of an unremedied material breach
by Colonial, a Person other than Sovereign or a subsidiary of
Sovereign, enters into a letter of intent or agreement with
Colonial pursuant to which such Person would:  (i) merge or
consolidate, or enter into any similar transaction, with
Colonial, (ii) acquire all or substantially all of the assets of
Colonial, or (iii) acquire beneficial ownership of securities
representing, or the right to acquire beneficial ownership or to
vote securities representing, 25% or more of the then outstanding
shares of Colonial Common Stock, and at such time, for any
reason, Sovereign is prohibited by a court or any government
authority from exercising the Sovereign Option or causing
Colonial to repurchase the Sovereign Option or Sovereign in its
sole discretion reasonably determines that it is otherwise unable
to exercise the Sovereign Option or cause Colonial to repurchase
the Sovereign Option, then Colonial shall immediately pay to
Sovereign a fee of $500,000, which fee shall constitute
reimbursement to Sovereign for its costs and expenses, including
legal fees and expenses, incurred in connection with this
Agreement and the transactions contemplated hereby.  Nothing in
this Section 7.02(b) shall constitute a waiver or limitation, in
whole or in part, of any legal or equitable rights which
Sovereign may possess against Colonial relating to any breach by
Colonial of its obligations under this Agreement or under the
Sovereign Option Agreement or against any other Person relating
to this Agreement or to the Sovereign Option Agreement, or
relating to Sovereign's relationship with Colonial or for any act
or omission of any such Person, including any tortious
interference with this Agreement or with the Sovereign Option
Agreement or for otherwise wrongfully inducing or causing any
breach of any such agreement.

               (c)  Sovereign Fees.

                    (i)  Breach by Sovereign.  If this Agreement
     is terminated by Colonial pursuant to Section 7.01(c)(i) on
     account of an unremedied material breach by Sovereign, then
     Sovereign shall immediately pay to Colonial a fee of
     $500,000, which fee shall constitute reimbursement to
     Colonial for its costs and expenses, including legal fees
     and expenses, incurred in connection with this Agreement and
     the transactions contemplated hereby.  Nothing in this
     Section 7.02(c)(i) shall constitute a waiver or limitation,
     in whole or in part, of any legal or equitable rights which
     Colonial may possess against Sovereign relating to any
     breach by Sovereign of its obligations under this Agreement.

                    (ii)  Adverse Determination by Sovereign.  If
     this Agreement is terminated by Sovereign pursuant to
     Section 7.01(b)(iii), then Sovereign shall immediately pay
     to Colonial a fee of $500,000.  Upon payment of such fee,
     Sovereign shall have no further obligations or liabilities
     of any kind whatsoever to Colonial relating to this
     Agreement or the transactions contemplated hereby, except
     for any liability of Sovereign under Section 4.03(b) and
     Section 8.01 hereof, and Colonial hereby covenants not to
     sue Sovereign or any Person which is an affiliate of
     Sovereign for any cause of action or claim of any kind
     whatsoever relating to this Agreement or the transactions
     contemplated hereby, whether such cause of action or claim
     is at law or in equity and whether it involves an alleged
     breach of contract, tort or otherwise.

                          ARTICLE VIII

                          MISCELLANEOUS

          Section 8.01  Expenses.  Each party hereto shall bear
and pay all costs and expenses incurred by it in connection with
the transactions contemplated hereby, including fees and expenses
of its own financial consultants, accountants and counsel, except
as provided in Section 4.12 and except that Sovereign shall pay: 
(i) one-half of the cost of printing and mailing the Proxy
Statement, up to $2,000, and (ii) the additional regulatory
application filing fees and legal and accounting fees, if any,
reasonably incurred by Colonial by reason of or relating to the
Charter Conversion and/or the Second Merger.

          Section 8.02  Non-Survival of Representations and
Warranties.  All representations, warranties and, except to the
extent specifically provided otherwise herein, agreements and
covenants shall terminate on the Effective Date.

          Section 8.03  Amendment, Extension and Waiver.  Subject
to applicable law, at any time prior to the Effective Date, the
parties may:  (i) amend this Agreement, (ii) extend the time for
the performance of any of the obligations or other acts of either
party hereto, (iii) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered
pursuant hereto, or (iv) waive compliance with any of the
agreements or conditions contained herein.  This Agreement may
not be amended except by an instrument in writing signed, by duly
authorized officers, on behalf of the parties hereto.  Any
agreement on the part of a party hereto to any extension or
waiver shall be valid only if set forth in an instrument in
writing signed by a duly authorized officer on behalf of such
party, but such waiver or failure to insist on strict compliance
with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.

          Section 8.04  Public Announcements.  The parties shall
agree upon the form and substance of any press release related to
this Agreement and the transactions contemplated hereby, and upon
the form and substance of other public disclosures related
thereto, including without limitation communications to Colonial
shareholders, Colonial internal announcements and customer
disclosures, but nothing contained herein shall prohibit either
party from making any disclosure which its counsel deems
necessary.

          Section 8.05  Entire Agreement.  This Agreement,
including the documents and other writings referred to herein or
delivered pursuant thereto, contains the entire agreement and
understanding of the parties with respect to its subject matter. 
This Agreement supersedes all prior arrangements and
understandings between the parties, both written and oral with
respect to its subject matter.  This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors; provided, however, that nothing in this
Agreement, express or implied, is intended to confer upon any
party, other than the parties hereto and their respective
successors, any rights, remedies, obligations or liabilities of
any kind and no such person (including, without limitation, any
officer, director, employee or shareholder of Colonial) shall
have any right to initiate or maintain any suit or other action
for any breach or alleged breach of this Agreement or to enforce
any provision set forth herein.

          Section 8.06  No Assignment.  Neither party hereto may
assign any of its rights or obligations hereunder to any other
person, without the prior written consent of the other party
hereto.

          Section 8.07  Notices.  All notices or other
communications hereunder shall be in writing and shall be deemed
given if delivered personally, mailed by prepaid registered or
certified mail (return receipt requested), or sent by telecopy,
addressed as follows:

               (a)  If to Sovereign, to:

                         Sovereign Bancorp, Inc.
                         1130 Berkshire Boulevard
                         P.O. Box 37
                         Reading, Pennsylvania  19603

                         Attention:  Richard A. Elko, Corporate
                                     Controller and Development
                                     Officer

                         Telecopy No.:  (610) 320-8448

                    with a copy to:

                         Stevens & Lee
                         607 Washington Street
                         Reading, Pennsylvania  19601

                         Attention:  Joseph M. Harenza, Esquire
                                             and
                                     Clinton W. Kemp, Esquire

                         Telecopy No.:  (610) 376-5610

               (b)  If to Colonial to:

                         Colonial State Bank
                         521 Park Avenue
                         Freehold, New Jersey  07728

                         Attention:  Eli Kramer,
                                     Chairman of the Board

                         Telecopy No.:  (908) 780-4948

                    with a copy to:

                         Wilentz, Goldman & Spitzer
                         90 Woodbridge Center Drive
                         Woodbridge, New Jersey  07095

                         Attention:  Norman Peer, Esquire

                         Telecopy No.:  (908) 855-6117

          Section 8.08  Captions.  The captions contained in this
Agreement are for reference purposes only and are not part of
this Agreement.

          Section 8.09  Counterparts.  This Agreement may be
executed in any number of counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.

          Section 8.10  Severability.  If any provision of this
Agreement or the application thereof to any person or
circumstance shall be invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such
provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent
permitted by law.

          Section 8.11  Governing Law.  This Agreement shall be
governed by and construed in accordance with the domestic
internal law (without reference to its law of conflicts of law)
of the Commonwealth of Pennsylvania, except to the extent that
matters relating to the Merger may be governed by the laws of the
United States of America or, in the absence of controlling
federal law, by the domestic internal law (without reference to
its law of conflicts of law) of the State of New Jersey.

          IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed by their duly authorized officers as of
the day and year first above written.

                         SOVEREIGN BANCORP, INC.

(CORPORATE SEAL)         By: /s/ Jay S. Sidhu                
                                   Jay S. Sidhu,
                                   President

                         Attest:/s/ Lawrence M. Thompson, Jr.
                                Lawrence M. Thompson, Jr.,
                                   Secretary


                         COLONIAL STATE BANK

(CORPORATE SEAL)         By: /s/ Eli Kramer                  
                                   Eli Kramer,
                                   Chairman of the Board

                         Attest: /s/ Robert S. Vuono             
                                   Robert S. Vuono,
                                   Secretary


Exhibits

Exhibit A - Plan of Merger
Exhibit B - Form of Opinion of Sovereign's Counsel
Exhibit C - Form of Tax Opinion
Exhibit D - Form of Opinion of Colonial's Counsel
Exhibit E - Form of Affiliate Letter Agreement

Schedule I
<PAGE>
                            EXHIBIT A

                         PLAN OF MERGER

                     SOVEREIGN INTERIM BANK

                          With and Into

                       COLONIAL STATE BANK


          The following is the Plan of Merger adopted pursuant to
the terms of an Agreement and Plan of Merger (the "Agreement")
dated as of March 23, 1995 by and between Sovereign Bancorp, Inc.
and Colonial State Bank, under the terms of which, among other
things:  (i) Sovereign Interim Bank will be merged with and into
Colonial State Bank, (ii) Colonial State Bank will survive the
merger as a wholly-owned subsidiary of Sovereign Bancorp, Inc.,
and (iii) each outstanding share of the $5.00 par value common
stock of Colonial State Bank (the "Colonial Common Stock"), other
than shares of such stock, if any, held by Sovereign Bancorp,
Inc. or by shareholders who duly elect to exercise and perfect
dissenters' rights, will be converted into the right to receive
$11.60 in cash from Sovereign Bancorp, Inc.

                            ARTICLE I   
                 PARTIES AND LOCATION OF OFFICES

          The parties to this Plan of Merger are Sovereign
Interim Bank and Colonial State Bank.  The location of the
principal office and each branch office of Sovereign Interim Bank
and Colonial State Bank are as follows:

Sovereign Interim Bank             Colonial State Bank
521 Park Avenue                    521 Park Avenue
Freehold, New Jersey 07728         Freehold, New Jersey  07728

                           ARTICLE II   
                             MERGER

          Subject to the terms and conditions of the Agreement
and this Plan of Merger, and in accordance with the applicable
laws and regulations of the United States of America and the
State of New Jersey, Sovereign Interim Bank shall, on the
Effective Date (as defined in Article IX of this Plan of Merger)
merge with and into Colonial State Bank, whereupon the separate
existence of Sovereign Interim Bank shall cease and Colonial
State Bank shall be the surviving institution.  The foregoing
merger is sometimes hereinafter referred to as the "Merger" and
Colonial State Bank is sometimes hereinafter referred to as the
"Surviving Bank".

                           ARTICLE III  
                              NAME

          The name of the Surviving Bank shall be Colonial State
Bank.

                           ARTICLE IV   
             CERTIFICATE OF INCORPORATION AND BYLAWS

          As of the Effective Date, the Certificate of
Incorporation and the bylaws of the Surviving Bank shall be the
Certificate of Incorporation and bylaws of Colonial State Bank as
then in effect.

                            ARTICLE V   
                 BOARD OF DIRECTORS AND OFFICERS

          Section 5.1  Board of Directors.  As of the Effective
Date, the directors of the Surviving Bank shall be:  (i) certain
directors of Colonial State Bank duly elected and then in office,
and (ii) _____ additional persons, each of whom shall serve at
the pleasure of Sovereign Bancorp, Inc. and until such time as
his successor is elected and has qualified and each of whom is
identified below:

               Robert J. Belon          Robert M. Kaye
               Anthony R. Coppola       Eli Kramer
               Robert L. Coutts         Charles R. Miller
               H. Daniel Harris         David I. Weiner
               Charles P. Kaempffer     ____________________
               ____________________     ____________________
               ____________________     ____________________
               ____________________     ____________________
               ____________________     ____________________

          Section 5.2  Officers.  On and after the Effective
Date, the officers of the Surviving Institution shall be the
officers of Colonial State Bank duly elected and then in office
(each of whom is identified below), together with such other
officers as may be subsequently elected or appointed, each of
whom shall serve at the pleasure of Sovereign Bancorp, Inc. and
until such time as his successor is elected and has qualified:


Name of Officer          Office Held

Stephen S. Laine         President and Chief Executive Officer
Robert S. Vuono          Executive Vice President, Secretary and
                         Treasurer
Frederick M. Wells       Senior Vice President and Senior Loan
                         Officer
Michael J. Salerno       Senior Vice President and Mortgage
                         Officer


                           ARTICLE VI
               PRINCIPAL OFFICE AND BRANCH OFFICE

          As of the Effective Date, the principal office and the
only branch office of the Surviving Bank shall be as follows:

                    521 Park Avenue
                    Freehold, New Jersey  07728

                           ARTICLE VII  
                      CONVERSION OF SHARES

          Section 7.1  Stock of Sovereign Interim Bank.  Each
share of Sovereign Interim Bank common stock issued and
outstanding immediately before the Effective Date shall, on the
Effective Date, be converted into and become, without any action
on the part of the holder thereof, such number of shares of the
$5.00 par value common stock of Colonial State Bank as shall be
equal to:  (i) 538,911, divided by (ii) the number of shares of
Sovereign Interim Bank common stock issued and outstanding
immediately before the Effective Date.  Immediately following the
Merger, the authorized capital stock of Colonial State Bank shall
consist of 2,550,000 shares of $5.00 par value common stock, of
which 538,911 shares shall be issued and outstanding. 
Immediately following the Merger, the surplus of Colonial State
Bank shall be not less than $500,000.

          Section 7.2  Stock of Colonial State Bank.

               (a)  General.  Subject to the provisions of
Section 7.2(b) below relating to dissenting shares, each share of
Colonial Common Stock issued and outstanding immediately before
the Effective Date (other than shares, if any, then owned by
Sovereign Bancorp, Inc. and shares, if any, held in the treasury
of Colonial State Bank) shall, on the Effective Date, be
converted into and become without any action on the part of the
holder thereof, the right to receive $11.60 in cash from
Sovereign Bancorp, Inc.  Each share of Colonial Common Stock, if
any, owned by Sovereign Bancorp, Inc. on the Effective Date and
each share of Colonial Common Stock, if any, held in the treasury
of Colonial on the Effective Date shall be cancelled and no cash
or other consideration shall be delivered in exchange therefor.

               (b)  Dissenting Shareholders of Colonial.  Shares
of Colonial Common Stock with respect to which dissenters' rights
shall have been duly exercised and perfected:  (i) shall not be
converted into the right to receive cash from Sovereign Bancorp,
Inc. pursuant to Section 7.2(a) above and the holders thereof
shall be entitled only to such rights as are granted by law to
dissenting shareholders, and (ii) shall be deemed to have been
retired and cancelled immediately prior to the Merger.

          Section 7.0  Surrender and Exchange of Colonial Stock
Certificates.

               (a)  Letter of Instruction.  On or promptly after
the Effective Date, Sovereign Bancorp, Inc. shall mail or cause
to be mailed to each former shareholder of Colonial State Bank at
his address as it appears on the records of Colonial State Bank a
letter of instruction specifying the procedures to be followed in
surrendering his Colonial Common Stock certificates.

               (b)  Surrender and Exchange Procedure.  As
promptly as possible after receipt of the foregoing letter of
instruction, each former shareholder of Colonial State Bank shall
surrender to Sovereign Bancorp, Inc. his Colonial Common Stock
certificates and Sovereign Bancorp, Inc. shall upon such
surrender mail to him in exchange therefore a check payable to
the order of the registered holder of such shares in an amount
equal to:  (i) the number of shares surrendered, multiplied by
(ii) $11.60.  Following the Effective Date and until surrender,
each Colonial Common Stock certificate shall be deemed for all
purposes to evidence solely the right to receive cash in exchange
therefore pursuant to the Agreement and this Plan of Merger. 
Notwithstanding the foregoing, neither Sovereign Bancorp, Inc.
nor any party to this Plan of Merger will be liable to any holder
of Colonial Common Stock for any amount paid in good faith to a
public official or agency pursuant to any applicable abandoned
property, escheat or similar law.

               (c)  Closing of Stock Transfer Books.  The stock
transfer books of Colonial State Bank will be closed on and after
the Effective Date and no further transfers of shares of Colonial
Common Stock will thereafter be made or recognized.

                          ARTICLE VIII  
                      EFFECT OF THE MERGER

          Section 8.:  Separate Existence.  On the Effective
Date, the separate existence of Colonial State Bank shall cease
and all of the property (real, personal and mixed), rights,
powers, duties and obligations of Sovereign Interim Bank and
Colonial State Bank shall be taken and deemed to be transferred
to and vested in the Surviving Bank, without further act or deed,
as provided by applicable laws and regulations.

          Section 8.2  Savings Accounts.  After the Effective
Date, the Surviving Bank will continue to issue savings accounts
on the same basis as immediately prior to the Effective Date.

                           ARTICLE IX   
                         EFFECTIVE DATE

          The Merger shall be effective on the date on which all
filings with government agencies as may be required under all
applicable laws and regulations for the Merger to become
effective are made and accepted by such agencies or, if later, on
the date specified in such filings (the "Effective Date").

                            ARTICLE X   
                      CONDITIONS PRECEDENT

          The obligations of Sovereign Bancorp, Inc., Sovereign
Interim Bank and Colonial State Bank to effect the Merger shall
be subject to the satisfaction, unless duly waived by the party
entitled to the benefit thereof, of the conditions precedent set
forth in the Agreement.

                           ARTICLE XI   
                           TERMINATION

          This Plan of Merger shall terminate upon any
termination of the Agreement in accordance with its terms;
provided, however, that neither Sovereign Bancorp, Inc. nor any
party hereto shall by reason of such termination be relieved from
liability on account of a breach by it of any of the terms of
this Plan of Merger or of the Agreement.

                           ARTICLE XII  
                            AMENDMENT

          Subject to applicable law, this Plan of Merger may be
amended at any time prior to consummation of the Merger, but only
by means of an instrument in writing signed by duly authorized
officers on behalf of the parties hereto.

                          ARTICLE XIII  
                          MISCELLANEOUS

          Section 13.1  Extensions; Waivers.  Each party, by a
written instrument signed by a duly authorized officer, may
extend the time for the performance of any of the obligations or
other acts of the other party hereto and may waive compliance
with any of the covenants, or performance of any of the
obligations, of the other party contained in this Plan of Merger.

          Section 13.2  Notices.  Any notice or other
communication required or permitted under this Plan of Merger
shall be given, and shall be effective, in accordance with the
provisions of Section 8.07 of the Agreement.

          Section 13.3  Captions.  The headings of the several
Articles and Sections herein are inserted for convenience of
reference only and are not intended to be part of, or to affect
the meaning or interpretation of, this Plan of Merger.

          Section 13.4  Counterparts.  For the convenience of the
parties hereto, this Plan of Merger may be executed in several
counterparts, each of which shall be deemed the original, but all
of which together shall constitute one and the same instrument.

          Section 13.5  Governing Law.  This Plan of Merger shall
be governed by and construed in accordance with the domestic
internal law (without reference to its law of conflicts of law)
of the Commonwealth of Pennsylvania, except to the extent that
matters relating to the Merger may be governed by the laws of the
United States of America or, in the absence of controlling
federal law, by the domestic internal law (without reference to
its law of conflicts of law) of the State of New Jersey.

          IN WITNESS WHEREOF, Sovereign Interim Bank and Colonial
State Bank have caused this Plan of Merger to be executed by
their duly authorized officers and their corporate seals to be
hereunto affixed as of this ________ day of ____________________,
1995.

                              SOVEREIGN INTERIM BANK, F.S.B.

                              By:________________________________
                                        Jay S. Sidhu,
                                        President
(CORPORATE SEAL)
                              Attest:____________________________
                                        Lawrence M. Thompson, Jr.
                                        Secretary


                              COLONIAL STATE BANK

                              By:________________________________
                                        Eli Kramer,
                                        Chairman of the Board

(CORPORATE SEAL)
                              Attest:____________________________
                                        Robert S. Vuono,
                                        Executive Vice President,
                                        Treasurer and Secretary 
<PAGE>
                            EXHIBIT B
                                
             FORM OF OPINION OF COUNSEL TO SOVEREIGN


          Colonial shall have received from Stevens & Lee an
opinion, dated as of the Closing Date, substantially to the
effect that, subject to customary exceptions and qualifications:

          (1)  Sovereign and Interim Bank have full corporate
power to carry out the transactions contemplated in the
Agreement.  The execution and delivery of the Agreement and the
completion of the transactions contemplated thereunder have been
duly and validly authorized by all necessary corporate action on
the part of Sovereign and Interim Bank, as the case may be, and
the Agreement constitutes a valid and legally binding obligation
of Sovereign, enforceable in accordance with its terms, except as
may be limited by bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship, and other laws
affecting creditors' rights generally and as may be limited by
the exercise of judicial discretion in applying principles of
equity.  Subject to satisfaction of the conditions set forth in
the Agreement, neither the transactions contemplated in the
Agreement, nor compliance by Sovereign and Interim Bank with any
of the provisions thereof, will (i) conflict with or result in a
breach or default under (A) the Articles of Incorporation or
bylaws of Sovereign or the charter or bylaws of Interim Bank, or,
(B) based upon certificates of officers and without independent
verification, to the actual knowledge of such counsel, any note,
bond, mortgage, indenture, license, agreement or other material
instrument or obligation to which Sovereign or Interim Bank is a
party; or (ii) violate in any material respect any order, writ,
injunction or decree actually known to such counsel, or any
federal or Pennsylvania statute, rule or regulation applicable to
Sovereign or Interim Bank.

          (2)  Interim Bank is a validly existing, nonoperating,
federally-chartered savings bank organized and in good standing
under the laws of the United States of America.

          (3)  There is, to the actual knowledge of such counsel,
no legal, administrative, arbitration or governmental proceeding
or investigation pending or threatened to which Sovereign or any
of its subsidiaries is a party which states a claim to restrain
or prohibit the transactions contemplated by the Agreement.

          (4)  No consent, approval, authorization or order of
any federal or state court or federal or state governmental
agency or body is required for the completion by Sovereign or
Interim Bank of the transactions contemplated by the Agreement,
except for such consents, approvals, authorizations or orders as
have been obtained.

          (5)  Assuming the receipt by Colonial of all required
regulatory approvals upon the filing and effectiveness of the
Articles of Merger with the NJDOB in accordance with the
Agreement, the merger of Interim Bank and Colonial contemplated
by the Agreement will have been effected in compliance in all
material respects with all applicable federal laws, rules and
regulations.
<PAGE>
                            EXHIBIT C

              FORM OF TAX OPINION OF STEVENS & LEE

          Sovereign shall have received an opinion of Stevens &
Lee dated as of the date of Closing and subject to customary
exceptions and qualifications substantially to the effect that,
under the provisions of the IRC:

          1.   The formation of Interim and its merger with and
               into Colonial ("Merger #1") will be disregarded. 
               The transaction will be treated as a sale by
               Colonial's stockholders of all of the outstanding
               Colonial Common Stock to Sovereign in exchange for
               cash.

          2.   Sovereign's purchase of all of the outstanding
               Colonial Common Stock will constitute a qualified
               stock purchase within the meaning of IRC Section
               338(d)(3).

          3.   No gain or loss will be recognized by Sovereign,
               Interim, or Colonial as a result of Merger #1.

          4.   Gain or loss, as determined under IRC Section
               1001, will be recognized by each Colonial
               stockholder in an amount measured by the
               difference between:  (i) the sum of the amount of
               cash received, and (ii) the adjusted basis (as
               determined under IRC Section 1011) in the Colonial
               Common Stock surrendered in exchange therefor.

          5.   Provided that IRC Section 341 is not applicable
               and that the Colonial Common Stock is a capital
               asset in the hands of a Colonial stockholder, any
               gain or loss realized by such stockholder will be
               capital gain or loss, subject to the provisions
               and limitations of Chapter 1P of the IRC.

          6.   The basis in the hands of Sovereign of the
               Colonial Common Stock acquired will, under IRC
               Section 1012, be equal to the sum of:  (i) the
               cash paid to the Colonial stockholders, and
               (ii) the amount of any expenses of the transaction
               which are properly chargeable to a capital
               account.

          7.   The merger of Colonial, as the surviving
               institution following Merger #1, with and into
               Second Interim Bank will qualify as a
               reorganization under IRC Section 368(a)(1).
<PAGE>
                            EXHIBIT D

             FORM OF OPINION OF COUNSEL TO COLONIAL


          Sovereign shall have received from counsel to Colonial,
an opinion, dated as of the Closing Date, substantially to the
effect that, subject to customary exceptions and qualifications:

          (1)  Colonial has full corporate power to carry out the
transactions contemplated in the Agreement.  The execution and
delivery of the Agreement and the completion of the transactions
contemplated thereunder have been duly and validly authorized by
all necessary corporate action on the part of Colonial, and the
Agreement constitutes a valid and legally binding obligation of
Colonial, enforceable in accordance with its terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium,
receivership, conservatorship, and other laws affecting
creditors' rights generally and institutions the deposits of
which are insured by the FDIC, and as may be limited by the
exercise of judicial discretion in applying principles of equity. 
Subject to satisfaction of the conditions set forth in the
Agreement, neither the transactions contemplated in the
Agreement, nor compliance by Colonial with any of the respective
provisions thereof, will:  (i) conflict with or result in a
breach or default under (A) the Certificate of Incorporation or
bylaws of Colonial, or (B) based on certificates of officers and
without independent verification, to the actual knowledge of such
counsel, any note, bond, mortgage, indenture, license, agreement
or other instrument or obligation to which Colonial is a party;
or (ii) to the actual knowledge of such counsel, result in the
creation or imposition of any material lien, instrument or
encumbrance upon the property of Colonial, except such material
lien, instrument or obligation that has been disclosed to
Sovereign pursuant to the Agreement, or (iii) violate in any
material respect any order, writ, injunction, or decree actually
known to such counsel, or any statute, rule or regulation
applicable to Colonial.

          (2)  Colonial is a validly existing New Jersey-
chartered commercial bank organized and in good standing under
the laws of the State of New Jersey.  The deposits of Colonial
are insured to the maximum extent provided by law by the Federal
Deposit Insurance Corporation.

          (3)  There is, to the actual knowledge of such counsel,
no legal, administrative, arbitration or governmental proceeding
or investigation pending or threatened to which Colonial is a
party which would, if determined adversely to Colonial, have a
material adverse effect on the business, properties, results of
operations, or condition, financial or otherwise, of Colonial or
which states a claim to restrain or prohibit the transactions
contemplated by the Agreement.

          (4)  No consent, approval, authorization, or order of
any federal or state court or federal or state governmental
agency or body, or of any third party, is required for the
consummation of the Merger by Colonial, except for such consents,
approvals, authorizations or orders as have been obtained.

          (5)  Assuming the receipt by Interim of all required
regulatory approvals, upon the filing and effectiveness of the
Articles of Merger with the NJDOB in accordance with the
Agreement, the merger of Interim Bank and Colonial contemplated
by the Agreement will have been effected in compliance in all
material respects with the Banking Act and all other applicable
New Jersey laws, rules and regulations.
<PAGE>
                            EXHIBIT E




                         March 23, 1995



Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania  19610

Ladies and Gentlemen:

     Sovereign Bancorp, Inc. ("Sovereign") and Colonial State
Bank ("Colonial") desire to enter into an agreement (the
"Agreement") pursuant to which and subject to the terms and
conditions set forth therein:  (a) Colonial will merge with a to-
be-formed nonoperating phantom federal savings bank subsidiary of
Sovereign, with Colonial surviving the merger, and
(b) shareholders of Colonial will receive cash in exchange for
common stock of Colonial outstanding on the closing date (the
foregoing, collectively, referred to herein as the "Merger").

     Sovereign has required, as a condition to its execution and
delivery to Colonial of the Agreement, that the undersigned,
being directors (or former directors) and/or executive officers
of Colonial, execute and deliver to Sovereign this Letter
Agreement.

     Each of the undersigned, intending to be legally bound and
in order to induce Sovereign to execute and deliver to Colonial
the Agreement, for himself and not for any other person who signs
this Letter Agreement, hereby irrevocably:

          (1)  Agrees to be present (in person or by proxy) at
all meetings of shareholders of Colonial called to vote for
approval of the Merger so that all shares of common stock of
Colonial then owned by him will be counted for the purpose of
determining the presence of a quorum at such meetings and to vote
all such shares:  (i) in favor of approval and adoption of the
Agreement and the transactions contemplated thereby (including
any amendments or modifications of the terms thereof approved by
Colonial's Board of Directors), and (ii) against approval or
adoption of any other merger, business combination,
recapitalization, partial liquidation or similar transaction
involving Colonial, provided, however, that these obligations
shall terminate concurrently with any termination of the
Agreement in accordance with its terms;

          (2)  Agrees not to vote or execute any written consent
to rescind or amend in any manner any prior vote or written
consent, as a shareholder of Colonial, to approve or adopt the
Agreement and the transactions contemplated thereby;

          (3)  Agrees to use his reasonable best efforts to cause
the Merger to be completed;

          (4)  Agrees not to sell, transfer or otherwise dispose
of any common stock of Colonial on or prior to the date of the
meeting of Colonial shareholders to vote on the Merger; 

          (5)  Agrees not to solicit, initiate or, except as
permitted by Section 4.13 of the Agreement, engage in any
negotiations or discussions with any party other than Sovereign
with respect to any offer, sale, transfer or other disposition
of, any shares of common stock of Colonial now or hereafter owned
by him or her, or to support any such offer, sale, transfer, or
other disposition;

          (6)  Waives the right to assert dissenters' rights
under applicable law;

          (7)  Agrees to disclose and to permit Sovereign and
colonial to disclose that he has entered into this Letter
Agreement and that he supports the Merger and recommends that
shareholders of Colonial vote in favor of the Merger; and

          (8)  Represents that he has the capacity to enter into
this Letter Agreement and that it is a valid and binding
obligation enforceable against him in accordance with its terms.
                    ________________________

     This Letter Agreement may be executed in two or more
counterparts, each of which shall be deemed to constitute an
original, but all of which together shall constitute one and the
same Letter Agreement.
                    ________________________

     This Letter Agreement shall be effective upon execution by
one or more persons listed below, and its validity and
enforceability shall not be affected by the lack of its execution
by any person listed below.
                    ________________________

     This Letter Agreement shall terminate concurrently with any
termination of the Agreement in accordance with its terms.
                    ________________________

     The undersigned intend to be legally bound hereby.

                              Sincerely,

                              __________________________________
                              Robert J. Belon


                              __________________________________
                              Anthony R. Coppola

                              __________________________________
                              Robert L. Couts

                              __________________________________
                              H. Daniel Harris

                              __________________________________
                              Charles P. Kaempffer

                              __________________________________
                              Robert M. Kaye

                              __________________________________
                              Eli Kramer

                              __________________________________
                              Stephen S. Laine

                              __________________________________
                              Charles R. Miller

                              __________________________________
                              Allan J. Sockol

                              __________________________________
                              Robert S. Vuono

                              __________________________________
                              David I. Weiner
<PAGE>
                  AGREEMENT AND PLAN OF MERGER
              PROPOSED TO BE ENTERED BY AND BETWEEN
         SOVEREIGN BANCORP, INC. AND COLONIAL STATE BANK
                           SCHEDULE I

Section 2.5(b):

A.)  Beneficial Owners of 5% or more of outstanding shares of
     Colonial State Bank Common Stock:

                                                Percentage of
                                                 Total Shares
                          Number of Shares    Outstanding As of
     Beneficial Owner    Beneficially Owned        03/15/95
     ----------------    ------------------   -----------------
     Anthony R. Coppola      87,954 (1)             16.32%
     Robert M. Kaye          30,079                  5.58%
     Eli Kramer              32,730 (2)              6.07%
     David I. Weiner         29,906 (3)              5.55%

Note: (1) Includes 2,547 shares owned by Mr. Coppola's wife and
          315 shares owned by Mr. Coppola's children.
      (2) Includes 32,630 shares owned by PEK Realty Associates
          of which Mr. Kramer is a principal.
      (3) Includes 13,500 shares owned by the Weiner Family
          Trust.

B.)  Director and Officer Beneficial Holdings:

                                           Number of Shares
     Director                             Beneficially Owned
     --------                             ------------------
     Robert J. Belon                             472
     Anthony R. Coppola                       87,954 (1)
     Robert Lloyd Coutts                       4,475 (2)
     H. Daniel Harris                            150
     Charles P. Kaempffer                      8,771
     Robert M. Kaye                           30,079
     Eli Kramer                               32,730 (3)
     Stephen S. Laine                            100
     Charles R. Miller                         5,122
     David I. Weiner                          29,906 (4)

                                           Number of Shares
     Officer                              Beneficially owned
     -------                              ------------------
     Stephen S. Laine                (See Director Listing Above)
       President & CEO
     Kenneth A. Ney                            100
       Assistant Treasurer
     Robert S. Vuono                           562 (5)
       Executive Vice President

Note: (1) Includes 2,547 shares owned by Mr. Coppola's wife and
          315 shares owned by Mr. Coppola's children.
      (2) Includes 1,237 shares owned by Mr. Coutts' wife.
      (3) Includes 32,630 shares owned by PEK Realty Associates
          of which Mr. Kramer is a principal.
      (4) Includes 13,500 shares owned by the Weiner Family
          Trust.
      (5) Includes 300 shares owned jointly with his wife.

Section 2.11:

In connection with the real estate transaction referred to in
Section 4.14 of the Agreement, the Colonial subsidiary will grant
a mortgage to a bank in an amount not to exceed $850,000.

Section 2.12:

See Attached December 31, 1994 Watch List.

Section 2.14(a):

A.   Contracts with payments in excess of $10,000 per year:

     Contract With                      Purpose
     -------------                      -------
     AT&T Global Information Services   Data Processing
     AT&T Credit                        Lease of DP Equipment
     Systematics, Inc.                  Item Processing
     Directors Limited                  Lease of Main Office
     KPMG Peat Marwick                  Audit of Financial
                                           Statements

Contracts with receipts in excess of $10,000 per year:

     Contract With                      Purpose
     -------------                      -------
     Director's Limited                 Land Lease

B.   Employment Contract with President & CEO Stephen S. Laine
     Severance Policy for Colonial State Bank staff.

C.   All of the foregoing contracts are in full force and effect
     and none are in default in any material respects.

Section 2. 14 (b):

None.

Section 2.18:

Insurance policies maintained by Colonial State Bank:

     Kidnap & Ransom
     Director's & Officers and IRA/Keough
     Financial Institution Bond
     Commercial Excess Policy
     Special Multi-Peril Policy
     Worker's Compensation
     Key Man Insurance on President (See Employment Contract)

Section 2.19:

Coverage Type & Limit of Liability

 Coverage                      Director   Financial      Excess
  Period        Carrier       & Officer  Institution   Dishonesty
 --------       -------       ---------  -----------   ----------
8/29/88 to   Progressive
8/29/89      Cas. Ins. Co.   $1,000,000   $1,000,000   $1,000,000

8/29/89 to   Progressive
8/29/90      Cas. Ins. Co.   $1,000,000   $1,000,000   $1,000,000

8/29/90 to   Progressive
8/29/91      Cas. Ins. Co.   $1,000,000   $1,000,000   $1,000,000

8/29/91 to   Reliance
8/29/92      Insurance Co.   $   500,000   $1,000,000      N/A

8/29/92 to   Continental
9/13/93      Insurance Co.   $1,000,000   $1,050,000       N/A

9/13/93 to   Continental
9/27/94      Insurance Co.   $1,000,000   $1,050,000       N/A

9/27/94 to
9/27/95      AETNA           $1,000,000   $1,050,000       N/A
<PAGE>
Section 2.21(a):

                       COLONIAL STATE BANK
                        EMPLOYEE BENEFITS
                        JANUARY 31, 1995

Employee Benefits provided are as follows:

     Group Life Insurance - Two times annual salary to $100,000
                            maximum coverage plus $25,000
          Cost: 2X's salary:   .465 per $1,000 (Sixteen
employees)
                $25,000:    $10.25 per month (Sixteen employees)

     Medical/Hospitalization - Coverage for employee and
                               dependents.
          Cost: Employees: $190.11 per month (Fourteen employees)
                Dependents: 339.83 per month (Seven employees)

     Prescription Drug Plan - Coverage for employee and
                              dependents.
          Cost: Employees: $26.45 per month (Sixteen employees)
                Dependents: 37.98 per month (Eight employees)

     Dental Plan - Coverage for employee and dependents.
          Cost: Employees: $30.06 per month (Sixteen employees)
                Dependents: 53.68 per month (Eight employees)

     Long Term Disability - Coverage for employee.
          Cost: .600 Per $100 in monthly salary (49,910
@01/31/95)

     Note:  Employees contribute on a monthly basis for coverage
            taken:
               Single coverage - $10.00 monthly
               Husband/Wife    - $25.00 monthly
               Family          - $50.00 monthly

     Employment contract of President Laine calls for additional
life insurance coverage in excess of standard coverage.
<PAGE>
Section 2.22:

Loans with Directors & officers (present and former):

   Borrower                         Type                Amount
   --------                         ----                ------
   R. Belon (Director)              Commercial Mtg.  $106,868.73
   A. Coppola (Director)            Secured Loan      100,000.00
   R. Kaye (Director)               Secured Loan      250,000.00
   E. & C. Kramer (Director)        Auto Loan          15,440.99
                                    Home Equity        61,192.67
   C. Miller (Director)             Commercial Mtg.    16,000.00
                                    Home Equity        78,505.98
   W.J.D. Ltd (D. Weiner-Director)  Construct Mtg.    186,000.00
   D. Hearn (Former Officer)        Personal Loan         200.00
   J. Peavley (officer)             Personal Cr Line    1,480.32
                                    Installment Loan      199.20
                                    Installment Loan    7,652.57
   D. Staples (Former Officer)      Personal Cr Line      381.62

Contracts with Directors & Officers (present and former):

Lease arrangement with four present and one former Director for
the sale and subsequent leaseback of Colonial's only office -
Director's Limited, A Joint Venture.  In addition, land lease by
Director's Limited of land owned by Colonial State.

Planned Residential communities services thirteen mortgages
purchased from PRC.  Total outstanding balances as of February 1,
1995 - $646,015.83. Director Robert M. Kaye is owner of PRC.

Business Arrangements with Directors & Officers (Present and
former):

Colonial's Loan Policy includes Mid-Atlantic Appraisal, Inc. as
one of seven authorized appraisers for the Bank.  Director Robert
J. Belon is owner of Mid-Atlantic.
<PAGE>
Section 2.24:

Customers with aggregate outstanding loans in the amount of
$250,000 or more as of February 28, 1995:

    Customer Name              Aggregate Outstanding Balance
    -------------              -----------------------------
    Harlayne Roberts           $405,270.65
    Marilyn Loh Collado         317,241.18
    Roy Carmen                  460,807.36
    William Schwartz            250,000.00
    Eugene Cheslock             314,956.68
    Howard Schoor               250,000.00
    Donald Steel                456,751.62
    Richard Eknoian             293,395.08
    Sirb Construction           700,000.00 (350,000.00 Partic.)
    George Fahoury              260,707.08
    James Vaccaro               294,115.48
    Samuel Carotenuto           457,813.68
    John P. Tsakiris            276,649.32
    Domenico Procopio           378,960.66
    Martin Barger               328,734.66
    Marvin Harris               271,492.95
    Summerton Group             437,920.00
    Frank Hawk                  338,438.09
    Jennie Nicol                350,000.00
    Timothy Sullivan            333,450.01
    Richard Sambol              250,000.00
    Brian Boyle                 460,807.09
    Conover Holding Corp.       319,079.51
    Joseph Lenczyk              333,450.01
    Robert M. Kaye              250,000.00
    Jewish Community Center     368,000.00
    East of Eden                391,089.95
    Rivers Edge Mall            296,000.00
    Vizzoni Bros. Const.        268,287.78
    Cong. Sons of Israel        250,562.50
    Miller & McTigue            331,197.37
    RC&C Sin Assoc.             275,000.00
    S.R. Whelan Dev.            259,999.60
    AMV GEN-3 Part.             385,808.50
    Group Const. of Marlboro    300,000.00
    V.S.K Inc.                  353,246.45
    Philip Kramer               250,000.00
<PAGE>
Section 2.24 (Continued):

Customers with aggregate deposit balances in the amount of
$200,000 or more as of February 28, 1995:

Customer Name                        Aggregate Deposit Balances
-------------                        --------------------------
Freehold Township                        $1,099,887.30 *
Freehold Township Escrow Accts              541,669.89
John Riehl                                  208,222.99
Freehold Chrysler Plymouth                  275,339.72
Coltsbrook, Inc.                            363,142.04
Beta Lambda Instruments                     234,605.72
Planned Residential Communities             200,000.00
Reussille Law Firm Estate Accounts
and Partner Deposits                        618,260.37
Charlene M. Schmitt                         200,707.25 **

*  Adjusted Balance
** Account Added
<PAGE>


                          TOTAL     DUE DATE
      BORROWER           CREDIT     PMT/NOTE   COLLATERAL VALUE    TYPE
      --------           ------     --------   ----------------    ----
                                                       
MARTIN BARGER          $  175,000    current   2ND MTG             I/L
MARTIN BARGER          $  156,679   11-24-94   UNSECURED           COMML
ROBERT BELON           $  107,085    current   LAND PARCEL         COMML
LAVERNE FINE           $   35,194    10-1-94   1ST MTG             R/E
LAVERNE FINE           $   28,365    current   1ST MTG             R/E
FIRST UNITED INVEST.   $  100,000    current   1ST MTG             COMML
GREENBROW ASSOC.       $  182,250    current   UNSECURED           COMML
CARL GROSS             $   72,000    current   UNSECURED           COMML
HERBERT GEORGE ASSOC.  $   57,600    current   A/R                 COMML
ALSON HODDER           $   12,564   12-10-93   2ND MTG             I/L
KIRSCH HOLDINGS        $  220,229    current   ASSIGN MTG          COMML
E. LEVINSON            $   28,349    current   1ST MTG             R/E
MARLBORO FEED          $   11,455    7-28-94   A/R, INV            COMML
JENNIE NICOL           $   89,000    1-13-94   UNSECURED           COMML
OMNI TEMPS             $   85,000    current   A/R                 COMML
GERALD RICHTER         $  100,156    current   UNSECURED           COMML
RIVERS EDGE            $  298,000    current   2NTG STRP MALL ##   COMML
VERDON'S LANDSCAPING   $   17,121    10-1-94   EQUIPMENT
VIZZONI BROTHERS       $    9,030    9-24-94   UNSECURED           COMML
VIZZONI BROTHERS       $  269,500    11-1-94   UNSECURED           COMML
                       ----------
                       $2,054,577
                       ==========




                       SPECIAL                                      ACTION TAKEN TO
      BORROWER         MENTION     SUBSTND.    DOUBTFUL  N.I.A.    IMPROVE BANK'S POS.
      --------         -------     --------    --------  ------    -------------------
                                                    
MARTIN BARGER                     $  175,000                    Bal 173,943 due 1/1/95
MARTIN BARGER                     $  156,679                    N/D 11/24/94
ROBERT BELON           $107,085                                 CURRENT
LAVERNE FINE                      $   35,194                    PRC servicing. CSB not
LAVERNE FINE                      $   28,365                    told this mtg. mat. 11/1/9
FIRST UNITED INVEST.   $100,000                                 Int. N/D 12/17/94
GREENBROW ASSOC                   $  182,250                    CURRENT
CARL GROSS                        $   72,000                    N/D 12/15/94
HERBERT GEORGE ASSOC.  $ 57,600                                 CURRENT
ALSON HODDER                      $   12,564                    Chpt. 13 BK 12/27/94
KIRSCH HOLDINGS                   $  220,229
E. LEVINSON                       $   28,349                    CURRENT
MARLBORO FEED                     $   11,455               Y    N/D 7/28/94
JENNIE NICOL                                   $89,000     Y    Stock MV 247M bal. 350M
OMNI TEMPS             $ 85,000                                 CURRENT
GERALD RICHTER                    $  100,156                    RENEWED TO 1/20/95
RIVERS EDGE                       $  298,000                    Paying $1M/mo + Int.
VERDON'S LANDSCAPING              $   17,121                    N/D 10/1/94; following
VIZZONI BROTHERS       $  9,030
VIZZONI BROTHERS       $269,500                                 1 pmt. promised
                       --------   ----------   -------
                       $628,215   $1,337,362   $89,000   TOTAL   $2,054,57
                       ========   ==========   =======           =========

<PAGE>


                                               
COMMERCIAL N.CLASS              $16,767,049     1.25%   $209,588

COMMERCIAL CLASS.       OLEM    $   628,215     2.00%   $ 18,564
                        SUBS    $ 1,040,769    10.00%   $ 74,077
                        DOUBT   $    89,000    50.00%   $ 44,500
                        LOSS    $         0   100.00%   $      0

INSTALLMENT N.CLASS             $ 6,073,771     1.00%   $ 60,738

INSTALLMENT CLASS       OLEM    $         0     2.00%   $      0
                        SUBS    $   187,564     5.00%   $  9,378
                        DOUBT   $         0    50.00%   $      0
                        LOSS    $         0   100.00%   $      0

REAL ESTATE N.CLASS             $ 8,516,989      .50%   $ 42,585

REAL ESTATE CLASS       OLEM    $         0     2.00%   $      0
                        SUBS    $    81,908     5.00%   $  4,595
                        DOUBT   $         0    50.00%   $      0
                        LOSS    $         0   100.00%   $      0
UNUSED COMM. AND LC'S . . . . . $ 3,933,887      .50%   $ 19,669
TOTAL PER FORMULA . . . . . . . . . . . . . . . . . . . $483,695

RESERVE PER G.L.  . . . . . . . . . . . . . . . . . . . $494,496
OVERAGE/(DEFICIT) . . . . . . . . . . . . . . . . . . . $ 10,801