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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-2979
NORWEST CORPORATION
A Delaware Corporation - I.R.S. No. 41-0449260
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota 55479
Telephone (612) 667-1234
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock ($1 2/3 par value) New York Stock Exchange
Chicago Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Chicago Stock Exchange
6 3/4% Convertible Subordinated New York Stock Exchange
Debentures Due 2003
No securities are registered pursuant to Section 12(g) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
On January 31, 1997, 373,643,305 shares of common stock were outstanding having
an aggregate market value, based upon a closing price of $47.625 per share, of
$17,794.8 million. At that date, the aggregate market value of the voting stock
held by non-affiliates was in excess of $16,106.6 million.
Documents Incorporated by Reference
Portions of the corporation's Notice of Annual Meeting and Proxy Statement for
the annual meeting of stockholders to be held April 22, 1997, are incorporated
by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Norwest Corporation (the corporation) is a diversified financial services
company organized under the laws of Delaware in 1929 and registered under the
Bank Holding Company Act of 1956, as amended (the BHC Act). As a diversified
financial services organization, the corporation owns subsidiaries engaged in
banking and in a variety of related businesses. Subsidiaries of the corporation
provide retail, commercial, and corporate banking services to customers through
banks located in Arizona, Colorado, Illinois, Indiana, Iowa, Minnesota, Montana,
Nebraska, Nevada, New Mexico, North Dakota, Ohio, South Dakota, Texas, Wisconsin
and Wyoming. Additional financial services are provided to customers by
subsidiaries engaged in various businesses, principally mortgage banking,
consumer finance, equipment leasing, agricultural finance, commercial finance,
securities brokerage and investment banking, insurance agency services, computer
and data processing services, trust services, mortgage-backed securities
servicing and venture capital investment.
At December 31, 1996, the corporation and its subsidiaries employed 53,369
persons, had consolidated total assets of $80.2 billion, total deposits of $50.1
billion, and total stockholders' equity of $6.1 billion. Based on total assets
at December 31, 1996, the corporation was the 12th largest bank holding company
in the United States.
The corporation provides to its subsidiaries various services, including
strategic planning, asset and liability management, investment administration
and portfolio planning, tax planning, new product and business development,
advertising, administrative and audit, employee benefits and payroll management.
In addition, the corporation provides funds to its subsidiaries. The
corporation derives substantially all its income from investments in and
advances to its subsidiaries and service fees received from its subsidiaries.
The Financial Review, which begins on page 18 in the Appendix, discusses
developments in the corporation's businesses during 1996 and provides financial
and statistical data relative to the business and operations of the corporation.
A brief description of the primary business lines of the corporation follows.
Refer to Note 16 of the corporation's consolidated financial statements for
financial information about the corporation's business segments.
Banking
As of February 1, 1997, the corporation's 42 subsidiary banks, located in 16
states with 829 locations, offer diversified financial services including
retail, commercial and corporate banking, equipment leasing, and trust services;
and through their affiliates offer insurance, securities brokerage, investment
banking and venture capital investment. Investment services are provided to
customers by Norwest Investment Services, Inc., a registered broker/dealer and a
registered investment adviser, which operates in 15 states with 274 offices,
primarily in banking locations. Norwest Insurance, Inc. and its subsidiaries
operate insurance agencies in eight states with 46 offices offering complete
lines of commercial and personal coverages to customers. A subsidiary of the
corporation operates one of the nation's top five crop insurance managing
general agencies. There are also three insurance companies that are owned by
bank affiliates and three other insurance companies that are owned directly or
indirectly by the corporation that reinsure credit-related insurance products
for banking affiliates.
Norwest Bank Minnesota, N.A. is the largest bank in the group with total assets
of $17.6 billion at December 31, 1996. Eleven other banks in the group exceeded
$2.0 billion in total assets: Norwest Bank Colorado, N.A. ($7.9 billion),
Norwest Bank Iowa, N.A. ($5.7 billion), Norwest Bank South Dakota, N.A. ($4.3
billion), Norwest Bank Arizona, N.A. ($3.8 billion), Norwest Bank Nevada, F.S.B.
($2.8 billion), Norwest Bank Wyoming, N.A. ($2.8 billion), Norwest Bank Texas,
N.A. ($2.5 billion); Norwest Bank Nebraska, N.A. ($2.3 billion), Norwest Bank
New Mexico, N.A. ($2.2 billion); Norwest Bank Indiana, N.A. ($2.2 billion) and
Norwest Bank Texas South Central, N.A. ($2.1 billion).
Norwest Venture Capital consists of a group of three affiliated companies
engaged in making and managing investments in start-up businesses, emerging
growth companies, management buy-outs, acquisitions and
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corporate recapitalizations. During 1996, Norwest Venture Capital made new
investments of $150 million. Norwest Venture Capital's investments typically
range from $1,500,000 to $15,000,000; however, larger sums may be invested in a
single company, sometimes through syndication with other venture capitalists.
Most Norwest Venture Capital emerging growth company clients are engaged in
technology-related businesses, such as computer software, telecommunications,
medical products, health care delivery and industrial automation. Remaining
clients are engaged in non-technology businesses, such as specialty retailing
and consumer-related businesses. Financing of management buy-outs is done for a
variety of businesses.
Mortgage Banking
Subsidiaries of the corporation originate and purchase residential first
mortgage loans for sale to various investors and provide servicing of mortgage
loans for others. Income is primarily earned from origination fees, loan
servicing fees, interest on mortgages held for sale, and the sale of mortgages
and servicing rights. Norwest Mortgage offers a wide range of FHA, VA and
conventional loan programs through a network of 754 offices in all 50 states.
Approximately 33.5 percent of the mortgages are FHA and VA mortgages guaranteed
by the federal government and sold as GNMA securities. In 1996 the company
funded $51.5 billion of mortgages, with the average loan being approximately
$112,800. This compares with $33.9 billion of fundings in 1995 and $24.9
billion in 1994. The five states with the highest originations in 1996 were:
California $9.7 billion; Minnesota $3.2 billion; Illinois $2.4 billion;
Washington $2.3 billion; and Colorado $2.3 billion. The originations in these
five states comprise approximately 38.6 percent of total originations in 1996.
The five highest states in servicing as of December 31, 1996 were: California
$36.4 billion; Minnesota $10.3 billion; New York $8.7 billion; Texas $8.6
billion; and Florida $7.9 billion. These five states comprise approximately
40.0 percent of the total servicing portfolio at year-end 1996. As of December
31, 1996, the mortgage servicing portfolio totaled $179.7 billion with a
weighted average coupon of 7.77 percent, as compared with $107.4 billion and
7.76 percent, respectively, at December 31, 1995. The increase in 1996 was due
in part to the acquisition of certain assets of The Prudential Home Mortgage
Company, Inc. in May 1996, including $47 billion of its mortgage servicing
portfolio.
Consumer Finance
Norwest Financial consists of Norwest Financial Services, Inc. and its
subsidiaries and Island Finance, a group of eight companies operating in the
Caribbean and Central America. Consumer finance activities include providing
direct installment loans to individuals, purchasing sales finance contracts,
providing private label and other lease and accounts receivables services and
providing other related products and services. Norwest Financial provides
consumer finance products and services through 1,244 stores in 48 states, Guam,
all ten Canadian provinces, the Caribbean and Central America. At December 31,
1996, consumer finance receivables accounted for 93 percent of Norwest
Financial's total receivables. Direct installment loans to individuals
constitute the largest portion of the consumer finance business and, in
addition, sales finance contracts are purchased from retailers. The five states
with the largest consumer finance receivables are: California $464.9 million;
Texas $226.8 million; Florida $225.3 million; Illinois $224.0 million; and Ohio
$173.1 million. Consumer finance receivables in Puerto Rico and Canada totaled
$1.1 billion and $545.7 million, respectively, at December 31, 1996. The
consumer finance receivables of Puerto Rico, Canada, and the five largest states
listed above comprise approximately 43.5 percent of total consumer finance
receivables at year-end 1996. The average installment loan made during 1996 was
approximately $2,700, while sales finance contracts purchased during the year
averaged approximately $1,100. Comparable amounts in 1995 were $2,400 and
$1,100, respectively.
Norwest Financial's insurance subsidiaries are primarily engaged in the business
of providing, directly or through reinsurance arrangements, credit life and
credit disability insurance as a part of Norwest Financial's consumer finance
business. Property, involuntary unemployment and non-filing insurance also are
sold as part of Norwest Financial's consumer finance business, either directly
or through a reinsurance arrangement with one of its insurance subsidiaries or
on an agency basis.
Norwest Financial Information Services Group, Inc. (NFISG) has developed and
installed an on-line, real-time information processing and communications system
which connects, over leased telecommunication facilities, equipment located in
branch offices to the computer center in Norwest Financial's home office.
Branch employees use the computer to process loans and payments, to write checks
and to perform bookkeeping functions. In addition, as of December 31, 1996,
NFISG had contracts to supply information services to 28 other non-affiliated
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finance companies. On that date, approximately 3,000 offices were being served
and 6.4 million accounts were being maintained on the system.
Acquisitions
The corporation expands its businesses in part by acquiring banking institutions
and other companies engaged in activities closely related to banking. See Note
2 of the corporation's consolidated financial statements beginning on page 39 in
the Appendix regarding acquisitions by the corporation since 1994.
The acquisition of banking institutions and other companies by the corporation
is generally subject to the prior approval of the Board of Governors of the
Federal Reserve System (the Federal Reserve Board) and may be subject to the
prior approval of other federal and state regulatory authorities. Under the
interstate banking provisions of the Reigle-Neal Interstate Banking and
Branching Act of 1994 (the Reigle-Neal Act), which became effective September
29, 1995, the corporation is permitted to acquire banks in any state subject to
the prior approval of the Federal Reserve Board, certain limited conditions that
a state may impose and deposit concentration limits of 10 percent nationwide and
30 percent in any one state, unless it is the initial entry of a banking
institution into that state. Effective June 1, 1997, under the interstate
branching provisions of the Reigle-Neal Act, banking subsidiaries of the
corporation are permitted to acquire directly a banking institution located in a
state other than the state in which the acquiring bank is located (interstate
bank merger) through merger, consolidation or purchase of assets and assumption
of liabilities, unless the state in which either of the banks is located has
enacted a law opting out of the interstate branching provisions of the Reigle-
Neal Act. The corporation will be unable to consolidate its banking operations
in one state with those of another state if either state has opted out of the
Reigle-Neal Act. The state of Texas has opted out of the Reigle-Neal Act and
the state of Montana has opted out until at least the year 2000. An interstate
bank merger may occur before June 1, 1997, if the states in which the merging
banks are located have enacted a law authorizing interstate bank mergers.
Interstate bank mergers are subject to the prior approval of the applicable
federal and state regulatory authorities, and may be subject to certain limited
conditions that a state may impose and the concentration limits outlined above.
In determining whether to approve a proposed bank acquisition or merger, bank
regulatory authorities consider a number of factors including the effect of the
proposed acquisition on competition, the public benefits expected to be derived
from the consummation of the proposed transaction, the projected capital ratios
and levels on a post-acquisition basis, and the acquiring institution's record
of addressing the credit needs of the communities it serves, including the needs
of low and moderate income neighborhoods, consistent with the safe and sound
operation of the bank, under the Community Reinvestment Act of 1977, as amended.
COMPETITION
Legislative and regulatory changes coupled with technological advances have
significantly increased competition in the financial services industry. The
corporation's banking and financial services subsidiaries compete with other
traditional financial services providers, such as commercial banks and financial
institutions, including savings and loan associations, credit unions, finance
companies, mortgage banking companies and mutual funds. Competition has also
increased from such non-banking institutions as brokerage houses and insurance
companies, as well as financial services subsidiaries of commercial and
manufacturing companies, that are not necessarily subject to the same regulatory
restrictions as banks and bank holding companies.
GOVERNMENT POLICIES, SUPERVISION AND REGULATION
General
As a bank holding company, the corporation is subject to the supervision and
examination by the Federal Reserve Board under the BHC Act. The corporation's
national banking subsidiaries are regulated primarily by the Office of the
Comptroller of the Currency (OCC) while its state-chartered banking subsidiaries
are regulated primarily by the Federal Deposit Insurance Corporation (FDIC) and
applicable state banking agencies. The corporation's savings and loan
association subsidiary is regulated primarily by the Office of Thrift
Supervision (OTS). The deposits of the corporation's banking subsidiaries are
primarily insured by the Bank Insurance Fund (BIF) and savings and loan
association deposits are insured by the Savings Association Insurance Fund
(SAIF), subjecting
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such subsidiaries to FDIC regulation. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the Federal
Reserve Board affecting the money supply and credit availability.
The corporation has other financial services subsidiaries that are subject to
regulation by the Federal Reserve Board and other applicable federal and state
agencies. For example, the corporation's brokerage subsidiary is subject to
regulation by the Securities and Exchange Commission, the National Association
of Securities Dealers, Inc. and state securities regulators. The corporation's
insurance subsidiaries are subject to regulation by applicable state insurance
regulatory agencies. Other nonbank subsidiaries of the corporation are subject
to the laws and regulations of both the federal government and the various
states in which they conduct business.
Dividend Restrictions
Various federal and state statutes and regulations limit the amount of dividends
the banking, savings and loan association and other subsidiaries can pay to the
corporation without regulatory approval. Refer to Note 19 of the corporation's
consolidated financial statements for additional information.
Holding Company Structure
The corporation is a legal entity separate and distinct from its banking and
nonbanking subsidiaries. Accordingly, the right of the corporation, and thus the
right of the corporation's creditors, to participate in any distribution of the
assets or earnings of any subsidiary, other than in its capacity as a creditor
of the subsidiary, is necessarily subject to the prior payment of claims of
creditors of such subsidiary. The principal sources of the corporation's
revenues are dividends and fees from its subsidiaries.
The corporation's banking subsidiaries are subject to restrictions under federal
law which limit the transfer of funds by the subsidiary banks to the corporation
and its non-bank subsidiaries, whether in the form of loans, extensions of
credit, investments or asset purchases. Such transfers by any subsidiary bank to
the corporation or any non-bank subsidiary are limited in amount to 10 percent
of the bank's capital and surplus and, with respect to the corporation and all
non-bank subsidiaries, to an aggregate of 20 percent of the bank's capital and
surplus. Further, such loans and extensions of credit are required to be
secured in specified amounts.
The Federal Reserve Board has a policy to the effect that a bank holding company
is expected to act as a source of financial and managerial strength to each of
its subsidiary banks and to commit resources to support each subsidiary bank.
This support may be required at times when the corporation may not have the
resources to provide support. Any capital loans by the corporation to any of the
subsidiary banks are subordinate in right of payment to deposits and to certain
other indebtedness of the subsidiary bank. In addition, the Crime Control Act of
1990 provides that in the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
A depository institution insured by the FDIC can be held liable for any loss
incurred, or reasonably expected to be incurred, by the FDIC after August 9,
1989, in connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance.
Federal law (12 U.S.C. Section 55) permits the OCC to order the pro rata
assessment of shareholders of a national bank whose capital stock has become
impaired, by losses or otherwise, to relieve a deficiency in such national
bank's capital stock. This statute also provides for the enforcement of any such
pro rata assessment of shareholders of such national bank to cover such
impairment of capital stock by sale, to the extent necessary, of the capital
stock of any assessed shareholder failing to pay the assessment. Similarly, the
laws of certain states provide for such assessment and sale with respect to
banks chartered by such states. The corporation, as the sole stockholder of
most of its subsidiary banks, is subject to such provisions.
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Capital Requirements
The Federal Reserve Board, the OCC and the FDIC have adopted substantially
similar risk-based and leverage capital guidelines for banking organizations.
Such guidelines are intended to ensure that banking organizations have adequate
capital given the risk levels of their assets and off-balance sheet commitments.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as stand-by letters of credit) is eight
percent. At least half of the total capital is to be comprised of common stock,
minority interests and noncumulative perpetual preferred stock (Tier 1 capital).
The remainder (Tier 2 capital) may consist of hybrid capital instruments,
perpetual stock, mandatory convertible debt securities, a limited amount of
subordinated debt, other preferred stock and a limited amount of the allowance
for credit losses. Additionally, the risk-based capital guidelines specify that
all intangibles, including core deposit intangibles, as well as mortgage
servicing rights (MSRs), and purchased credit card relationships (PCCRs) be
deducted from Tier 1 capital. The guidelines, however, grandfather identifiable
intangible assets (other than MSRs and PCCRs) acquired on or before February 19,
1992, and permit the inclusion of readily marketable PMSRs and PCCRs in Tier 1
capital to the extent that (i) MSRs and PCCRs do not exceed 50 percent of Tier 1
capital and (ii) PCCRs do not exceed 25 percent of Tier 1 capital. For such
purposes, MSRs and PCCRs each are included in Tier 1 capital only up to the
lesser of (a) 90 percent of their fair market value (which must be determined
quarterly) and (b) 100 percent of the remaining unamortized book value of such
assets.
In addition, the Federal Reserve Board has specified minimum "leverage ratio"
(the ratio of Tier 1 capital to quarterly average total assets) guidelines for
bank holding companies and state member banks. These guidelines provide for a
minimum leverage ratio of three percent for bank holding companies and state
member banks that meet certain specified criteria, including that they have the
highest regulatory rating. All other bank holding companies and state member
banks are required to maintain a leverage ratio of three percent plus an
additional cushion of one to two percent. The guidelines also provide that
banking organizations experiencing internal growth or making acquisitions are
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier 1 leverage ratio" in evaluating proposals
for expansion or new activities. The tangible Tier 1 leverage ratio is the
ratio of a banking organization's Tier 1 capital, less all intangibles, to total
assets, less all intangibles. Each of the corporation's banking subsidiaries is
also subject to capital requirements adopted by applicable regulatory agencies
which are substantially similar to the foregoing. At December 31, 1996, the
corporation's Tier 1 and total capital (the sum of Tier 1 and Tier 2 capital) to
risk-adjusted assets ratios were 8.63 percent and 10.42 percent, respectively,
and the corporation's leverage ratio was 6.15 percent. Neither the corporation
nor any subsidiary bank has been advised by the appropriate federal regulatory
agency of any specific leverage ratio applicable to it.
As a result of federal law enacted in 1991 that required each federal banking
agency to revise its risk-based capital standards to ensure that those standards
take adequate account of interest rate risk, concentration of credit risk and
the risks of nontraditional activities, each of the federal banking agencies has
revised the risk-based capital guidelines described above to take account of
concentration of credit risk and risk of nontraditional activities. The Federal
Reserve Board, the FDIC and the OCC adopted a rule that amends, effective
September 1, 1995, the capital standards to include explicitly a bank's exposure
to declines in the economic value of its capital due to changes in interest
rates as a factor to be considered in evaluating a bank's interest rate
exposure. Such agencies issued for comment a joint policy statement that
described the process to be used to measure and assess the exposure of a bank's
net economic value to changes in interest rates. In June 1996, these agencies
elected not to pursue a standardized supervisory measure and explicit capital
charge for interest rate risk. In supervising interest rate risk, the agencies
intend to emphasize reliance on internal measures of risk, promotion of sound
risk management practices and other means to identify those institutions that
appear to be taking excessive risk. The corporation does not believe these
revisions to the capital guidelines will materially impact its operations.
Effective January 1, 1998, federal bank regulatory agencies will require banking
organizations that engage in significant trading activity to calculate a charge
for market risk. Organizations may opt to comply effective January 1, 1997.
Significant trading activity, for this purpose, is defined to include trading
activity of at least ten
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percent of total assets or $1 billion, whichever is smaller, calculated on a
consolidated basis for bank holding companies. Federal bank regulators may apply
the market risk measure to other banks and bank holding companies if the agency
deems necessary or appropriate for safe and sound banking practices. Each agency
may exclude organizations that it supervises that otherwise meet the criteria
under certain circumstances. The market risk charge will be included in the
calculation of applicable risk-based capital ratios. The corporation has not
historically engaged in significant trading activity, as defined.
Federal Deposit Insurance Corporation Improvement Act of 1991
In December 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
revisions to several other federal banking statutes. Among other things, FDICIA
requires the federal banking regulators to take "prompt corrective action" in
respect of depository institutions insured by the FDIC that do not meet minimum
capital requirements. FDICIA establishes five capital tiers: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized".
Under applicable regulations, an FDIC-insured depository institution is defined
to be well capitalized if it maintains a leverage ratio of at least five
percent, a risk-adjusted Tier 1 capital ratio of at least six percent and a
risk-adjusted total capital ratio of at least 10 percent, and is not subject to
a directive, order or written agreement to meet and maintain specific capital
levels. An insured depository institution is defined to be adequately
capitalized if it meets all of its minimum capital requirements as described
above. An insured depository institution will be considered undercapitalized if
it fails to meet any minimum required measure, significantly undercapitalized if
it has a risk-adjusted total capital ratio of less than six percent, risk-
adjusted Tier 1 capital ratio of less than three percent or a leverage ratio of
less than three percent, and critically undercapitalized if it fails to maintain
a level of tangible equity equal to at least two percent of total assets. An
insured depository institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating. As of December 31, 1996, all of the
corporation's banking subsidiaries were well capitalized.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to a
wide range of limitations on operations and activities, including growth
limitations, and are required to submit a capital restoration plan. The federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to succeed
in restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with such capital
restoration plan. The aggregate liability of the parent holding company is
limited to the lesser of (i) an amount equal to five percent of the depository
institution's total assets at the time it became undercapitalized and (ii) the
amount which is necessary (or would have been necessary) to bring the
institution into compliance with all capital standards applicable with respect
to such institution as of the time it fails to comply with the plan. If a
depository institution fails to submit an acceptable plan, it is treated as if
it were significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
FDICIA, as amended by the Reigle Community Development and Regulatory
Improvement Act of 1994 enacted on August 22, 1994, directs that each federal
banking agency prescribe standards, by regulation or guideline, for depository
institutions relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, asset quality, earnings, stock valuation, and such other
operational and managerial standards as the agency deems appropriate. The FDIC,
in consultation with the other federal banking agencies, has adopted a final
rule and guidelines with respect to internal and external audit procedures and
internal controls in order to implement those provisions of FDICIA
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intended to facilitate the early identification of problems in financial
management of depository institutions. On July 10, 1995, the federal banking
agencies published the final rules implementing three of the safety and
soundness standards required by FDICIA, including operational and managerial
standards, asset quality and earnings standards, and compensation standards. The
impact of such standards on the corporation has not been material.
FDICIA also contains a variety of other provisions that may affect the
operations of the corporation, including new reporting requirements, revised
regulatory standards for real estate lending, "truth in savings" provisions and
the requirement that a depository institution give 90 days' notice to customers
and regulatory authorities before closing any branch.
Under other regulations promulgated under FDICIA a bank cannot accept brokered
deposits (that is, deposits obtained through a person engaged in the business of
placing deposits with insured depository institutions or with interest rates
significantly higher that prevailing market rates) unless (i) it is well
capitalized or (ii) it is adequately capitalized and receives a waiver from the
FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-
through" insurance on certain employee benefit accounts, unless it provides
certain notices to affected depositors. In addition, a bank that is adequately
capitalized and that has not received a waiver from the FDIC may not pay an
interest rate on any deposits in excess of 75 basis points over certain
prevailing market rates. There are no such restrictions on a bank that is well
capitalized. At December 31, 1996, all of the corporation's banking subsidiaries
were well capitalized and, therefore, were not subject to these restrictions.
FDIC Insurance
The FDIC insures the deposits of the corporation's depository institution
subsidiaries through the BIF or, in the case of deposits held by its savings and
loan association subsidiary or deposits held by banking subsidiaries as a result
of savings and loan associations acquired by the corporation, through the SAIF.
The amount of FDIC assessments paid by each BIF member institution is based on
its relative risk of default as measured by regulatory capital ratios and other
factors. Specifically, the assessment rate is based on the institution's
capitalization risk category and supervisory subgroup category. An
institution's capitalization risk category is based on the FDIC's determination
of whether the institution is well capitalized, adequately capitalized or less
than adequately capitalized. An institution's supervisory subgroup is based on
the FDIC's assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will be required.
Subgroup A institutions are financially sound institutions with few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weakness
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness.
The BIF assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits, with Subgroup A institutions assessed at a rate of zero and
Subgroup C institutions assessed at a rate of 27 cents. The FDIC may increase
or decrease the assessment rate schedule on a semiannual basis. An increase in
the rate assessed one or more of the corporation's banking subsidiaries could
have a material effect on the corporation's earnings, depending upon the amount
of the increase. The FDIC is authorized to terminate a depository institution's
deposit insurance upon a finding by the FDIC that the institution's financial
condition is unsafe or unsound or that the institution has engaged in unsafe or
unsound practices or violated any applicable rule, regulation, order or
condition enacted or imposed by the institution's regulatory agency. The
termination of deposit insurance with respect to one or more of the
corporation's subsidiary depository institutions could have a material adverse
effect on the corporation depending on the collective size of the particular
institutions involved.
Deposits insured by SAIF are currently assessed at the BIF rate of zero to 27
cents per $100 of domestic deposits. The SAIF assessment rate may increase or
decrease as is necessary to maintain the designated SAIF reserve ratio of 1.25
percent of insured deposits. In September 1996, Congress enacted legislation
that imposed a one-time charge on deposits insured by SAIF to recapitalize the
SAIF deposit insurance fund. In the third quarter of 1995 when the SAIF
recapitalization legislation was first introduced in Congress, the corporation
included as a charge in its normal operating results $23.5 million for its share
of recapitalization of the SAIF deposit insurance fund. In
8
1996, the corporation has acquired thrift institutions and recorded a $19.0
million pre-tax charge for payments due for these institutions.
Under the 1996 legislation, all FDIC-insured depository institutions are
required to pay an assessment to provide funds for payment of interest on
Financing Corporation (FICO) bonds effective January 1, 1997. Until December
31, 1999 or when the last savings and loan association ceases to exist,
whichever occurs first, institutions will pay approximately 6.4 cents per $100
of SAIF-assessable deposits and approximately 1.3 cents per $100 of BIF-
assessable deposits.
Subject to certain conditions, BIF and SAIF will be merged into one insurance
fund effective January 1, 1999.
Depositor Preference
Under the Federal Deposit Insurance Act, claims of holders of domestic deposits
and certain claims of administrative expenses and employee compensation against
an FDIC-insured depository institution have priority over other general
unsecured claims against the institution in the "liquidation or other
resolution" of the institution by a receiver.
9
ITEM 2. PROPERTIES
The corporation's bank subsidiaries operate out of 829 banking locations, of
which 542 are owned directly and 287 are leased from outside parties. The
mortgage banking operations lease its headquarters facilities and servicing
center in Des Moines, Iowa and leases servicing centers in Minneapolis,
Minnesota; Phoenix, Arizona; Charlotte, North Carolina; Springfield, Illinois;
and leases all mortgage production offices nationwide. In addition, the
mortgage banking operation owns additional servicing centers located in
Springfield, Ohio and Riverside, California. Norwest Financial owns its
headquarters in Des Moines, Iowa, and leases all consumer finance branch
locations. The corporation and Norwest Bank Minnesota, N.A. lease their offices
in Minneapolis, Minnesota.
The accompanying notes to consolidated financial statements on pages 44 and 57
in the Appendix contain additional information with respect to premises and
equipment and commitments under noncancelable leases for premises and equipment.
ITEM 3. LEGAL PROCEEDINGS
The corporation and certain subsidiaries are defendants in various matters of
litigation generally incidental to their businesses. Although it is difficult
to predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability will not materially affect
the consolidated financial position and results of operations of the corporation
and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal trading markets for the corporation's common equity are presented
on the cover page of this Form 10-K. The high and low sales prices for the
corporation's common stock for each quarter during the past two years and
information regarding cash dividends is set forth on pages 48 through 50, 75,
and 81 in the Appendix. The number of holders of record of the common stock and
securities convertible into common stock of the corporation at January 31, 1997
were:
Title of Class Number of Holders
-------------- -----------------
6 3/4 % Convertible
Subordinated Debentures Due 2003................. 6
Common Stock, par value $1 2/3 per share......... 39,105
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data begins on page 75 in the Appendix.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis is presented beginning on page 18 in the Appendix
and should be read in conjunction with the related financial statements and
notes thereto included under Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the corporation and its subsidiaries
begin on page 31 in the Appendix. The report of independent certified public
accountants on the corporation's consolidated financial statements is presented
on page 73 in the Appendix.
Selected quarterly financial data is presented on pages 81 and 82 in the
Appendix.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, and such
information is expressly incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, and such
information is expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, and such
information is expressly incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, and such
information is expressly incorporated herein by reference.
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - See Item 8 above.
(2) Financial Statement Schedules
All schedules to the consolidated financial statements normally
required by Form 10-K are omitted since they are either not
applicable or the required information is shown in the financial
statements or the notes thereto.
(3) Management Contracts or Compensatory Plan Arrangements - See exhibits
marked with an asterisk in Item 14(c) below.
(b) Reports on Form 8-K
The corporation filed a Current Report on Form 8-K, dated October 14,
1996, reporting consolidated operating results of the corporation for
the quarter ended September 30, 1996.
(c) Exhibits
3(a). Restated Certificate of Incorporation, as amended, incorporated by
reference to Exhibit 3(b) to the corporation's Current Report on
Form 8-K dated June 28, 1993. Certificate of Amendment of
Certificate of Incorporation of the corporation authorizing
4,000,000 shares of Preference Stock, incorporated by reference to
Exhibit 3 to the corporation's Current Report on Form 8-K dated
July 3, 1995.
3(b). Certificate of Designations of powers, preferences and rights
relating to the corporation's ESOP Cumulative Convertible Preferred
Stock incorporated by reference to Exhibit 4 to the corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
3(c). Certificate of Designations of powers, preferences and rights
relating to the corporation's Cumulative Tracking Preferred Stock
incorporated by reference to Exhibit 3 to the corporation's Current
Report on Form 8-K dated January 9, 1995.
3(d). Certificate of Designations of powers, preferences and rights
relating to the corporation's 1995 ESOP Cumulative Convertible
Preferred Stock incorporated by reference to Exhibit 4 to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
3(e). Certificate Eliminating the Certificate of Designations with
respect to the Cumulative Convertible Preferred Stock, Series B,
incorporated by reference to Exhibit 3(a) to the corporation's
Current Report on Form 8-K dated November 1, 1995.
3(f). Certificate Eliminating the Certificate of Designations with
respect to the 10.24% Cumulative Preferred Stock incorporated by
reference to Exhibit 3 to the corporation's Current Report on Form
8-K dated February 20, 1996.
3(g). Certificate of Designations of powers, preferences and rights
relating to the corporation's 1996 ESOP Cumulative Convertible
Preferred Stock incorporated by reference to Exhibit 3 to the
corporation's Current Report on Form 8-K dated February 26, 1996.
13
3(h). By-Laws, as amended, incorporated by reference to Exhibit 4(c) to
the corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1991.
4(a). See 3(a) through 3(h) of Item 14(c) above.
4(b). Rights Agreement, dated as of November 22, 1988, between the
corporation and Citibank, N.A. incorporated by reference to Exhibit
1 to the corporation's Form 8-A, dated December 6, 1988, and
Certificates of Adjustment pursuant to Section 12 of the Rights
Agreement incorporated by reference to Exhibit 3 to the
corporation's Form 8, dated July 21, 1989, and to Exhibit 4 to the
corporation's Form 8-A/A dated June 29, 1993.
4(c). Copies of instruments with respect to long-term debt will be
furnished to the Commission upon request.
*10(a). Long-Term Incentive Compensation Plan (as amended effective April
23, 1996) incorporated by reference to Exhibit 10(a) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
*10(b). Employees' Stock Deferral Plan incorporated by reference to Exhibit
10(c) to the corporation's Annual Report on Form 10-K for the year
ended December 31, 1992.
*10(c). Employees' Deferred Compensation Plan (as amended effective January
1, 1996) incorporated by reference to Exhibit 10(c) to the
corporation's Annual Report on Form 10-K for the year ended
December 31, 1995.
*10(d). Executive Incentive Compensation Plan incorporated by reference to
Exhibit 19(a) to the corporation's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1988. Amendment to Executive
Incentive Compensation Plan incorporated by reference to Exhibit
19(b) to the corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1989.
*10(e). Performance-Based Compensation Policy for Covered Executive
Officers incorporated by reference to Exhibit 10(a) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994.
*10(f). Supplemental Savings Investment Plan (as amended effective January
1, 1997).
*10(g). Executive Financial Counseling Plan incorporated by reference to
Exhibit 10(f) to the corporation's Annual Report on Form 10-K for
the year ended December 31, 1987.
*10(h). Supplemental Long Term Disability Plan incorporated by reference to
Exhibit 10(f) to the corporation's Annual Report on Form 10-K for
the year ended December 31, 1990. Amendment to Supplemental Long
Term Disability Plan incorporated by reference to Exhibit 10(g) to
the corporation's Annual Report on Form 10-K for the year ended
December 31, 1992.
*10(i). Deferred Compensation Plan for Non-Employee Directors (as amended
effective January 23, 1996) incorporated by reference to Exhibit
10(i) to the corporation's Annual Report on Form 10-K for the year
ended December 31, 1995.
*10(j). Retirement Plan for Non-Employee Directors (as amended effective
January 28, 1997).
14
*10(k). Directors' Formula Stock Award Plan (as amended effective April 23,
1996) incorporated by reference to Exhibit 10(b) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
*10(l). Directors' Stock Deferral Plan incorporated by reference to Exhibit
19 to the corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992.
*10(m). Agreement between the corporation and Lloyd P. Johnson dated March
11, 1991, incorporated by reference to Exhibit 19(c) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1991.
*10(n). Agreement between the corporation and Richard M. Kovacevich dated
March 18, 1991, incorporated by reference to Exhibit 19(e) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1991. Amendment effective January 1, 1995 to the March
18, 1991 agreement between the corporation and Richard M.
Kovacevich, incorporated by reference to Exhibit 10(c) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
*10(o). Form of agreement between the corporation and 13 executive
officers, including two directors, incorporated by reference to
Exhibit 19(f) to the corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1991. Amendment effective January
1, 1995, to the March 11, 1991 agreement between the corporation
and Richard M. Kovacevich incorporated by reference to Exhibit
10(b) to the corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
*10(p). Consulting Agreement between the corporation and Gerald J. Ford
dated January 19, 1994, incorporated by reference to Exhibit 10(q)
to the corporation's Annual Report on Form 10-K for the year ended
December 31, 1993.
11. Computation of Earnings Per Share.
12(a). Computation of Ratio of Earnings to Fixed Charges.
12(b). Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends.
21. Subsidiaries of the Corporation.
23. Consent of Experts.
24. Powers of Attorney.
___________________
* Management contract or compensatory plan or arrangement.
Stockholders may obtain a copy of any Exhibit, Item 14(c), none of which are
contained herein, upon payment of a reasonable fee, by writing Norwest
Corporation, Office of the Secretary, Norwest Center, Sixth and Marquette,
Minneapolis, Minnesota 55479-1026.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 24th day of
February, 1997.
Norwest Corporation
(Registrant)
By /s/ RICHARD M. KOVACEVICH
-------------------------
Richard M. Kovacevich
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on the 24th day of February, 1997, by the following persons on
behalf of the registrant and in the capacities indicated.
By /s/ JOHN T. THORNTON
--------------------
John T. Thornton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By /s/ MICHAEL A. GRAF
-------------------
Michael A. Graf
Senior Vice President and Controller
(Principal Accounting Officer)
The Directors of Norwest Corporation listed below have duly executed powers of
attorney empowering Richard S. Levitt to sign this document on their behalf.
Les S. Biller Reatha Clark King
J. A. Blanchard III Richard M. Kovacevich
David A. Christensen Richard D. McCormick
Pierson M. Grieve Cynthia H. Milligan
Charles M. Harper Benjamin F. Montoya
William A. Hodder Ian M. Rolland
Michael W. Wright
By /s/ RICHARD S. LEVITT
---------------------
Richard S. Levitt
Director and Attorney-in-Fact
February 24, 1997
16
Appendix
NORWEST CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Financial
Statements, Report of Independent Auditors
and Selected Financial Data
Forming a Part of the Annual Report
on Form 10-K for the
Year Ended December 31, 1996
Contents
--------
Page
----
Financial Review........................................ 18
Financial Statements.................................... 31
Independent Auditors' Report............................ 73
Management's Report..................................... 74
Six-Year Consolidated Financial Summary................. 75
Consolidated Average Balance Sheets
and Related Yields and Rates............................ 76
Quarterly Condensed Consolidated Financial Information.. 81
17
FINANCIAL REVIEW
This financial review should be read with the consolidated financial statements
and accompanying notes presented on pages 31 through 72 and other information
presented on pages 75 through 82.
Earnings Performance
Norwest Corporation (the corporation) reported record net income of $1,153.9
million in 1996, an increase of 20.7 percent over earnings of $956.0 million in
1995, which were up 19.4 percent over the $800.4 million earned in 1994. Net
income per fully diluted common share was $3.07 in 1996, compared with $2.73 in
1995 and $2.41 in 1994, an increase of 12.5 percent and 13.3 percent,
respectively. Return on realized common equity was 21.9 percent and return on
assets was 1.51 percent for 1996, compared with 22.3 percent and 1.44 percent,
respectively, in 1995, and 21.4 percent and 1.45 percent, respectively, in 1994.
In September 1996, legislation was enacted by Congress that imposed a one-time
charge on deposits insured by the Savings Association Insurance Fund (SAIF) to
recapitalize the SAIF deposit insurance fund for savings and loan associations.
In the past, the corporation acquired savings and loan associations which are
subject to this charge. In the third quarter of 1995 when the SAIF
recapitalization legislation was first introduced in Congress, the corporation
included as a charge in its normal operating results $23.5 million for its share
of recapitalization of the SAIF deposit insurance fund. In 1996, the corporation
has acquired thrift institutions and recorded a charge of $19.0 million for
payments due for these institutions. Excluding the $19.0 million pre-tax charge,
net operating earnings were $1,165.7 million or $3.10 per fully diluted common
share. On an operating basis, return on realized common equity was 22.1 percent
and return on assets was 1.52 percent for the year ended December 31, 1996.
Norwest Corporation and Subsidiaries
Consolidated Income Summary
5 Year
Growth
In millions 1996 Change 1995 Change 1994 1993 1992 Rate
-------- ------ -------- ------ -------- -------- -------- ----
Interest income (tax-equivalent basis)......... $6,350.5 10.4% $5,750.8 30.0% $4,422.7 $3,979.6 $3,844.3 9.3%
Interest expense............................... 2,617.0 6.9 2,448.0 54.0 1,590.1 1,442.9 1,610.6 4.0
-------- -------- -------- -------- --------
Net interest income......................... 3,733.5 13.0 3,302.8 16.6 2,832.6 2,536.7 2,233.7 14.2
Provision for credit losses.................... 394.7 26.3 312.4 89.4 164.9 158.2 270.8 (0.6)
-------- -------- -------- -------- --------
Net interest income after provision
for credit losses......................... 3,338.8 11.7 2,990.4 12.1 2,667.7 2,378.5 1,962.9 17.1
Non-interest income............................ 2,564.6 38.8 1,848.2 12.8 1,638.3 1,585.0 1,273.7 19.2
Non-interest expenses.......................... 4,089.7 20.9 3,382.3 9.2 3,096.4 3,050.4 2,553.1 14.9
-------- -------- -------- -------- --------
Income before income taxes.................. 1,813.7 24.5 1,456.3 20.4 1,209.6 913.1 683.5 27.4
Income tax expense............................. 627.6 34.4 466.8 22.8 380.2 266.7 175.6 53.6
Tax-equivalent adjustment...................... 32.2 (3.9) 33.5 15.5 29.0 33.3 37.9 (7.6)
-------- -------- -------- -------- --------
Income before cumulative effect of
a change in accounting for
postretirement medical benefits............. 1,153.9 20.7 956.0 19.4 800.4 613.1 470.0 22.5
Cumulative effect on years ended prior to
December 31, 1992 of a change in
accounting for postretirement
medical benefits............................ -- -- -- -- -- -- (76.0) --
-------- -------- -------- -------- ---------
Net income..................................... $1,153.9 20.7% $ 956.0 19.4% $ 800.4 $ 613.1 $ 394.0 22.5%
======== ======== ======== ======== ========
Organizational Earnings
Banking The Banking Group reported record operating earnings of $776.4 million
in 1996, 28.9 percent over 1995 earnings of $602.2 million, which increased 18.8
percent over 1994 earnings of $507.1 million. The Banking Group earnings
increases in 1996 and 1995 reflect a 7.3 percent and 17.4 percent growth in tax-
equivalent net interest income, respectively, primarily due to increases in
average earning assets and net interest margin. The Banking Group's provision
for credit losses
18
was $146.7 million in 1996, compared with $143.0 million and $50.5 million in
1995 and 1994, respectively. The 1996 and 1995 increases in the provision for
loan losses were due to higher net charge-offs. Non-interest income in the
Banking Group increased 35.8 percent from 1995 due primarily to increases in
venture capital gains and gains on sale of credit card receivables. The Banking
Group non-interest income for 1995 increased 24.1 percent from 1994 due largely
to investment securities losses in 1994. Non-interest income in 1995 also
benefited from growth in service charges and other fees and higher venture
capital gains. Excluding the previously discussed SAIF assessment charge, the
Banking Group non-interest expenses increased 14.7 percent in 1996 reflecting
writedowns of goodwill and intangibles and additional operating expenses related
to acquired companies, partially offset by reduced pension expense. Non-interest
expenses in the Banking Group increased 14.9 percent in 1995 reflecting
additional operating expenses related to acquired companies, partially offset by
reductions in FDIC insurance premiums. During 1995, the FDIC assessment rate on
Banking Group deposits was reduced from 23 cents per $100 of insured deposits to
4 cents per $100 of insured deposits. This rate was subsequently reduced to zero
for 1996. In 1995, the Banking Group received refunds of $20.6 million related
to the FDIC premium reduction. These refunds were used to offset the accrual for
the SAIF assessment related to savings and loan associations acquired by the
corporation prior to 1996.
The venture capital subsidiaries reported $256.4 million of net gains in 1996,
compared with net gains of $102.1 million in 1995 and net gains of $77.1 million
in 1994. Certain appreciated securities which comprised $19.6 million of the
1994 net venture gains were contributed to the Norwest Foundation due to the
funding status of the Foundation. The contribution amount of such securities,
which included the cost basis, was $21.8 million in 1994. In 1995 and 1996,
there were no contributions of appreciated securities to the Foundation. Net
unrealized appreciation in the venture capital investment portfolio was $237.7
million at December 31, 1996 and $169.3 million at December 31, 1995.
Mortgage Banking Mortgage Banking earned a record $125.0 million in 1996, a 19.2
percent increase over the $104.9 million earned in 1995, which was 48.0 percent
over the $70.8 million earned in 1994. The increases were principally due to
increases in mortgage loan fundings and the servicing portfolio. Fundings were
$51.5 billion in 1996, compared with $33.9 billion in 1995 and $24.9 billion in
1994. Increases in volume were attributable in part to the acquisition of
certain assets of Prudential Home Mortgage Company, Inc. in May 1996, including
$47 billion of its mortgage servicing portfolio. The percentage of fundings
attributed to mortgage loan refinancings was approximately 22.0 percent in 1996,
compared with 19.6 percent in 1995 and 16.0 percent in 1994. The servicing
portfolio increased to $179.7 billion at December 31, 1996, compared with $107.4
billion at December 31, 1995. The weighted average coupon was 7.77 percent at
December 31, 1996, essentially unchanged from a year earlier. In 1995, the
corporation adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No.
65" (FAS 122). FAS 122 sets standards related to capitalizing values for
mortgage servicing and recognition of impairment valuations for amounts
previously capitalized. Under FAS 122 the corporation recognizes as separate
assets the rights to service mortgage loans for others whether the servicing
rights are acquired through purchase transactions or through loan originations.
Total capitalized servicing (including excess servicing rights) amounted to $2.6
billion or 147 basis points of the mortgage servicing portfolio at December 31,
1996. Amortization of capitalized mortgage servicing rights was $300.6 million
in 1996, compared with $139.6 million in 1995 and $64.1 million in 1994. The
additional amortization in 1996 and in 1995 principally reflects increased
balances of capitalized servicing associated with a larger servicing portfolio
and increased prepayments due to the low interest rate environment. Mortgage
servicing impairment valuation provisions, including writedowns of excess
servicing rights, totaled $70.5 million in 1995. No mortgage servicing
impairment provisions were recorded in 1996. Combined gains on sales of
mortgages and servicing rights were $70.5 million in 1996, compared with $57.1
million in 1995 and $204.5 million in 1994.
Norwest Financial Norwest Financial (including Norwest Financial Services, Inc.
and Island Finance) reported record earnings of $264.3 million in 1996, a 6.2
percent increase over the $248.9 million earned in 1995, which was an increase
of 11.8 percent over the $222.5 million earned in 1994. The increases were
primarily due to increases in tax-equivalent net interest income of 16.8 percent
and 21.4 percent, respectively, for 1996 and 1995. The increase in tax-
equivalent net interest income was due to 14.9 percent and 28.4 percent
increases in average finance receivables in 1996 and 1995, respectively. The
1996 and 1995 increases in tax-equivalent net interest income and average
receivables reflect internal growth as well as the May 1995 acquisition of ITT
Financial Corporation's Island Finance business, with $1 billion in receivables
in Puerto Rico, the Virgin Islands and elsewhere in the Caribbean. Net interest
margin increased 22 basis points in 1996 due to an improvement in funding costs.
Net interest margin decreased 66 basis points in 1995, reflecting a narrowing of
the yield spread on earning assets. Norwest Financial's non-interest expenses
increased 15.5 and 22.9 percent in 1996 and 1995, respectively, primarily due to
the acquisition of Island Finance.
19
Norwest Corporation and Subsidiaries
Organizational Earnings*
In millions 1996 1995 1994 1993 1992
-------- --------- -------- --------- ---------
Years Ended December 31,
- ------------------------
Banking............................................................. $ 776.4 602.2 507.1 356.7 257.6
Mortgage Banking.................................................... 125.0 104.9 70.8 56.3 53.4
Norwest Financial................................................... 264.3 248.9 222.5 200.1 159.0
-------- --------- -------- --------- ---------
Consolidated operating earnings before cumulative effect of a
change in accounting for postretirement medical benefits and
SAIF recapitalization........................................... 1,165.7 956.0 800.4 613.1 470.0
Cumulative effect on years ended prior to December 31, 1992
of a change in accounting for postretirement medical benefits... -- -- -- -- (76.0)
SAIF recapitalization, net of income taxes.......................... (11.8) -- -- -- --
-------- --------- -------- --------- ---------
Net income.......................................................... $1,153.9 956.0 800.4 613.1 394.0
======== ========= ======== ========= =========
*Earnings of the entities listed are impacted by intercompany revenues and
expenses, such as interest on borrowings from the parent company, corporate
service fees and allocations of federal income taxes.
Consolidated Income Statement Analysis
Net Interest Income Net interest income on a tax-equivalent basis is the
difference between interest earned on assets and interest paid on liabilities,
with adjustments made to present yields on tax-exempt assets as if such income
were fully taxable. Changes in the mix and volume of earning assets and
interest-bearing liabilities, their related yields and overall interest rates
have a major impact on earnings. In 1996, tax-equivalent net interest income
provided 59.3 percent of the corporation's tax-equivalent net revenues, compared
with 64.1 percent in 1995 and 63.4 percent in 1994.
Total tax-equivalent net interest income was $3,733.5 million in 1996, a 13.0
percent increase over the $3,302.8 million reported in 1995. Growth in tax-
equivalent net interest income over 1995 was primarily due to a 12.7 percent
increase in average earning assets and a five basis point increase in net
interest margin. The increase in average earning assets was primarily due to an
8.4 percent increase in average loans and leases and a 9.7 percent increase in
investment securities. The 1995 increase in tax-equivalent net interest income
of 16.6 percent over the $2,832.6 million reported in 1994 was due to an 18.7
percent increase in average earning assets, partially offset by an eight basis
point decrease in net interest margin. Non-accrual and restructured loans
reduced net interest income by $17.8 million in 1996, $11.7 million in 1995 and
$12.3 million in 1994. Detailed analyses of net interest income appear on pages
76, 77 and 78 and a discussion of the corporation's asset and liability
management process begins on page 26.
Net interest margin, the ratio of tax-equivalent net interest income divided by
average earning assets, was 5.63 percent in 1996, 5.58 percent in 1995 and 5.66
percent in 1994. The increase in 1996 was primarily due to an improvement in
funding costs, partially offset by a lower yield on average earning assets. Net
interest margin also benefited from a reduction in overall long-term debt rates.
The decrease in margin in 1995 from 1994 was due to a narrowing of the yield
spread on earning assets and a change in funding mix due to increases in long-
term debt. Average loans and leases comprised 57.7 percent of average earning
assets in 1996, compared with 60.0 percent in 1995 and 60.6 percent in 1994.
Provision for Credit Losses The provision for credit losses reflects
management's judgment of the cost associated with credit risk inherent in the
loan and lease portfolio. The consolidated provision for credit losses was
$394.7 million in 1996, $312.4 million in 1995 and $164.9 million in 1994. The
provision for credit losses was 1.02 percent of average loans and leases in
1996, compared with 0.88 percent in 1995 and 0.55 percent in 1994. The provision
for credit losses was higher in 1996 compared with 1995 as well as in 1995
compared with 1994 due to higher net charge-offs and loan growth.
Net credit losses were $382.4 million in 1996, $304.2 million in 1995 and $193.2
million in 1994. Net credit losses as a percent of average loans and leases were
0.99 percent in 1996, compared with 0.86 percent in 1995 and 0.64 percent in
1994. The increase in net credit losses in 1996 over 1995 was principally due to
higher levels of charge-offs in regions where the corporation has had
acquisitions and to slightly higher consumer credit charge-offs at Norwest
Financial. The increase in net credit losses in 1995 over 1994 was due
principally to increases in consumer and credit card net charge-offs of $108.2
million. The net charge-off ratio, the ratio of net credit losses to average
loans and leases, for Norwest Financial was 3.24
20
percent in 1996, compared with 2.52 percent in 1995 and 2.00 percent in 1994.
Norwest Card Services' net charge-off ratio (excluding credit card portfolios
classified held for sale in 1995) was 4.23 percent in 1996 compared with 4.77
percent in 1995 and 3.07 percent in 1994. The higher consumer loan net credit
losses reflect, in part, growth in the overall portfolio, including the
acquisition of Island Finance in 1995. Norwest Financial's net charge-offs in
1995 increased $60.7 million over 1994, of which $23.6 million related to Island
Finance. Further, $49.2 million of 1995 net credit card charge-offs relate to
receivables from the corporation's direct mail programs which were suspended in
1995.
Non-interest Income Non-interest income is a significant source of the
corporation's revenue, representing 40.7 percent of tax-equivalent net revenues
in 1996, compared with 35.9 percent in 1995 and 36.6 percent in 1994.
Consolidated non-interest income was $2,564.6 million in 1996, an increase of
38.8 percent over $1,848.2 million recorded in 1995. Non-interest income
includes net investment securities losses of $46.8 million and $44.5 million in
1996 and 1995, respectively; proceeds from sales provided opportunities for the
corporation to reinvest at higher yields. Contributing to the 1996 increase were
higher fees and service charges including trust fees, service charges on deposit
accounts and insurance revenues, increases in mortgage banking revenues, net
venture capital gains and gains on the disposition of credit card receivables
held for sale.
The increases in trust fees and deposit service charges reflect overall
increases in business activity, including acquisitions, and marketing efforts.
Mortgage banking revenues increased $286.0 million from 1995 due to increased
levels of origination and other closing fees and servicing fees, resulting from
growth in the corporation's servicing portfolio and higher mortgage loan funding
levels. Servicing fees are expected to increase as the servicing portfolio grows
through retention of servicing and through acquisitions. Mortgage banking
revenue derived from sales of servicing and future sales of servicing rights are
largely dependent upon portfolio characteristics and prevailing market
conditions. The increase in insurance fees is attributed to commissions on
credit life and crop hail insurance. Net venture capital gains were $256.4
million in 1996, compared with $102.1 million in 1995. Sales of venture capital
securities generally relate to the timing of such holdings becoming publicly
traded and subsequent market conditions, causing venture capital gains to be
unpredictable in nature. Other non-interest income in 1996 includes $33.5
million in gains on the sale of credit card receivables.
Consolidated non-interest income increased 12.8 percent in 1995 from $1,638.3
million in 1994, primarily due to higher trust fees, service charges on deposit
accounts, credit card and insurance fees, and trading revenues, and lower levels
of net investment securities losses, partially offset by lower mortgage banking
revenues from reduced sales of servicing rights. The increases in various fee
based services related to growth in consumer-related lending activities and
other marketing initiatives.
Non-interest Expenses Consolidated non-interest expenses increased 20.9 percent
in 1996 to $4,089.7 million. In addition to the non-recurring charge related to
the recapitalization of SAIF, the change in non-interest expenses reflects
increased operating expenses associated with acquisitions and certain one-time
acquisition charges related to completed 1996 transactions and writedowns of
goodwill and other intangibles of $151.0 million before taxes, partially offset
by reduced pension benefits expense of $53.2 million due to changes in pension
assumptions.
Personnel expenses increased $352.0 million in 1996, primarily attributable to
salaries expense. Changes in personnel expenses by business segment for 1996
included an increase of 14.0 percent for the Banking Group, an increase of 37.5
percent for Mortgage Banking, and an increase of 15.9 percent for Norwest
Financial. Normalized for acquisitions, personnel expenses increased 8.0 percent
for the Banking Group, 23.6 percent for Mortgage Banking and 10.2 percent for
Norwest Financial.
Of the 1996 increases of $60.2 million in communication expenses, $55.0 million
in equipment rentals, depreciation and maintenance, and $61.9 million in net
occupancy expenses, the Banking Group contributed $33.3 million, $36.9 million
and $40.8 million, respectively, and Mortgage Banking contributed $20.7 million,
$15.8 million and $16.1 million, respectively. In addition to the Prudential
acquisition, increases in Mortgage Banking reflect higher levels of origination
and servicing volume.
Consolidated non-interest expenses increased 9.2 percent in 1995 to $3,382.3
million, reflecting higher personnel expenses, additional intangible asset
amortization and higher operating expenses associated with acquisitions, and
growth in Mortgage Banking.
Changes in personnel expenses by business segment for 1995 include an increase
of 8.6 percent for the Banking Group, an increase of 21.1 percent for Mortgage
Banking, and an increase of 19.2 percent for Norwest Financial. Normalized for
21
acquisitions, personnel expenses increased 1.9 percent for the Banking Group,
2.8 percent for Mortgage Banking and 8.9 percent for Norwest Financial.
Of the 1995 increases of $40.2 million in communication expenses, $37.3 million
in equipment rentals, depreciation and maintenance, and $27.1 million in net
occupancy expenses, the Banking Group contributed $16.9 million, $24.8 million
and $12.3 million, respectively, and Mortgage Banking contributed $16.1 million,
$10.7 million and $8.3 million, respectively. Other non-interest expense
decreased principally due to mortgage origination cost deferrals related to
increased fundings.
Income Taxes The corporation's income tax planning is based upon the goal of
maximizing long-term, after-tax profitability. The effective income tax rate was
35.2 percent in 1996, compared with 32.8 percent in 1995 and 32.2 percent in
1994. For more information on income taxes, see Note 12 to the consolidated
financial statements on page 56.
Consolidated Balance Sheet Analysis
Earning Assets At December 31, 1996, earning assets were $68.2 billion, compared
with $62.8 billion at December 31, 1995. This increase was primarily due to a
$1.0 billion increase in total investment securities and a $3.2 billion increase
in loans and leases.
Average earning assets were $66.8 billion in 1996, an increase of 12.7 percent
over 1995. This increase is primarily due to an 8.4 percent increase in average
loans and leases, a 9.7 percent increase in average total investment securities
and a 32.3 percent increase in average mortgages held for sale resulting from
increases in residential mortgage funding volume.
Leverage, the ratio of average assets to average total stockholders' equity, was
13.5 times during 1996, compared with 14.3 times during 1995. The change from
1995 is due to a 21.8 percent increase in average stockholders' equity,
partially offset by a 15.5 percent increase in average assets.
In Note 18 to the consolidated financial statements on page 67 the corporation
has disclosed the estimated fair values of all on- and off-balance sheet
financial instruments and certain non-financial instruments in accordance with
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments."
At December 31, 1996, the fair value of net financial instruments totaled $2.6
billion, a decrease of $0.1 billion from December 31, 1995. During the same
period, the net fair value of certain non-financial instruments increased $3.3
billion to $16.3 billion at December 31, 1996. The fair value of non-maturity
deposits rose $0.8 billion as the benefit of these funding sources increased
over 1995. The fair value of the mortgage loan origination/wholesale network
increased $0.4 billion due to higher levels of mortgage loan originations and
earnings, benefited in part by the acquisition of certain assets of The
Prudential Home Mortgage Company. The fair value of the consumer finance network
increased $0.3 billion due to a lower interest rate environment and the
integration of various acquired consumer finance businesses. The fair value of
the asset-based lending businesses increased $0.5 billion due to higher earnings
and market penetration.
As of December 31, 1995, the fair value of net financial instruments totaled
$2.7 billion, a decrease of $0.8 billion from December 31, 1994. The decrease
was primarily due to higher borrowing levels, partially offset by growth in
loans and leases and investment securities. During the same period, the net fair
value of certain non-financial instruments increased $3.3 billion to $13.0
billion as of December 31, 1995. The fair value of the consumer finance network
increased $0.5 billion due to a lower interest rate environment and the
integration of Island Finance. The fair value of the asset-based lending
businesses increased $0.4 billion due to a greater market presence resulting
from the acquisition of The Foothill Group, Inc. The fair value of the mortgage
loan origination/wholesale network increased $1.3 billion due to higher levels
of earnings and mortgage loan originations. The fair value of non-maturity
deposits decreased $0.6 billion as lower market interest rates reduced the
benefit of these fund sources.
Credit Risk Management Credit risk management includes pricing loans to cover
anticipated future credit losses, funding and servicing costs and to allow for a
profit margin. Loans and leases by type appear in Note 5 to the consolidated
financial statements on page 43. The corporation manages exposure to credit risk
through loan portfolio diversification by customer, product, industry and
geography in order to minimize concentrations in any single sector. The
corporation's credit risk management policies and activities as well as the
geographical diversification of the corporation's Banking Group (including
Norwest Card Services), Mortgage Banking, and Norwest Financial help mitigate
the credit risk in their respective portfolios. The corporation's Banking Group
operates in 16 states, largely in the Midwest, Southwest, and Rocky Mountain
regions of the country. Distribution of average loans by region in 1996 was
approximately 57.8 percent in the north central Midwest, 13.9 percent in the
south central Midwest and 28.3 percent in the Rocky Mountain/Southwest region.
Norwest
22
Mortgage, Norwest Financial and Norwest Card Services operate on a nationwide
basis. Mortgage Banking includes the largest retail mortgage origination network
and the largest servicing portfolio in the country. The five states with the
highest originations in 1996 are: California, $9.7 billion; Minnesota, $3.2
billion; Illinois, $2.4 billion; Washington, $2.3 billion; and Colorado, $2.3
billion. The originations in these five states comprise approximately 38.6
percent of total originations in 1996. The five states representing the highest
level of servicing include: California, $36.4 billion; Minnesota, $10.3 billion;
New York, $8.7 billion; Texas, $8.6 billion; and Florida, $7.9 billion. These
five states comprise approximately 40.0 percent of the total servicing portfolio
at December 31, 1996.
Norwest Financial engages in consumer finance activities in 48 states, all 10
Canadian provinces, the Caribbean, Central America and Guam. The five states
with the largest consumer finance receivables are: California, $464.9 million;
Texas, $226.8 million; Florida, $225.3 million; Illinois, $224.0 million; and
Ohio, $173.1 million. Consumer finance receivables in Puerto Rico and Canada
totaled $1.1 billion and $545.7 million, respectively, at December 31, 1996. The
consumer finance receivables of the five largest states above, Puerto Rico and
Canada comprise approximately 43.5 percent of total consumer finance receivables
at December 31, 1996.
With respect to credit card receivables, approximately 63.9 percent of the
portfolio is within the corporation's 16-state banking region. Minnesota and
Iowa represent approximately 12.6 percent and 9.7 percent of the total
outstanding credit card portfolio, respectively. No other state accounts for
more than 10 percent of the portfolio.
In general, the U.S. economy continues to experience moderate growth, although
consumer-related loan delinquencies and charge-offs have increased moderately.
See Provision for Credit Losses on page 20 for a further discussion of consumer-
related net charge-offs. The average consumer installment loan made during 1996
at Norwest Financial was approximately $2,700 while sales finance contracts
purchased averaged approximately $1,100. This compares with $2,400 and $1,100,
respectively, in 1995. The average credit card receivable balance at Norwest
Card Services was $1,465 in 1996, compared with $1,200 in 1995.
The corporation is not aware of any loans classified for regulatory purposes at
December 31, 1996, that are expected to have a material impact on the
corporation's future operating results, liquidity or capital resources. The
corporation is not aware of any material credits about which there is serious
doubt as to the ability of borrowers to comply with the loan repayment terms.
There are no material commitments to lend additional funds to customers whose
loans were classified as non-accrual or restructured at December 31, 1996.
Allowance for Credit Losses At December 31, 1996, the allowance for credit
losses was $1,040.8 million, or 2.64 percent of loans and leases outstanding,
compared with $917.2 million, or 2.54 percent, at December 31, 1995. The ratio
of the allowance for credit losses to the total non-performing assets and 90-day
past due loans and leases was 335.0 percent at December 31, 1996, compared with
307.9 percent at December 31, 1995.
Although it is impossible for any lender to predict future credit losses with
complete accuracy, management monitors the allowance for credit losses with the
intent to provide for all losses that can reasonably be anticipated based on
current conditions. The corporation maintains the allowance for credit losses as
a general allowance available to cover future credit losses within the entire
loan and lease portfolio and other credit-related risks. However, management has
prepared an allocation of the allowance based on its views of risk
characteristics of the portfolio. This allocation of the allowance for credit
losses does not represent the total amount available for actual future credit
losses in any single category, nor does it prohibit future credit losses from
being absorbed by portions of the allowance allocated to other categories or by
the unallocated portion. The table on page 79 presents the allocation of the
allowance for credit losses to major categories of loans.
Non-performing Assets and Past Due Loans and Leases The table on page 24
presents data on the corporation's non-performing assets and 90-day past due
loans and leases. Generally, the accrual of interest on a loan or lease is
suspended when the credit becomes 90 days past due unless fully secured and in
the process of collection. A restructured loan is generally a loan that is
accruing interest, but on which concessions in terms have been made as a result
of deterioration in the borrower's financial condition. Under the corporation's
credit policies and practices, all non-accrual and restructured commercial,
agricultural, construction, and commercial real estate loans are included in
impaired loans. Loan impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the observable market price of the loan or the fair
value of the collateral if the loan is collateral-dependent.
23
Non-performing assets, including non-accrual, restructured and other real estate
owned, and 90-day past due loans and leases, totaled $310.7 million, or 0.4
percent of total assets, at December 31, 1996, compared with $297.9 million, or
0.4 percent of total assets, at December 31, 1995. Non-performing loans
increased because of acquisitions by $49.2 million from December 31, 1995.
Norwest Corporation and Subsidiaries
Non-performing Assets and 90-Day Past Due Loans and Leases
In millions, except per share amounts 1996 1995 1994 1993 1992 1991
------ ----- ----- ----- ----- -----
At December 31,
- ---------------
Non-accrual loans and leases........................................... $156.5 166.9 128.5 195.7 257.6 355.5
Restructured loans and leases.......................................... 0.2 2.0 1.8 10.3 5.4 18.0
------ ----- ----- ----- ----- -----
Total non-accrual and restructured loans and leases*................. 156.7 168.9 130.3 206.0 263.0 373.5
Other real estate owned................................................ 43.3 37.1 29.6 63.0 113.7 151.2
------ ----- ----- ----- ----- -----
Total non-performing assets.......................................... 200.0 206.0 159.9 269.0 376.7 524.7
Loans and leases past due 90-days or more**............................ 110.7 91.9 58.4 50.8 51.9 82.4
------ ----- ----- ----- ----- -----
Total non-performing assets and 90-day past due loans and leases..... $310.7 297.9 218.3 319.8 428.6 607.1
====== ===== ===== ===== ===== =====
Interest income as originally contracted on non-accrual and
restructured loans and leases........................................ $ 25.1 15.3 15.4 19.4 26.5 41.6
Interest income reorganized on non-accrual and restructured
loans and leases..................................................... (7.3) (3.6) (3.1) (5.5) (8.1) (14.2)
------ ----- ----- ----- ----- -----
Reduction of interest income due to non-accrual and restructured
loans and leases..................................................... $ 17.8 11.7 12.3 13.9 18.4 27.4
====== ===== ===== ===== ===== =====
Reduction in primary earnings per share due to non-accrual
and restructured loans and leases.................................... $ .03 .02 .03 .03 .04 .06
* Total impaired loans included in total non-accrual and restructured loans and
leases amounted to $94.2 million, $102.1 million and $98.6 million at
December 31, 1996, 1995 and 1994, respectively.
** Excludes non-accrual and restructured loans and leases.
Mortgage Servicing Rights and Other Assets At December 31, 1996, mortgage
servicing rights totaled $2.6 billion, an increase of $1.4 billion from year-end
1995. The increase in mortgage servicing rights included $0.8 billion from the
Prudential acquisition, with the remaining increase due to higher levels of
originations. Other assets increased slightly due to the timing of receivables
associated with sales of securities and increases in mortgage-related
receivables.
Effective January 1, 1996, the corporation adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121). FAS 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset is not recoverable. The adoption of FAS 121 has not
had a material effect on the corporation's consolidated financial statements.
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," (FAS 125)
was issued in June 1996 and sets forth the criteria for determining whether a
transfer of financial assets should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. FAS 125 requires that after a transfer of
financial assets, a company must recognize the financial and servicing assets
controlled and liabilities incurred, and derecognize financial assets and
liabilities in which control is surrendered or debt is extinguished. Adoption of
FAS 125 is required as of January 1, 1997 except for certain repurchase
agreements, dollar-rolls, securities lending and similar transactions for which
application of FAS 125 has been deferred until 1998. The adoption of FAS 125 is
not expected to have a material effect on the corporation's consolidated
financial statements.
24
Funding Sources
Interest-Bearing Liabilities At December 31, 1996, interest-bearing liabilities
totaled $56.5 billion, an increase of $3.9 billion over December 31, 1995. The
increase was principally due to a $5.4 billion increase in interest-bearing
deposits, partially offset by a $1.0 billion decrease in short-term borrowings.
Average interest-bearing liabilities were $56.0 billion in 1996, compared with
$49.5 billion in 1995, primarily due to a 16.9 percent increase in average
interest-bearing deposits, a 14.7 percent increase in long-term debt, partially
offset by a 2.1 percent decrease in average short-term borrowings. Increases in
interest-bearing deposits and long-term debt are principally from acquisitions.
Core Deposits In the corporation's banking subsidiaries, demand deposits,
regular savings and NOW accounts, money market checking and savings accounts and
consumer savings certificates provide a stable source of low-cost funding. These
funds accounted for approximately 58 percent of the corporation's total funding
sources during 1996 and approximately 57 percent in 1995. This is a high level
of core deposits by industry standards. In the corporation's Banking Group,
where these funds are utilized, average core deposits accounted for
approximately 73 percent of total funding sources during 1996, compared with 70
percent in 1995.
Purchased Deposits In addition to core deposits, purchased deposits are another
source of funding for the corporation's banking subsidiaries. Purchased deposits
include certificates of deposit with denominations of more than $100,000 and
foreign time deposits. Purchased deposits represented approximately four percent
of the corporation's total funding sources in 1996 and 1995. There were no
brokered certificates of deposit at December 31, 1996 and 1995.
Short-term Borrowings Short-term borrowings include federal funds purchased,
securities sold under agreements to repurchase, master note agreements,
privately negotiated financing agreements and commercial paper issued by the
corporation and Norwest Financial. Commercial paper is used by the corporation
to fund the short-term needs of its subsidiaries, consisting primarily of
funding of Norwest Mortgage's inventory of mortgages held for sale which are
typically held for 30 to 60 days. Norwest Financial utilized funds generated
through its own commercial paper sales program to fund approximately 30 percent
of its average earning assets in 1996, compared with 26 percent in 1995.
The commercial paper/short-term debt of the corporation and Norwest Financial,
Inc. are currently rated TBW-1 by Thomson BankWatch, P-1 by Moody's, A-1+ by
Standard & Poor's, Duff 1+ by Duff & Phelps and F-1+ by Fitch Investors Service,
L.P. IBCA has also rated the corporation's commercial paper/short-term debt A1+.
On average, total short-term borrowings represented approximately 11.6 percent
of the corporation's total funding sources during 1996 and approximately 13.6
percent during 1995.
Long-term Debt Long-term debt represents an important funding source for the
corporation and for Norwest Financial, Inc. Total long-term debt represented
approximately 18.5 percent of the corporation's consolidated average funding
sources during 1996, compared with approximately 18.6 percent in 1995. The
corporation utilizes long-term debt primarily to meet the long-term funding
requirements of its subsidiaries, with outstandings of $6,384.0 million as of
December 31, 1996, compared with $5,840.9 million as of December 31, 1995.
Further, 18 subsidiaries are members of the Federal Home Loan Bank allowing them
to receive long-term advances secured by certain loans and investment
securities. As of December 31, 1996, these banking subsidiaries had advances
outstanding totaling $2,527.2 million, a decrease of $1,140.5 million from
December 31, 1995. Long-term debt also plays a significant role at Norwest
Financial, Inc. which utilizes this source of financing to fund approximately 52
percent of its average earning assets. At December 31, 1996, Norwest Financial,
Inc.'s long-term debt outstanding was $4,132.9 million. Note 9 to the
consolidated financial statements on page 46 presents the corporation's
outstanding consolidated long-term debt as of December 31, 1996 and 1995.
Thomson BankWatch has assigned its highest issuer rating, an A rating, to both
the corporation and Norwest Financial, Inc. The corporation's senior debt is
currently rated AA+ by Thomson BankWatch, Fitch Investors Service, L.P. and Duff
& Phelps, AA by IBCA, AA- by Standard & Poor's and Aa3 by Moody's. Norwest
Financial, Inc.'s senior debt is currently rated AA+ by Thomson BankWatch and
Fitch Investors Service, L.P., AA by Duff & Phelps, AA- by Standard & Poor's and
Aa3 by Moody's.
25
Interest Rate Sensitivity and
Liquidity Management
Asset and Liability Management The goal of the asset and liability management
process is to manage the structure of the balance sheet to provide the maximum
level of net interest income while maintaining acceptable levels of interest
sensitivity risk (as defined below) and liquidity. The focal point of this
process is the corporate Asset and Liability Management Committee (ALCO). This
committee forms and monitors policies governing investments, funding sources,
off-balance sheet commitments, overall interest sensitivity risk and liquidity.
These policies form the framework for management of the asset and liability
process at the corporate and affiliate levels. The corporation's interest
sensitivity position is managed as a function of balance sheet trends, asset
opportunities and interest rate expectations, and the corporation is normally
well within policy risk limits at any given time.
Definition of Interest Sensitivity Risk Interest sensitivity risk is the risk
that future changes in interest rates will reduce net interest income or the net
market value of the corporation's balance sheet. Two basic ways of defining
interest rate risk in the financial services industry are commonly referred to
as the accounting perspective and the economic perspective. The corporation
draws upon aspects of each perspective to provide a more complete view of
interest rate risk than would be provided by either perspective alone.
The accounting perspective focuses on the risk to reported net income over a
particular time frame. Differences in the timing of interest rate repricing
(repricing or "gap" risk) and changing market rate relationships (basis risk)
determine the exposure of net income to changes in interest rates.
The economic perspective focuses on the risk to the market value of the
corporation's balance sheet, the net of which is referred to as the market value
of balance sheet equity. The sensitivity of the market value of balance sheet
equity to changes in interest rates is an indicator of the level of interest
rate risk inherent in an institution's current position and an indicator of
longer horizon earnings trends. Assessing interest rate risk from the economic
perspective focuses on the risk to net worth arising from all repricing
mismatches (gaps) across the full maturity spectrum.
Measurement of Interest Rate Risk Measurement of interest rate risk from the
accounting perspective has traditionally taken the form of the gap report, which
represents the difference between assets and liabilities that reprice in given
time periods. While providing a rough measure of rate risk, the gap report
provides only a static (i.e., point-in-time) measurement, and it does not
capture basis risk or risks that vary either asymmetrically or
non-proportionately with rate movements.
The corporation uses a simulation model as its primary method of measuring
earnings risk. The simulation model, because of its dynamic nature, can capture
the effects of future balance sheet trends, different patterns of rate
movements, and changing relationships between rates (basis risk). In addition,
it can capture the effects of embedded option risk by taking into account the
effects of interest rate caps and floors, and varying the level of prepayment
rates on assets as a function of interest rates. The simulation model is used to
determine the one and three year gap levels which correspond to the limits
within which the corporation has placed earnings at risk to interest rate
movements.
Measurement of interest rate risk from the economic perspective is accomplished
with a market valuation model. The market value of each asset and liability is
calculated by computing the present value of all cash flows generated. In each
case the cash flows are discounted by a market interest rate chosen to reflect
as closely as possible the characteristics of the given asset or liability.
Management of Interest Rate Risk In the most current simulation, net income was
forecasted using various interest rate scenarios. A most likely scenario, in
which short rates remain constant but long rates increase somewhat, was used as
the base case for comparison of other scenarios. If short rates increase 200
basis points above the base case over the next twelve months, accompanied by a
smaller increase in long rates, the effect will be to decrease net income by
approximately $40 million relative to the base case. If short rates decrease 200
basis points below the base case over the next twelve months, accompanied by a
lesser decrease in long rates, the effect will be to increase net income by
approximately $63 million. This analysis takes into account the effect of
derivative products that are used to hedge balance sheet instruments, as well as
the effect of interest rates on prepayment speeds of mortgages and
mortgage-backed securities. However, under the rate scenarios considered, net
income would not be affected by impairment of capitalized mortgage servicing
rights.
26
The market valuation model is used to measure the sensitivity of the market
value of equity to a wide range of interest rate changes. The process of
modeling market valuation risk continues to evolve in the financial services
industry, including structuring the modeling process, defining policy limits and
interpreting the results.
Changes In Interest Sensitivity The table below presents the corporation's
interest sensitivity gaps for December 1996. The cumulative gap within one year
was $(3,317) million, or (4.2) percent of assets. This compares with a one year
gap of $(2,762) million, or (3.8) percent of assets, in December 1995. The
cumulative gap within three years was $(990) million, or (1.2) percent of
assets, in December 1996, compared to $(1,603) million, or (2.2) percent of
assets, in December 1995. The relatively small changes in the gaps in percentage
terms are due to a number of offsetting changes in the balance sheet during the
year. These included increases in the investment portfolio and demand deposits.
The effect of the current interest sensitivity position is to make the
corporation's earnings slightly vulnerable to rising rates and neutral to
falling rates.
Norwest Corporation and Subsidiaries
Interest Rate Sensitivity
In millions, except ratios Repricing or Maturing
--------------------------------------------------------------------
Within 6 Months 1 Year 3 Years After
6 Months - 1 Year - 3 Years - 5 Years 5 Years
-------- ----------- ---------- --------- -------
Average Balances For December 1996
- ----------------------------------
Loans and leases........................................ $ 16,813 3,103 5,966 2,863 10,437
Investment securities................................... 2,218 2,088 2,700 1,935 8,166
Loans held for sale..................................... 2,659 -- -- -- --
Mortgages held for sale................................. 5,881 -- -- -- --
Other earning assets.................................... 4,251 -- -- -- --
Other assets............................................ -- 650 -- -- 10,102
--------- --------- --------- --------- -------
Total assets........................................ $ 31,822 5,841 8,666 4,798 28,705
========= ========= ========= ========= =======
Noninterest-bearing deposits............................ $ 4,134 63 268 178 8,832
Interest-bearing deposits............................... 16,508 3,733 4,770 981 9,633
Short-term borrowings................................... 8,230 -- -- -- --
Long-term debt.......................................... 3,938 709 2,266 2,321 4,154
Other liabilities and equity............................ 1 -- 188 -- 8,925
--------- --------- --------- --------- -------
Total liabilities and equity........................ $ 32,811 4,505 7,492 3,480 31,544
========= ========= ========= ========= =======
Swaps and options....................................... $ (3,860) 196 1,153 866 1,645
Gap*.................................................... (4,849) 1,532 2,327 2,184 (1,194)
Cumulative gap.......................................... (4,849) (3,317) (990) 1,194 --
Gap as a percent of total assets........................ (6.1)% (4.2) (1.2) 1.5 --
*[assets - (liabilities + equity) + swaps and options] The gap includes the
effect of off-balance sheet instruments on the corporation's interest
sensitivity.
In addition to adjusting the pricing and levels of assets and liabilities, the
corporation utilizes off-balance sheet derivative financial instruments to
manage interest rate risk. The corporation primarily enters into interest rate
swaps, interest rate caps and floors, futures contracts and options as part of
its overall risk management activities. Certain of these derivative financial
instruments synthetically change the repricing or other characteristics of
underlying assets and liabilities hedged. The corporation principally utilizes
interest rate swaps to hedge certain fixed-rate debt and certain deposit
liabilities and to convert these funding sources to floating rates. Interest
rate floors, futures contracts and options on futures contracts are principally
used to hedge the corporation's portfolio of mortgage servicing rights. The
floors provide for the receipt of payments when interest rates are below
predetermined interest rate levels. The unrealized gains (losses) on the floors
and futures contracts are included, as appropriate, in determining the fair
value of mortgage servicing rights, offsetting lost future servicing revenue
related to increased levels of prepayments associated with lower interest rates.
In Notes 9 and 15 to the consolidated financial statements beginning on pages 46
and 59, respectively, the corporation has disclosed additional information with
respect to its use of derivative financial instruments.
The corporation's net cash flows from off-balance sheet derivative financial
instruments used to manage interest rate risk added approximately $56.9 million
to net interest income in 1996, compared with $7.1 million in 1995 and $12.3
million in 1994. This resulted in an impact on net interest margin of nine basis
points in 1996, compared with one basis point in 1995
27
and two basis points in 1994. Based on interest rate levels at December 31,
1996, total estimated future cash flows related to the corporation's derivative
financial instruments, including interest rate swaps and floors hedging
capitalized mortgage servicing rights, are expected to approximate $74 million
in 1997, $55 million in 1998, $52 million in 1999, $32 million in 2000, $23
million in 2001, and $59 million thereafter.
Liquidity Management Liquidity management involves planning to meet funding
needs and cash flow requirements of customers and the corporation at a
reasonable cost, and is governed by policies formulated and monitored by ALCO.
Each affiliate is responsible for managing its own liquidity position within
overall guidelines, which consider the marketability of assets, the sources and
stability of funding, and the level of unfunded commitments.
The corporation has a significant liquidity reserve in its investment securities
portfolio, as approximately 83 percent of the $17.0 billion portfolio consists
of highly marketable U.S. Treasury or federal agency securities. Several other
factors provide a favorable liquidity position for the corporation compared with
most large bank holding companies, including the large amount of funding that
comes from consumer deposits, which are a more stable source of funding than
purchased funds.
Another source of asset liquidity is the ability to securitize assets such as
automobile and mortgage loans. Affiliates of the corporation securitized $1.1
billion in automobile loans and $2.7 billion in mortgage loans through public
offerings in 1996.
The corporation also filed shelf registration statements in July 1996 which
permit the corporation to issue up to $5 billion and $2 billion of debt
securities, respectively, in domestic and international money and capital
markets. As of December 31, 1996, the corporation has issued $500 million of
securities under such shelf registrations.
Capital Management
The corporation believes that a strong capital position is vital to continued
profitability and to promote depositor and investor confidence. The
corporation's consolidated capital levels are a result of its capital policy,
which establishes guidelines for each subsidiary based on industry standards,
regulatory requirements, perceived risk of the various businesses, and future
growth opportunities. The corporation requires its bank affiliates to maintain
capital levels above regulatory minimums for Tier 1 capital and total capital
(Tier 1 plus Tier 2) to risk-weighted assets and leverage ratios. The primary
source of equity capital available for the affiliates is earnings, with other
forms of capital available from the corporation as needed. Earnings above levels
required to meet capital policy requirements are paid to the corporation in the
form of dividends and are used to support capital needs of other affiliates, to
pay corporate dividends or to reduce the corporation's borrowings.
Various federal and state statutes and regulations limit the amount of dividends
the subsidiary banks can pay to the corporation without regulatory approval. The
approval of the Office of the Comptroller of the Currency is required for any
dividend by a national bank if the total of all dividends declared by the bank
in any calendar year would exceed the total of its net income for that year
combined with its retained net income for the preceding two calendar years, less
any required transfers to surplus or a fund for the retirement of preferred
stock. The Office of Thrift Supervision imposes substantially similar
restrictions on the payment of dividends to the corporation by its savings and
loan association subsidiary. The corporation also has several state bank
subsidiaries that are subject to state regulations limiting dividends. Under
these provisions, the corporation's national bank subsidiaries, savings and loan
association and state-chartered bank subsidiaries could have declared as of
December 31, 1996 aggregate dividends of at least $279.9 million without
obtaining prior regulatory approval and without reducing the capital below
minimum regulatory levels. Additionally, the corporation's non-bank subsidiaries
could have declared dividends totaling $599.1 million at December 31, 1996.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as standby letters of credit) is currently
eight percent. The minimum Tier 1 capital to risk-adjusted assets is four
percent. Through implementation of its capital policies, the corporation has
achieved a strong capital position. The corporation's total capital and Tier 1
capital to risk-adjusted assets ratios were 10.42 percent and 8.63 percent,
respectively, at December 31, 1996 compared with 10.18 percent and 8.11 percent,
respectively, at December 31, 1995. The Federal Reserve Board also requires bank
holding companies to comply with minimum leverage ratio guidelines. The leverage
ratio is the ratio of a bank holding company's Tier 1 capital to its total
consolidated quarterly average assets, less goodwill and certain other
intangible assets. The guidelines require a minimum leverage ratio of three
percent for bank holding companies that meet certain specified criteria. The
corporation's leverage ratio was 6.15 percent at December 31, 1996, compared
with 5.65 percent at December 31, 1995.
28
The Federal Deposit Insurance Act requires federal bank regulatory agencies to
take "prompt corrective action" with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements. A depository
institution's treatment for purposes of the prompt corrective action provisions
will depend upon how its capital levels compare to various capital measures and
certain other factors, as established by regulation.
Federal bank regulatory agencies have adopted regulations that classify insured
depository institutions into one of five capital-based categories. The
regulations use the total capital ratio, the Tier 1 capital ratio and the
leverage ratio as the relevant measures of capital. A depository institution is
(a) "well capitalized" if it has a risk-adjusted total capital ratio of at least
ten percent, a Tier 1 capital ratio of at least six percent and a leverage ratio
of at least five percent and is not subject to any order or written directive to
maintain a specific capital level; (b) "adequately capitalized" if it has a
risk-adjusted total capital ratio of at least eight percent, a Tier 1 capital
ratio of at least four percent and a leverage ratio of at least four percent
(three percent in some cases) and is not well capitalized; (c)
"undercapitalized" if it has a risk-adjusted total capital ratio of less than
eight percent, a Tier 1 capital ratio of less than four percent or a leverage
ratio of less than four percent (three percent in some cases); (d)
"significantly undercapitalized" if it has a risk-adjusted total capital ratio
of less than six percent, a Tier 1 capital ratio of less than three percent or a
leverage ratio of less than three percent; and (e) "critically undercapitalized"
if its tangible equity is less than two percent of total assets. As of December
31, 1996, all of the corporation's insured depository institutions met the
criteria for well capitalized institutions as set forth above.
Common stockholders' equity was $5,875.4 million at December 31, 1996, compared
with $5,009.8 million at December 31, 1995. The corporation's internal capital
growth rate (ICGR) in 1996 was 13.74 percent. The ICGR represents the rate at
which the corporation's average common equity grew as a result of earnings
retained (net income less dividends paid).
Since 1986, the corporation has repurchased common stock in the open market in a
systematic pattern to meet the common stock issuance requirements of the
corporation's Savings Investment Plans, the Long-Term Incentive Compensation
Plan, and other stock issuance requirements other than acquisitions accounted
for as pooling of interests. In September, 1996, the corporation's board of
directors authorized additional purchases, upon such terms and conditions as
management approves, of 4,500,000 shares of the corporation's common stock, and
the total common stock purchase authority was 3,082,000 shares as of December
31, 1996.
During 1996, the corporation repurchased 3,731,000 shares of its common stock
for issuance in conjunction with specific purchase acquisitions that were
consummated during the year. In addition, approximately 5,237,000 shares were
repurchased during 1996 for benefit plans and other ongoing needs. During 1995,
1,295,000 shares were repurchased for acquisition purposes and 6,804,000 shares
were repurchased for benefit plans, preferred stock conversions and other
ongoing needs.
All shares of the corporation's 10.24% Cumulative Preferred Stock, in the form
of depositary shares, were redeemed on January 2, 1996. The redemption price for
each depositary share, representing one-quarter of a share of preferred stock,
was the $25 stated value. No shares of the 10.24% Cumulative Preferred Stock
were repurchased in 1995.
All shares of the corporation's Cumulative Convertible Preferred Stock, Series
B, in the form of depositary shares, were called for redemption on September 1,
1995. Each depositary share, which represented one-quarter of a share of the
preferred stock, was convertible at the option of the stockholder into
approximately 2.74 shares of the corporation's common stock or redeemable at a
price of $52.10 per depositary share plus accrued dividends. During 1995,
1,141,891 preferred shares were converted into 12,531,003 shares of common stock
and 1,784 shares were redeemed.
In January, 1997, the board of directors approved an increase in the
corporation's quarterly common stock dividend to 30 cents per share from 27
cents, representing an 11.1 percent increase in the quarterly dividend rate. The
dividend increase reflects the corporation's continuing record of strong
earnings performance and the corporation's policy of maintaining the dividend
payout ratio in a range of 30 to 35 percent. In the second quarter of 1996, the
corporation increased its quarterly dividend rate 12.5 percent to 27 cents per
common share. In the third quarter of 1995, the corporation increased the
quarterly cash dividend paid to common stockholders from 21 cents per share to
24 cents per share, representing a 14.3 percent increase in the quarterly
dividend rate.
29
Acquisitions
The corporation regularly explores opportunities for acquisitions of financial
institutions and related businesses. Generally, management of the corporation
does not make a public announcement about an acquisition opportunity until a
definitive agreement has been signed.
In Note 2 to the consolidated financial statements on pages 39 and 40, the
corporation has disclosed completed acquisitions for the three years ended
December 31, 1996.
At December 31, 1996, the corporation had six pending acquisitions with total
assets of approximately $2.0 billion and it is anticipated that cash of $91.4
million and approximately 7.2 million common shares will be issued upon
completion of these acquisitions. Pending acquisitions include Central
Bancorporation, Inc., a $1.1 billion bank holding company based in Fort Worth,
Texas. The pending acquisitions, subject to approval by regulatory agencies, are
expected to be completed during 1997 and are not, either individually or in the
aggregate, significant to the financial statements of the corporation.
30
Norwest Corporation and Subsidiaries
Consolidated Balance Sheets
In millions, except shares 1996 1995
------------ -----------
At December 31,
- ---------------
Assets
Cash and due from banks...................................................................... $ 4,856.6 4,320.3
Interest-bearing deposits with banks......................................................... 1,237.9 29.4
Federal funds sold and resale agreements..................................................... 1,276.8 596.8
----------- ----------
Total cash and cash equivalents...................................................... 7,371.3 4,946.5
Trading account securities................................................................... 186.5 150.6
Investment securities (fair value $745.2 in 1996 and $795.8 in 1995)......................... 712.2 760.5
Investment and mortgage-backed securities available for sale................................. 16,247.1 15,243.0
----------- ----------
Total investment securities.......................................................... 16,959.3 16,003.5
Loans held for sale.......................................................................... 2,827.6 3,343.9
Mortgages held for sale...................................................................... 6,339.0 6,514.5
Loans and leases, net of unearned discount................................................... 39,381.0 36,153.1
Allowance for credit losses.................................................................. (1,040.8) (917.2)
----------- ----------
Net loans and leases................................................................. 38,340.2 35,235.9
Premises and equipment, net.................................................................. 1,200.9 1,034.1
Mortgage servicing rights, net............................................................... 2,648.5 1,226.7
Interest receivable and other assets......................................................... 4,302.1 3,678.7
----------- ----------
Total assets........................................................................... $ 80,175.4 72,134.4
=========== ==========
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing...................................................................... $ 14,296.3 11,623.9
Interest-bearing......................................................................... 35,833.9 30,404.9
----------- ----------
Total deposits......................................................................... 50,130.2 42,028.8
Short-term borrowings........................................................................ 7,572.6 8,527.2
Accrued expenses and other liabilities....................................................... 3,326.2 2,589.5
Long-term debt............................................................................... 13,082.2 13,676.8
----------- ----------
Total liabilities...................................................................... 74,111.2 66,822.3
Preferred stock.............................................................................. 249.8 341.2
Unearned ESOP shares......................................................................... (61.0) (38.9)
----------- ----------
Total preferred stock.................................................................. 188.8 302.3
Common stock, $1 2/3 par value-authorized 500,000,000 shares:
Issued 375,533,625 and 358,332,153 shares in 1996 and 1995, respectively................. 625.9 597.2
Surplus ..................................................................................... 948.6 734.2
Retained earnings............................................................................ 4,248.2 3,496.3
Net unrealized gains on securities available for sale........................................ 303.5 327.1
Notes receivable from ESOP................................................................... (11.1) (13.3)
Treasury stock- 6,830,919 and 5,571,696 common shares in 1996 and 1995, respectively......... (233.3) (125.9)
Foreign currency translation................................................................. (6.4) (5.8)
----------- ----------
Total common stockholders' equity...................................................... 5,875.4 5,009.8
----------- ----------
Total stockholders' equity............................................................. 6,064.2 5,312.1
----------- ----------
Total liabilities and stockholders' equity............................................. $ 80,175.4 72,134.4
=========== ==========
See notes to consolidated financial statements.
31
Norwest Corporation and Subsidiaries
Consolidated Statements of Income
In millions, except per common share amounts 1996 1995 1994
---------- -------- --------
Years Ended December 31,
- ------------------------
Interest Income on
Loans and leases................................................................ $ 4,301.5 3,955.8 3,071.2
Investment securities........................................................... 36.2 83.8 71.5
Investment and mortgage-backed securities available for sale.................... 1,170.1 1,065.3 835.9
Loans held for sale............................................................. 254.3 195.7 111.4
Mortgages held for sale......................................................... 468.5 366.2 257.2
Money market investments........................................................ 63.0 35.7 21.9
Trading account securities...................................................... 24.7 14.8 24.6
--------- --------- ---------
Total interest income..................................................... 6,318.3 5,717.3 4,393.7
--------- ------- -------
Interest Expense on
Deposits........................................................................ 1,324.9 1,156.3 863.4
Short-term borrowings........................................................... 454.1 515.8 290.3
Long-term debt.................................................................. 838.0 775.9 436.4
--------- -------- --------
Total interest expense.................................................... 2,617.0 2,448.0 1,590.1
--------- ------- -------
Net interest income............................................................. 3,701.3 3,269.3 2,803.6
Provision for credit losses..................................................... 394.7 312.4 164.9
--------- -------- --------
Net interest income after provision for credit losses........................... 3,306.6 2,956.9 2,638.7
--------- ------- -------
Non-interest Income
Trust .......................................................................... 296.3 240.7 210.3
Service charges on deposit accounts............................................. 329.5 268.8 234.4
Mortgage banking................................................................ 821.5 535.5 581.0
Data processing................................................................. 72.5 72.4 61.6
Credit card..................................................................... 122.2 132.8 116.5
Insurance....................................................................... 279.6 224.7 207.4
Other fees and service charges.................................................. 294.4 230.3 182.3
Net investment securities gains (losses)........................................ -- 0.6 (0.2)
Net investment and mortgage-backed securities available for sale losses......... (46.8) (45.1) (79.0)
Net venture capital gains....................................................... 256.4 102.1 77.1
Trading......................................................................... 35.3 39.9 (18.1)
Other .......................................................................... 103.7 45.5 65.0
--------- ------- -------
Total non-interest income................................................. 2,564.6 1,848.2 1,638.3
--------- ------- -------
Non-interest Expenses
Salaries and benefits.......................................................... 2,097.1 1,745.1 1,573.7
Net occupancy.................................................................. 316.3 254.4 227.3
Equipment rentals, depreciation and maintenance................................ 327.7 272.7 235.4
Business development........................................................... 227.9 172.2 190.5
Communication.................................................................. 285.2 225.0 184.8
Data processing................................................................ 163.0 136.2 113.4
Intangible asset amortization.................................................. 161.5 124.7 77.0
Other ......................................................................... 511.0 452.0 494.3
--------- ------- -------
Total non-interest expenses.............................................. 4,089.7 3,382.3 3,096.4
--------- ------- -------
Income Before Income Taxes..................................................... 1,781.5 1,422.8 1,180.6
Income tax expense............................................................. 627.6 466.8 380.2
--------- -------- --------
Net Income..................................................................... $ 1,153.9 956.0 800.4
========= ======== ========
Average Common and Common Equivalent Shares.................................... 369.7 331.7 315.1
Per Common Share
Net Income
Primary.................................................................. $ 3.07 2.76 2.45
Fully Diluted............................................................ 3.07 2.73 2.41
Dividends...................................................................... $ 1.050 0.900 0.765
See notes to consolidated financial statements.
32
Norwest Corporation and Subsidiaries
Consolidated Statements of Cash Flows
In millions 1996 1995 1994
----------- ---------- ----------
Years Ended December 31,
- ------------------------
Cash Flows From Operating Activities
Net income...................................................................... $ 1,153.9 956.0 800.4
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for credit losses................................................. 394.7 312.4 164.9
Depreciation and amortization............................................... 681.6 311.8 232.2
Gains on sales of loans, securities and other assets, net................... (230.3) (96.8) (73.0)
Release of preferred shares to ESOP......................................... 37.8 40.0 26.6
Purchases of trading account securities..................................... (58,280.4) (90,793.2) (109,556.3)
Proceeds from sales of trading account securities........................... 58,279.6 90,718.4 109,561.2
Originations of mortgages held for sale..................................... (52,691.9) (35,045.1) (24,905.1)
Proceeds from sales of mortgages held for sale.............................. 55,244.7 31,771.4 27,962.8
Originations of loans held for sale......................................... (1,305.5) (901.0) (1,351.7)
Proceeds from sales of loans held for sale.................................. 1,867.6 606.8 745.1
Deferred income taxes....................................................... 205.8 (70.4) 312.7
Interest receivable......................................................... (25.7) (94.1) (66.9)
Interest payable............................................................ 38.0 148.0 20.5
Other assets, net........................................................... (1,336.1) (1,853.4) (540.6)
Other accrued expenses and liabilities, net................................. 245.1 447.2 (425.0)
----------- ---------- -----------
Net cash flows from (used for) operating activities....................... 4,278.9 (3,542.0) 2,907.8
----------- ---------- -----------
Cash Flows From Investing Activities
Proceeds from maturities and paydowns of:
Investment securities....................................................... 106.2 345.6 949.5
Investment and mortgage-backed securities available for sale................ 2,806.6 1,924.3 2,781.4
Proceeds from sales and calls of:
Investment securities....................................................... 138.7 154.4 98.8
Investment and mortgage-backed securities available for sale................ 5,185.9 5,742.6 3,741.6
Purchases of:
Investment securities....................................................... (169.1) (524.8) (509.0)
Investment and mortgage-backed securities available for sale................ (7,341.4) (6,159.9) (8,635.6)
Net change in banking subsidiaries' loans and leases............................ 1,751.9 (177.3) (1,786.2)
Principal collected on non-bank subsidiaries' loans and leases.................. 5,503.1 5,725.2 4,081.8
Non-bank subsidiaries' loans and leases originated.............................. (6,950.4) (6,241.7) (5,342.5)
Purchases of premises and equipment............................................. (288.7) (208.0) (266.0)
Proceeds from sales of premises and equipment and other real estate owned....... 105.7 50.4 131.8
Cash paid for acquisitions, net of cash and cash equivalents acquired........... (2,469.0) (94.9) 124.8
Divestiture of branches, net of cash and cash equivalents paid.................. (14.6) (4.1) (55.1)
----------- ---------- -----------
Net cash flows from (used for) investing activities......................... (1,635.1) 531.8 (4,684.7)
----------- ---------- -----------
Cash Flows From Financing Activities
Deposits, net................................................................... 2,410.7 1,488.7 (1,247.2)
Short-term borrowings, net...................................................... (1,078.3) (1,124.0) 1,736.8
Long-term debt borrowings....................................................... 4,343.6 7,329.1 3,508.7
Repayments of long-term debt.................................................... (5,109.9) (3,274.8) (1,270.1)
Issuances of preferred stock.................................................... -- 20.0 170.7
Repurchases of preferred stock.................................................. (112.7) (0.4) (8.4)
Issuances of common stock....................................................... 82.4 65.4 49.8
Repurchases of common stock..................................................... (355.1) (233.8) (482.1)
Net decrease in notes receivable from ESOP...................................... 3.7 -- 3.0
Dividends paid.................................................................. (403.4) (337.8) (268.0)
----------- ---------- -----------
Net cash flows from (used for) financing activities......................... (219.0) 3,932.4 2,193.2
----------- ---------- -----------
Net increase in cash and cash equivalents................................... 2,424.8 922.2 416.3
Cash and cash equivalents
Beginning of year........................................................... 4,946.5 4,024.3 3,608.0
----------- ---------- -----------
End of year................................................................. $ 7,371.3 4,946.5 4,024.3
=========== ========== ===========
See notes to consolidated financial statements.
33
Norwest Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Net
Unrealized
Gains
(Losses)
In millions, except for shares on Notes
Unearned Securities Receivable Foreign
Preferred ESOP Common Retained Available from Treasury Currency
Stock Shares Stock Surplus Earnings for Sale ESOP Stock Translation Total
--------- -------- ------ ------- -------- ---------- ---------- -------- ----------- --------
Balance, December 31,
1993 as originally
reported............... $341.9 -- 490.2 413.0 2,394.4 -- (16.3) (51.5) (3.3) 3,568.4
Adjustments for
pooling of
interests.............. 38.1 -- 25.2 90.3 38.9 -- -- -- -- 192.5
--------- -------- ------ ------- -------- ---------- ---------- -------- ----------- --------
Balance, December 31,
1993................... 380.0 -- 515.4 503.3 2,433.3 -- (16.3) (51.5) (3.3) 3,760.9
Net unrealized gains
on securities
available for sale,
January 1, 1994........ -- -- -- -- -- 313.4 -- -- -- 313.4
Net income.............. -- -- -- -- 800.4 -- -- -- -- 800.4
Dividends on
Common stock........... -- -- -- -- (240.2) -- -- -- -- (240.2)
Preferred stock........ -- -- -- -- (27.8) -- -- -- -- (27.8)
Issuance of 3,022,168
common shares.......... -- -- -- 53.9 (74.1) -- -- 80.5 -- 60.3
Issuance of 13,985,159
common shares
for acquisitions....... -- -- 18.6 (2.3) 58.4 -- -- 73.7 -- 148.4
Repurchase of
18,918,200 common
shares................. -- -- -- -- -- -- -- (482.1) -- (482.1)
Issuance of 980,000
preferred shares,
net of 125,000
shares held by
subsidiary............. 171.0 -- -- (0.3) -- -- -- -- -- 170.7
Issuance of 40,900
preferred shares to
ESOP................... 40.9 (42.1) -- 1.2 -- -- -- -- -- --
Release of preferred
shares to ESOP......... -- 27.4 -- (0.8) -- -- -- -- -- 26.6
Conversion of 1,230,280
preferred shares
to 3,756,975
common shares.......... (56.8) -- 4.5 23.8 -- -- -- 28.5 -- --
Repurchase of 192,220
preferred shares....... (8.4) -- -- -- -- -- -- -- -- (8.4)
Change in net unrealized
gains (losses) on
securities available
for sale............... -- -- -- -- -- (673.8) -- -- -- (673.8)
Cash payments
received on notes
receivable from
ESOP................... -- -- -- -- -- -- 3.0 -- -- 3.0
Foreign currency
translation............. -- -- -- -- -- -- -- -- (5.0) (5.0)
--------- -------- ------ ------- -------- ---------- ---------- -------- ----------- --------
Balance, December 31,
1994................... 526.7 (14.7) 538.5 578.8 2,950.0 (360.4) (13.3) (350.9) (8.3) 3,846.4
Net income.............. -- -- -- -- 956.0 -- -- -- -- 956.0
Dividends on
Common stock........... -- -- -- -- (296.6) -- -- -- -- (296.6)
Preferred stock........ -- -- -- -- (41.2) -- -- -- -- (41.2)
Issuance of 3,289,250
common shares.......... -- -- -- 120.5 (135.6) -- -- 90.9 -- 75.8
Issuance of
34,533,245
common shares
for acquisitions....... -- -- 51.6 40.6 68.3 16.7 -- 95.4 -- 272.6
Repurchase of
8,098,650
common shares.......... -- -- -- -- -- -- -- (233.8) -- (233.8)
Issuance of 63,300
preferred shares
to ESOP................ 63.3 (65.8) -- 2.5 -- -- -- -- -- --
Release of preferred
shares to ESOP......... -- 41.6 -- (1.6) -- -- -- -- -- 40.0
Conversion of
1,181,900 preferred
shares to 13,891,755
common shares.......... (268.4) -- 7.1 (6.6) (4.6) -- -- 272.5 -- --
Repurchase of 1,784
preferred shares....... (0.4) -- -- -- -- -- -- -- -- (0.4)
Sale of 100,000
preferred shares
held by subsidiary..... 20.0 -- -- -- -- -- -- -- -- 20.0
Change in net
unrealized
gains (losses)
on securities
available for
sale................... -- -- -- -- -- 670.8 -- -- -- 670.8
Foreign currency
translation............ -- -- -- -- -- -- -- -- 2.5 2.5
--------- -------- ------ ------- -------- ---------- ---------- -------- ----------- --------
Balance, December
31, 1995............... 341.2 (38.9) 597.2 734.2 3,496.3 327.1 (13.3) (125.9) (5.8) 5,312.1
Net income.............. -- -- -- -- 1,153.9 -- -- -- -- 1,153.9
Dividends on
Common stock........... -- -- -- -- (385.6) -- -- -- -- (385.6)
Preferred stock........ -- -- -- -- (17.8) -- -- -- -- (17.8)
Issuance of 3,745,134
common shares.......... -- -- -- 59.0 (71.2) -- -- 115.9 -- 103.7
Issuance of
20,180,381
common shares
for acquisitions....... -- -- 28.7 149.8 72.6 (1.6) (1.5) 98.8 -- 346.8
Repurchase of
8,968,421
common shares.......... -- -- -- -- -- -- -- (355.1) -- (355.1)
Issuance of 59,000
preferred shares to
ESOP................... 59.0 (61.3) -- 2.3 -- -- -- -- -- --
Release of preferred
shares to ESOP......... -- 39.2 -- (1.4) -- -- -- -- -- 37.8
Conversion of
37,777
preferred shares
to 985,155
common shares.......... (37.7) -- -- 4.7 -- -- -- 33.0 -- --
Repurchase of 1,127,125
preferred shares....... (112.7) -- -- -- -- -- -- -- -- (112.7)
Change in net
unrealized
gains (losses)
on securities
available for
sale................... -- -- -- -- -- (22.0) -- -- -- (22.0)
Cash payments
received on notes
receivable from
ESOP................... -- -- -- -- -- -- 3.7 -- -- 3.7
Foreign currency
translation............ -- -- -- -- -- -- -- -- (0.6) (0.6)
--------- -------- ------ ------- -------- ---------- ---------- -------- ----------- --------
Balance, December 31,
1996................... $249.8 (61.0) 625.9 948.6 4,248.2 303.5 (11.1) (233.3) (6.4) 6,064.2
========= ======== ====== ======= ======== ========== ========== ======== =========== ========
See notes to consolidated financial statements.
Norwest Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Norwest Corporation (the corporation) is a diversified financial services
company which was organized in 1929 and is registered under the Bank Holding
Company Act of 1956, as amended. The corporation owns subsidiaries engaged in
banking and a variety of related businesses. The corporation provides retail,
commercial, and corporate banking services to its customers through banks
located in Arizona, Colorado, Illinois, Indiana, Iowa, Minnesota, Montana,
Nebraska, Nevada, New Mexico, North Dakota, Ohio, South Dakota, Texas, Wisconsin
and Wyoming. The corporation provides additional financial services to its
customers through subsidiaries engaged in various businesses, principally
mortgage banking, consumer finance, equipment leasing, agricultural finance,
commercial finance, securities brokerage and investment banking, insurance
agency services, computer and data processing services, trust services,
mortgage-backed securities servicing and venture capital investment.
The accounting and reporting policies of the corporation and its subsidiaries
conform to generally accepted accounting principles and general practices within
the financial services industry. The more significant accounting policies are
summarized below.
Consolidation The consolidated financial statements include the accounts of the
corporation and all subsidiaries. Significant inter-company accounts and
transactions have been eliminated.
Consolidated Statements of Cash Flows For purposes of the consolidated
statements of cash flows, the corporation considers cash and due from banks,
interest-bearing deposits with banks and federal funds sold and resale
agreements to be cash equivalents.
Supplemental disclosures of cash flow information for the years ended December
31 include:
In millions 1996 1995 1994
-------- ------- -------
Interest........................................ $2,579.0 2,299.9 1,569.6
Income taxes.................................... 43.0 533.1 22.3
Transfer of loans to other real estate owned.... 51.3 28.6 69.8
See Notes 2 and 10 for certain non-cash common and preferred stock transactions.
In 1995, credit card receivables totaling $1,007.4 million were transferred to
the loans held for sale category pending their sale.
Mortgage-backed securities of $151.0 million, held for investment by First
United Bank Group, Inc. (First United), were transferred to available for sale
in 1994 to comply with the corporation's investment and interest rate risk
policies. Also during 1994, venture capital securities of $122.0 million,
originally classified as available for sale, were transferred to the held to
maturity category to comply with Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (FAS 115).
See Note 4 regarding the transfer of investment securities to available for sale
in 1995.
Investment Securities Investment and mortgage-backed securities which the
corporation intends to hold until maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts using a method that
approximates level yield. Investment and mortgage-backed securities which the
corporation intends to hold for indefinite periods of time, including securities
that management intends to use as part of its asset/liability management
strategy, or that may be sold in response to changes in interest rates, changes
in prepayment risk, securities on which call options have been written, the need
to increase regulatory capital or similar factors, are classified as available
for sale.
Investment and mortgage-backed securities available for sale are measured at
fair value. Net unrealized gains and losses, net of deferred income taxes, on
investments and mortgage-backed securities available for sale are excluded from
earnings and reported as a separate component of stockholders' equity until
realized. The classification of investment securities is determined at the date
of purchase and subsequent transfers, if any, between security classifications
are recorded at fair value.
35
The corporation's venture capital subsidiaries classify equity securities that
are publicly traded as available for sale and non-publicly traded equity
securities as held for investment.
Realized gains and losses on sales of investment securities are computed by the
specific identification method at the time of disposition and are recorded in
non-interest income.
Trading account securities are purchased with the intent to earn a profit by
trading or selling the security. These securities are stated at fair value.
Adjustments to the fair value are reported in non-interest income.
Loans and Leases Loans are stated at their principal amount and interest income
is recognized on an accrual basis. With the exception of certain consumer and
residential real estate loans, loans and leases on which payments are past due
for 90 days are placed on nonaccrual status, unless such loan is in the process
of collection and, in management's opinion, is fully secured. Residential real
estate loans over 120 days are included in nonaccrual while other consumer loans
are generally written off when deemed uncollectible or when they reach a
predetermined number of days past due depending upon loan product, country,
terms and other factors. When a loan is placed on non-accrual status,
uncollected interest accrued in prior years is charged against the allowance for
credit losses. A loan is returned to accrual status when principal and interest
are no longer past due and collectibility is no longer doubtful.
Restructured loans are those on which concessions in terms have been made as a
result of deterioration in a borrower's financial condition. Interest on these
loans is accrued at the new terms.
Effective January 1, 1995, the corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures" (FAS 114
and 118). Under the corporation's credit policies and practices, all non-accrual
and restructured commercial, agricultural, construction, and commercial real
estate loans meet the definition of impaired loans under FAS 114 and 118.
Impaired loans as defined by FAS 114 and 118 exclude certain consumer loans,
residential real estate loans and lease financing classified as non-accrual.
Loan impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the observable market price of the loan or the fair value of the
collateral if the loan is collateral dependent. The adoption of FAS 114 and 118
did not have a material effect on the corporation's financial position or
results of operation.
Lease financing assets include aggregate lease rentals, net of related unearned
income, which includes deferred investment tax credits, and related nonrecourse
debt. Leasing income is recognized as a constant percentage of outstanding lease
financing balances over the lease terms.
Unearned discount on consumer loans is recognized by the interest method or
other methods for which results are not materially different from the interest
method.
Loan origination fees and costs incurred to extend credit are deferred and
amortized over the term of the loan and the loan commitment period as a yield
adjustment. Loan fees representing adjustments of interest rate yield are
generally deferred and amortized into interest income over the term of the loan
using the interest method. Loan commitment fees are generally deferred and
amortized into non-interest income on a straight-line basis over the commitment
period.
Allowance for Credit Losses The allowance for credit losses is based upon
management's evaluation of a number of factors, including credit loss
experience, risk analyses of loan portfolios, as well as current and expected
economic conditions.
Charge-offs are loans or portions thereof evaluated as uncollectible. Loans made
by the domestic consumer finance subsidiaries, unless fully secured by real
estate, are generally charged off when the loan is 90 days or more contractually
delinquent and no payment has been received for 90 days. Credit card receivables
are generally charged off when they become 180 days past due or sooner upon
receipt of a bankruptcy notice. Other consumer loans are charged off when
certain delinquency criteria are met unless fully secured.
Loans Held for Sale Student loans and certain credit card receivables at
December 31, 1995 are classified as held for sale because the corporation does
not intend to hold these loans until maturity or sales of the loans are pending.
Such loans are carried at the lower of aggregate cost or market value by type of
loan. Gains and losses are recorded in non-interest income, based on the
difference between sales proceeds and carrying value.
36
Mortgages Held For Sale Mortgages held for sale are stated at the lower of
aggregate cost or market value. The determination of market value includes
consideration of all open positions, outstanding commitments from investors, and
related fees paid.
Gains and losses on sales of mortgages are recognized at settlement dates and
are determined by the difference between sales proceeds and the carrying value
of the mortgages. Gains and losses are recorded in non-interest income.
Mortgage Servicing Rights Effective January 1, 1995, the corporation adopted
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65" (FAS 122). Accordingly,
the corporation recognizes as separate assets the rights to service mortgage
loans for others, whether the servicing rights are acquired through purchases or
loan originations. The fair value of capitalized mortgage servicing rights is
based upon the present value of estimated future cash flows. Based upon current
fair values and considering outstanding positions of derivative financial
instruments utilized as hedges, capitalized mortgage servicing rights are
periodically assessed for impairment, which is recognized in the statement of
income during the period in which impairment occurs as an adjustment to the
corresponding valuation allowance. For purposes of performing its impairment
evaluation, the corporation stratifies its portfolio on the basis of certain
risk characteristics including loan type and note rate. Capitalized mortgage
servicing rights are amortized over the period of estimated net servicing income
and take into account appropriate prepayment assumptions. Prior to adoption of
FAS 122, the corporation only capitalized the costs related to purchased
mortgage servicing rights.
Premises and Equipment Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Owned properties are depreciated on a
straight-line basis over their estimated useful lives. Capital lease assets and
leasehold improvements are amortized over lease terms on a straight-line basis.
The costs of improvements are capitalized. Maintenance and repairs, as well as
gains and losses on dispositions of premises and equipment, are included in
non-interest expenses.
Other Real Estate Owned Other real estate owned is stated at the lower of cost
or 70 percent of current appraised value (which is not materially different from
fair value minus estimated costs to sell). When a property is acquired, the
excess of the recorded investment in the property over fair value, if any, is
charged to the allowance for credit losses. Subsequent declines in the estimated
fair value, net operating results and gains or losses on disposition of the
property are included in other non-interest expenses.
Goodwill and Other Intangibles Goodwill represents the unamortized cost of
acquiring subsidiaries and other net assets in excess of the appraised value of
such net assets at the date of acquisition. Goodwill is amortized over a maximum
15-year period using the straight-line method. Other identifiable intangibles
are amortized either on an accelerated basis or straight-line, over various
periods which do not exceed 15 years.
Derivative Financial Instruments The corporation and its subsidiaries utilize a
variety of derivative financial instruments as part of an overall interest rate
risk management strategy and in conjunction with their customer service and
trading activities. Derivative financial instruments utilized include interest
rate swaps, interest rate futures, caps, floors, options and forward contracts.
Interest rate swaps are used principally as a tool to manage the interest
sensitivity of the corporation's balance sheet. These contracts represent an
exchange of interest payment streams based on an agreed-upon notional principal
amount with at least one stream based on a specified floating-rate index. The
underlying principal balances of the assets or liabilities are not affected. Net
settlement amounts are reported as adjustments to interest income or interest
expense, as appropriate.
Options are contracts which grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell the underlying
financial instrument at a set price during a period or at a specified date in
the future. The writer of the option is obligated to purchase or sell the
underlying financial instrument if the purchaser chooses to exercise the option.
Premiums paid on purchased put options which qualify as hedges are deferred and
amortized over the terms of the contracts. Purchased put options are marked to
market daily with losses limited to the amount of the option fee. Losses are
recognized currently on put options sold when the market value of the underlying
security falls below the put price plus the premium received. A premium received
on a covered call option sold is deferred until the option matures. If the
market value of the related asset is greater than the option strike price, the
option will be exercised and the premium recorded as an adjustment of the gain
or loss recognized. If the option expires, the premium is recorded in other
non-interest income. Uncovered call options sold are marked to market daily with
the gain limited to the amount of the option fee.
37
Interest rate futures and forward contracts are commitments to either purchase
or sell a financial instrument at a specified price on an agreed-upon future
date. These contracts may be settled either in cash or by delivery of the
underlying financial instruments. Interest rate caps and floors require the
seller to pay the purchaser, at specified dates, the amount, if any, by which
the market interest rate exceeds the agreed-upon cap or falls below the
agreed-upon floor, applied to a notional principal amount. Positions which are
designated and effectively hedge specific mortgage servicing risk tranches
correlate on the basis of certain duration and convexity parameters. Realized
gains and losses on positions used in the management of specific asset and
liability positions in banking operations are deferred and amortized over the
terms of the items hedged as adjustments to interest income or interest expense.
Within mortgage banking operations, realized and unrealized gains and losses on
positions used as hedges of mortgages held for sale are considered in the
computation of the market value of such loans. Realized gains and losses on
positions used as hedges of capitalized mortgage servicing rights are deferred
and amortized while unrealized gains and losses are considered in the
calculation of the fair value of such mortgage servicing rights.
Derivative financial instruments which are not hedges of specific assets,
liabilities or commitments are included in the trading account. For a discussion
of the risks associated with derivatives and the corporation's policies used to
monitor such risks refer to Note 15, Derivative Activities.
Income Taxes The corporation and its United States subsidiaries file a
consolidated federal income tax return. The effects of current or deferred taxes
are recognized as a current and deferred tax liability or asset based on current
tax laws. Accordingly, income tax expense in the consolidated statements of
income includes charges or credits to properly reflect the current and deferred
tax asset or liability. Foreign taxes paid are applied as credits to reduce
federal income taxes payable.
Foreign Currency Translation The accounts of the corporation's foreign consumer
finance subsidiaries are measured using local currency as the functional
currency. Assets and liabilities are translated into United States dollars at
period-end exchange rates, and income and expense accounts are translated at
average monthly exchange rates. Net exchange gains or losses resulting from such
translation are excluded from net income and included as a separate component of
stockholders' equity.
Stock-Based Compensation The corporation accounts for its stock incentive plans
in accordance with Accounting Principles Board Opinion No. 25 (APB Opinion No.
25) and related Interpretations. The corporation adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (FAS
123) in 1996. The corporation has included in Note 11, Employee Benefit and
Stock Incentive Plans the impact of the fair value of employee stock-based
compensation plans on net income and earnings per share on a pro forma basis for
awards granted since January 1, 1995, pursuant to FAS 123.
Earnings Per Share Income for primary and fully diluted earnings per share is
adjusted for preferred stock dividends. Primary earnings per share data is
computed based on the weighted average number of common shares outstanding and
common stock equivalents arising from the assumed exercise of outstanding stock
options. Fully diluted earnings per share data is computed by using such average
common shares and equivalents increased by the assumed conversion into common
stock of the 6 3/4 percent convertible subordinated debentures, the Cumulative
Convertible Preferred Stock, Series B, the First United Cumulative Convertible
Exchangeable Preferred Stock, Series A and the First United Cumulative
Convertible Exchangeable Preferred Stock, Series C. Income for fully diluted
earnings per share is also adjusted for interest expense on these debentures and
notes, net of the related income tax effect, and preferred stock dividends
related to the convertible preferred stock.
Weighted average numbers of common and common equivalent shares applied in
calculating earnings per share are as follows:
1996 1995 1994
----------- ----------- -----------
Primary....................... 369,709,666 331,679,492 315,091,891
Fully diluted................. 370,670,926 341,118,009 327,798,536
38
2. Business Combinations
The corporation regularly explores opportunities for acquisitions of financial
institutions and related businesses. Generally, management of the corporation
does not make a public announcement about an acquisition opportunity until a
definitive agreement has been signed.
Transactions completed in the years ended December 31, 1996, 1995 and 1994
include:
In millions, except share amounts Common
Cash Shares Method of
Date Assets Paid Issued Accounting
----------- --------- -------- ---------- ----------------------
1996
The Bank of Robstown, Robstown, Texas (B)................ January 12 $ 71.4 $ 9.5 -- Purchase
AMFED Financial, Inc., Reno, Nevada (B).................. January 18 1,518.8 -- 6,046,636 Pooling of interests*
Irene Bancorporation, Inc., Viborg, South Dakota (B)..... January 31 39.7 7.1 -- Purchase
Canton Bancshares, Inc., Canton, Illinois (B)............ February 15 49.7 -- 279,270 Purchase
Henrietta Bancshares, Inc., Henrietta, Texas (B)......... March 12 164.0 24.4 -- Purchase
Victoria Bankshares, Inc., Victoria, Texas (B)........... April 11 1,918.7 -- 8,510,801 Pooling of interests*
The Prudential Home Mortgage Company, Inc. (M)........... May 7 3,335.6 3,335.6 -- Purchase of assets
Cardinal Credit Corporation, Lexington, Kentucky (F)..... May 13 34.2 33.6 -- Purchase of assets
Benson Financial Corporation, San Antonio, Texas (B)..... May 31 463.8 -- 2,044,035 Pooling of interests*
Regional Bank of Colorado, N.A., Rifle, Colorado (B)..... June 1 56.0 -- 354,967 Purchase
AmeriGroup, Incorporated, Minneapolis, Minnesota (B)..... June 4 155.1 -- 916,200 Purchase
Union Texas Bancorporation, Inc., Laredo, Texas (B)...... June 27 245.0 -- 394,979 Purchase
B & G Investment Company, San Antonio, Texas (B)......... July 3 71.2 -- 270,998 Purchase
PriMerit Bank, F.S.B., Las Vegas, Nevada (B)............. July 19 1,577.6 190.7 -- Purchase of assets
DUMAE Insurance Agency, Inc., Baltic, South Dakota (B)... July 25 0.2 0.2 -- Purchase of assets
Aman Collection Service, Inc., Aberdeen, South Dakota (F) August 2 4.1 -- 600,000 Pooling of interests*
Rapid Finance, Inc., Jacksonville, Mississippi (F)....... August 16 28.6 28.6 -- Purchase of assets
National Business Finance, Inc., Denver, Colorado (B).... September 30 8.4 7.5 -- Purchase
American Bank Moorhead, Moorhead, Minnesota (B).......... October 1 154.7 23.9 -- Purchase
Texas Bancorporation, Inc., Odessa, Texas (B)............ November 1 173.6 -- 762,495 Purchase
West Columbia National Bank, West Columbia, Texas (B).... December 27 34.4 5.0 -- Purchase
--------- -------- ----------
$10,104.8 $3,666.1 20,180,381
========= ======== ==========
1995
Ken-Caryl Investment Company, Littleton, Colorado (B).... January 5 $ 29.0 $ -- 149,774 Purchase
American Republic Bancshares, Inc.,
Belen, New Mexico (B)................................. January 6 222.0 -- 1,206,546 Purchase
Independent Bancorp of Arizona, Inc.,
Phoenix, Arizona (B).................................. February 12 1,600.0 159.7 -- Purchase
Parker Bankshares, Incorporated, Parker, Colorado (B).... February 28 59.0 -- 394,995 Pooling of interests*
Directors Mortgage Loan Corporation,
Riverside, California (M)............................. March 13 270.8 -- 10,545,778 Pooling of interests*
Babbscha Company, Fridley, Minnesota (B)................. April 1 53.0 -- 275,921 Purchase
The First National Bank of Bay City, Bay City, Texas (B). April 10 146.0 -- 932,642 Purchase
Goldenbanks of Colorado, Inc., Golden, Colorado (B)...... May 1 361.3 -- 2,716,629 Pooling of interests*
ITT Financial Corporation - Island Finance business (F).. May 4 1,016.1 574.3 -- Purchase
New Braunfels Bancshares, Inc., New Braunfels, Texas (B). May 10 43.1 7.0 -- Purchase
United Texas Financial Corporation,
Wichita Falls, Texas (B).............................. June 1 296.3 -- 1,515,851 Purchase
First American National Bank, Chandler, Arizona (B)...... June 1 39.0 -- 192,831 Pooling of interests*
First Tule Bancorp, Inc., Tulia, Texas (B)............... June 1 61.4 8.3 -- Purchase
The Ryland Group, Inc. - Mortgage-related
institutional financial services business (B)......... June 30 -- 47.1 -- Purchase
Comfort Bancshares, Inc., Comfort, Texas (B)............. July 10 41.1 6.2 -- Purchase
Valley-Hi Investment Company, San Antonio, Texas (B)..... August 1 121.6 -- 427,998 Purchase
39
In millions, except share amounts Common
Cash Shares Method of
Date Assets Paid Issued Accounting
----------- ---------- -------- ---------- ---------------------
1995, continued
Dickinson Bancorporation, Inc.,
Dickinson, North Dakota (B)........................... August 8 $ 123.3 $ -- 541,591 Purchase
Alice Bancshares, Inc., Alice, Texas (B)................. September 15 187.6 40.2 -- Purchase
State National Bank, El Paso, Texas (B).................. October 2 1,052.3 157.0 -- Purchase
Liberty National Bank, Austin, Texas (B)................. October 16 167.1 27.3 -- Purchase
The Foothill Group, Inc., Los Angeles, California (B).... October 19 905.1 -- 15,632,689 Pooling of interests*
The First National Bank in Big Spring,
Big Spring, Texas (B)................................. November 1 216.9 38.0 -- Purchase
Beacon Business Credit Corp.,
Boston, Massachusetts (B)............................. December 1 30.6 12.5 -- Purchase
---------- -------- ----------
$ 7,042.6 $1,077.6 34,533,245
========== ======== ==========
1994
St. Cloud National Bank & Trust Co.,
St. Cloud, Minnesota (B)............................... January 1 $ 119.0 $ -- 1,105,820 Pooling of interests*
St. Cloud Metropolitan Agency, Inc.,
St. Cloud, Minnesota (B)............................... January 6 -- -- 32,969 Purchase
First United Bank Group, Inc.,
Albuquerque, New Mexico (B)............................ January 14 3,924.6 -- 17,784,916 Pooling of interests
Lindeberg Financial Corporation,
Forest Lake, Minnesota (B)............................. February 2 55.0 -- 413,599 Pooling of interests*
First National Bank of Arapahoe County,
Aurora, Colorado (B)................................... February 2 36.0 -- 260,896 Pooling of interests*
First National Bank of Lakewood, Lakewood, Colorado (B).. February 2 61.0 -- 337,582 Pooling of interests*
First National Bank of Southeast Denver,
Denver, Colorado (B).................................. February 2 134.0 -- 803,439 Pooling of interests*
Community Credit Co., Minneapolis, Minnesota (F)......... March 15 173.0 -- 3,726,871 Pooling of interests*
Bank of Montana System, Great Falls, Montana (B)......... April 15 807.0 -- 4,174,105 Pooling of interests*
D.L. Bancshares, Inc., Detroit Lakes, Minnesota (B)...... April 28 78.5 11.9 -- Purchase
Double Eagle Financial Corporation, Phoenix, Arizona (M). May 1 5.4 -- 307,700 Purchase
American Land Title Company of Kansas City, Inc.,
Kansas City, Missouri (M)............................. July 1 0.5 -- 166,666 Purchase
La Porte Bancorp., Hammond, Indiana (B).................. September 15 137.7 -- 564,553 Purchase
Copper Bancshares, Inc., Silver City, New Mexico (B)..... October 2 98.4 -- 524,920 Purchase
Bank of Scottsdale, Scottsdale, Arizona (B).............. October 21 92.8 13.6 -- Purchase
Texas National Bankshares, Inc., Midland, Texas (B)...... December 2 187.8 24.5 -- Purchase
First National Bank of Kerrville, Kerrville, Texas (B)... December 9 205.7 -- 1,225,000 Purchase
Alexandria Securities and Investment Company,
Alexandria, Minnesota (B).............................. December 9 59.3 -- 341,039 Purchase
-------- -------- ----------
$6,175.7 $ 50.0 31,770,075
======== ======== ==========
*Pooling of interests transaction was not material to the corporation's
consolidated financial statements; accordingly, previously reported results
were not restated.
B - Banking Group; M - Mortgage Banking; F - Norwest Financial
At December 31, 1996, the corporation had six other pending acquisitions with
total assets of approximately $2.0 billion, and it is anticipated that cash of
$91.4 million and approximately 7.2 million common shares will be issued upon
completion of these acquisitions. Pending acquisitions include Central
Bancorporation, Inc., a $1.1 billion bank holding company based in Fort Worth,
Texas. These pending acquisitions, subject to approval by regulatory agencies,
are expected to be completed during 1997 and are not significant to the
financial statements of the corporation, either individually or in the
aggregate.
40
3. Restrictions on Cash and Due from Banks
The corporation's banking subsidiaries are required to maintain reserve balances
in cash with Federal Reserve Banks. The average amount of those reserve balances
was approximately $580 million and $575 million for the years ended December 31,
1996 and 1995, respectively.
4. Investment Securities
Information related to the amortized cost and fair value of investment
securities at December 31 is provided in the table below.
Amortized Cost and Fair Values of Investment Securities
1996 1995 1994
---------------------------------- --------------------------------- ----------------------------------
Gross Gross Gross Gross Gross Gross
Amor- Unreal- Unreal- Amor- Uneal- Unreal- Amor- Unreal- Unreal-
tized ized ized Fair tized ized ized Fair tized ized ized Fair
In millions Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Investment securities
available for sale:
U.S. Treasury
and federal
agencies................ $ 1,173.6 13.4 (6.9) 1,180.1 969.3 21.9 (5.0) 986.2 932.4 6.3 (15.4) 923.3
State, municipal
and housing-tax
exempt................. 917.5 37.6 (3.2) 951.9 793.9 40.7 (8.6) 826.0 107.1 0.3 (3.9) 103.5
Other................... 868.8 356.9 (67.5) 1,158.2 658.1 289.1 (5.4) 941.8 321.2 97.0 (17.4) 400.8
-------- ----- ------ -------- -------- ----- ------ -------- -------- ----- ------ --------
Total investment
securities
available for
sale................... 2,959.9 407.9 (77.6) 3,290.2 2,421.3 351.7 (19.0) 2,754.0 1,360.7 103.6 (36.7) 1,427.6
-------- ----- ------ -------- -------- ----- ------ -------- -------- ----- ------ --------
Mortgage-backed
securities
available for sale:
Federal
agencies............. 12,651.0 194.4 (61.2) 12,784.2 12,163.2 254.9 (80.0) 12,338.1 12,635.2 19.1 (642.4) 12,011.9
Collateralized
mortgage
obligations........... 165.5 7.8 (0.6) 172.7 147.9 3.2 (0.2) 150.9 165.8 0.5 (4.0) 162.3
-------- ----- ------ -------- -------- ----- ------ -------- -------- ----- ------ --------
Total mortgage-
backed
securities
available
for sale............... 12,816.5 202.2 (61.8) 12,956.9 12,311.1 258.1 (80.2) 12,489.0 12,801.0 19.6 (646.4) 12,174.2
-------- ----- ------ -------- -------- ----- ------ -------- -------- ----- ------ --------
Total investment
and mortgage-
backed securities
available
for sale............... 15,776.4 610.1 (139.4) 16,247.1 14,732.4 609.8 (99.2) 15,243.0 14,161.7 123.2 (683.1) 13,601.8
Other securities
held for
investment............. 712.2 35.8 (2.8) 745.2 760.5 44.2 (8.9) 795.8 1,235.1 56.7 (23.1) 1,268.7
--------- ----- ------ -------- -------- ----- ------ -------- -------- ----- ------ --------
Total investment
securities.... $16,488.6 645.9 (142.2) 16,992.3 15,492.9 654.0 (108.1) 16,038.8 15,396.8 179.9 (706.2) 14,870.5
========= ===== ====== ======== ======== ===== ====== ======== ======== ===== ====== ========
The carrying and fair of investment securities by maturity at December 31 were:
1996 1995
------------------------------ ----------------------------
In millions Carrying Fair Carrying Fair
Value Value Value Value
----------- -------- -------- --------
Available for sale:
Investment securities:
In one year or less............................. $ 649.8 649.8 746.2 746.2
After one year through five years............... 1,295.4 1,295.4 966.3 966.3
After five years through ten years.............. 372.3 372.3 334.7 334.7
After ten years................................. 972.7 972.7 706.8 706.8
----------- -------- -------- --------
Total investment securities available for sale 3,290.2 3,290.2 2,754.0 2,754.0
----------- -------- -------- --------
Mortgage-backed securities:
In one year or less............................. 132.8 132.8 53.5 53.5
After one year through five years............... 409.9 409.9 271.1 271.1
After five years through ten years.............. 152.0 152.0 320.6 320.6
After ten years................................. 12,262.2 12,262.2 11,843.8 11,843.8
----------- -------- -------- --------
Total mortgage-backed securities
available for sale......................... 12,956.9 12,956.9 12,489.0 12,489.0
----------- -------- -------- --------
Total investment and mortgage-backed
securities available for sale................... 16,247.1 16,247.1 15,243.0 15,243.0
----------- -------- -------- --------
Held for investment:
In one year or less............................. -- -- -- --
After one year through five years............... 294.8 327.8 262.9 298.2
After five years through ten years.............. -- -- -- --
After ten years................................. 417.4 417.4 497.6 497.6
----------- -------- -------- --------
Total investment securities held for investment..... 712.2 745.2 760.5 795.8
----------- -------- -------- --------
Total investment securities......................... $ 16,959.3 16,992.3 16,003.5 16,038.8
=========== ======== ======== ========
41
In November 1995, the Financial Accounting Standards Board announced it would
permit companies to make a one-time reclassification of their investment
securities in conjunction with the issuance of a Special Report entitled "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities." The corporation transferred the remaining
federal agency and state, municipal and housing tax exempt securities with
amortized costs of $27.4 million and $665.2 million, respectively, from held for
investment to available for sale as of December 31, 1995. Unrealized gains
related to such securities transferred amounted to $25.3 million.
Investment securities (including securities available for sale) carried at
$6,515.9 million and $5,610.7 million were pledged to secure public or trust
deposits or for other purposes at December 31, 1996 and 1995, respectively.
Interest income on investment securities for each of the three years ended
December 31 was:
In millions 1996 1995 1994
------ ------ ------
Investment securities available for sale:
U.S. Treasury and federal agencies............................... $ 79.8 73.5 93.9
State, municipal and housing-tax exempt.......................... 53.5 6.5 5.4
Other............................................................ 48.5 39.5 20.9
--------- -------- ------
Total investment securities available for sale................. 181.8 119.5 120.2
--------- -------- ------
Mortgage-backed securities available for sale:
Federal agencies................................................. 974.7 934.1 707.3
Collateralized mortgage obligations.............................. 13.6 11.7 8.4
--------- -------- ------
Total mortgage-backed securities available for sale............ 988.3 945.8 715.7
--------- -------- ------
Total investment and mortgage-backed securities available for sale.. 1,170.1 1,065.3 835.9
Other securities held for investment................................ 36.2 83.8 71.5
--------- -------- ------
Total investment securities......................................... $ 1,206.3 1,149.1 907.4
========= ======== ======
Total gross realized gains and gross realized losses from the sale of investment
securities for each of the three years ended December 31 were:
In millions 1996 1995 1994
------ ------ ------
Available for sale:
Investment securities:
Gross realized gains...................................................... $ 16.1 14.8 28.3
Gross realized losses..................................................... (71.1) (21.3) (75.9)
------- ------ ------
Net realized losses....................................................... (55.0) (6.5) (47.6)
Mortgage-backed securities:
Gross realized gains...................................................... 97.5 50.5 17.1
Gross realized losses..................................................... (89.3) (89.1) (48.5)
------- ------ ------
Net realized gains (losses)............................................... 8.2 (38.6) (31.4)
------- ------ ------
Net realized losses on investment
and mortgage-backed securities available for sale........................... $ (46.8) (45.1) (79.0)
======= ====== ======
Held for investment:
Investment securities:
Gross realized gains...................................................... $ -- 0.7 0.9
Gross realized losses..................................................... -- (0.1) (1.1)
------- ------ ------
Net realized gains (losses) on
investment securities held for investment................................... $ -- 0.6 (0.2)
======= ====== ======
Venture capital securities:
Gross realized gains...................................................... $ 364.1 129.3 85.4
Gross realized losses..................................................... (107.7) (27.2) (8.3)
------- ------ ------
Net venture capital realized gains............................................. $ 256.4 102.1 77.1
======= ====== ======
42
Certain investment securities with a total amortized cost of $138.7 million,
$97.0 million and $102.6 million were sold during 1996, 1995 and 1994,
respectively, by the corporation principally because such securities were called
by the issuers prior to maturity, or in certain cases due to significant
deterioration in the creditworthiness of the related issuers.
5. Loans and Leases
The carrying values of loans and leases at December 31 were:
In millions 1996 1995
----------- ----------
Commercial, financial and industrial................................................... $ 10,204.9 9,327.3
Agricultural........................................................................... 1,107.7 1,090.8
Real estate
Secured by 1-4 family residential properties........................................ 10,376.3 8,592.9
Secured by development properties................................................... 2,104.5 2,024.0
Secured by construction and land development........................................ 943.8 742.0
Secured by owner-occupied properties................................................ 2,644.6 2,149.9
Consumer............................................................................... 10,431.2 10,520.7
Credit card............................................................................ 1,566.2 1,666.1
Lease financing........................................................................ 812.4 815.7
Foreign
Consumer............................................................................ 774.9 705.2
Commercial.......................................................................... 187.7 196.1
----------- ----------
Total loans and leases........................................................... 41,154.2 37,830.7
Unearned discount...................................................................... (1,773.2) (1,677.6)
----------- ----------
Total loans and leases, net of
unearned discount.............................................................. $ 39,381.0 36,153.1
=========== ==========
Changes in the allowance for credit losses were:
In millions 1996 1995 1994
-------- -------- --------
Balance at beginning of year.......................................... $ 917.2 789.9 789.2
Allowances related to assets
acquired, net................................................... 111.3 119.1 29.0
Provision for credit losses....................................... 394.7 312.4 164.9
Credit losses..................................................... (511.8) (421.2) (314.8)
Recoveries........................................................ 129.4 117.0 121.6
--------- ------- ------
Net credit losses............................................... (382.4) (304.2) (193.2)
--------- ------- ------
Balance at end of year................................................ $ 1,040.8 917.2 789.9
========= ======= ======
Total non-performing assets and 90-day past due loans and leases at December 31
were:
In millions 1996 1995
-------- --------
Impaired loans:
Non-accrual..................................... $ 94.0 100.1
Restructured.................................... 0.2 2.0
-------- --------
Total impaired loans.......................... 94.2 102.1
Other non-accrual loans and leases.................. 62.5 66.8
-------- --------
Total non-accrual and restructured
loans and leases.............................. 156.7 168.9
Other real estate owned............................. 43.3 37.1
-------- --------
Total non-performing assets..................... 200.0 206.0
Loans and leases past due 90 days or more*.......... 110.7 91.9
-------- --------
Total non-performing assets and
90-day past due loans and leases.............. $ 310.7 297.9
======== ========
*Excludes non-accrual and restructured loans and leases.
43
The average balances of impaired loans for the years ended December 31, 1996 and
1995 were $113.1 million and $88.1 million, respectively. The allowance for
credit losses related to impaired loans at December 31, 1996 and 1995 was $31.4
million and $43.3 million, respectively. Impaired loans of $0.9 million and $2.7
million were not subject to a related allowance for credit losses at December
31, 1996 and 1995, respectively, because of the net realizable value of loan
collateral, guarantees and other factors.
The effect of non-accrual and restructured loans on interest income for each of
the three years ended December 31 was:
In millions 1996 1995 1994
----- ----- -----
Interest income
As originally contracted................ $25.1 15.3 15.4
As recognized........................... (7.3) (3.6) (3.1)
----- ---- ----
Reduction of interest income......... $17.8 11.7 12.3
===== ==== ====
There were no material commitments to lend additional funds to customers whose
loans were classified as non-accrual or restructured at December 31, 1996.
Leveraged lease financing amounted to $151.1 million and $140.9 million at
December 31, 1996 and 1995, respectively. Deferred income taxes related to
leveraged leases amounted to $115.5 million and $111.2 million at the same
dates, respectively.
Loans and leases totaling $4,614.6 million and $4,325.2 million were pledged to
secure Federal Home Loan Bank (FHLB) advances at December 31, 1996 and 1995,
respectively.
Loans to executive officers and directors (and their associates) of the
corporation and its significant subsidiaries, made in the ordinary course of
business, were not material at December 31, 1996 and 1995.
Loans held for sale at December 31, 1996 consisted of $2,827.6 million in
student loans. Loans held for sale at December 31, 1995 included $2,336.5
million in student loans and $1,007.4 million in credit card receivables.
6. Premises and Equipment
The carrying value of premises and equipment at December 31 was:
In millions 1996 1995
---------- --------
Owned
Land................................................ $ 151.1 124.3
Premises and improvements........................... 988.7 798.8
Furniture, fixtures and equipment................... 1,298.3 1,137.3
--------- --------
Total............................................ 2,438.1 2,060.4
--------- --------
Capitalized leases
Premises............................................ 19.1 20.1
Equipment........................................... 2.1 4.5
--------- --------
Total............................................ 21.2 24.6
--------- --------
Total premises and equipment........................ 2,459.3 2,085.0
Less accumulated depreciation and amortization...... (1,258.4) (1,050.9)
--------- --------
Premises and equipment, net......................... $ 1,200.9 1,034.1
========= ========
7. Certificates of Deposit Over $100,000
The corporation had certificates of deposit over $100,000 of $3,457.1 million
and $2,504.6 million at December 31, 1996 and 1995, respectively. Interest
expense on certificates of deposit over $100,000 was $177.1 million, $139.9
million and $69.4 million for the years ended December 31, 1996, 1995 and 1994,
respectively. There were no brokered certificates of deposit at December 31,
1996 and 1995.
44
8. Short-term Borrowings
Information related to short-term borrowings for the three years ended December
31 is provided in the table below.
At December 31, 1996, the corporation had available lines of credit totaling
$2,357.7 million, including $2,057.7 million at a subsidiary, Norwest Financial.
A portion of these financing arrangements require the maintenance of
compensating balances or payment of fees, which are not material.
At December 31, 1996, the corporation had commercial paper placement agreements
totaling $300.0 million (included in the $2,357.7 million reported in the
preceding paragraph).
Short-Term Borrowings
1996 1995 1994
----------------- -------------------- ----------------
In millions, except rates Amount Rate Amount Rate Amount Rate
-------- ----- --------- ----- ------- ------
At December 31,
Commercial paper............................................ $3,466.0 5.26% $ 3,129.2 5.77% $2,544.9 5.87%
Federal funds purchased and securities sold under
agreements to repurchase................................. 2,665.0 5.47 3,563.6 5.10 4,252.5 5.79
Other....................................................... 1,441.6 5.75 1,834.4 5.88 1,052.8 5.68
-------- --------- --------
Total.................................................. $7,572.6 5.43 $ 8,527.2 5.52 $7,850.2 5.81
======== ========= ========
For the year ended December 31,
Average daily balance
Commercial paper............................................ $4,277.5 5.37% $ 3,364.3 6.01% $2,672.1 4.42%
Federal funds purchased and securities sold under
agreements to repurchase................................. 2,925.0 5.03 3,854.9 5.78 2,966.7 4.34
Other....................................................... 1,351.1 5.71 1,518.4 5.97 989.7 4.38
-------- --------- --------
Total.................................................. $8,553.6 5.31 $ 8,737.6 5.90 $6,628.5 4.38
======== ========= ========
Maximum month-end balance
Commercial paper............................................ $5,357.7 NA $ 4,981.0 NA $2,949.3 NA
Federal funds purchased and securities sold under
agreements to repurchase................................. 3,366.9 NA 5,670.6 NA 4,252.5 NA
Other....................................................... 1,760.9 NA 2,321.1 NA 1,341.6 NA
NA--Not applicable.
45
9. Long-term Debt
Long-term debt at December 31 consisted of:
In millions 1996 1995
-------- -------
Norwest Corporation (parent company only)
Medium-Term Notes, Series A, 5.58% to 5.74%, due 1998........................... $ 6.6 57.5
Medium-Term Notes, Series C, 4.93% to 5.14%, due 1998........................... 1.5 23.4
Floating Rate Medium-Term Notes, Series C, due 1998............................. 105.0 180.4
Medium-Term Notes, Series D, 7.125% to 8.15%, due 1999 to 2001.................. 375.0 375.0
Floating Rate Medium-Term Notes, Series D, due 1999............................. 200.0 600.0
Medium-Term Notes, Series E, 7.70% to 8.67%, due 1997 to 2002................... 550.0 750.0
Floating Rate Medium-Term Notes, Series E, due 1997 to 1998..................... 250.0 250.0
Medium-Term Notes, Series F, 6.50% to 7.68%, due 2000 to 2005................... 1,000.0 1,000.0
Medium-Term Notes, Series G, 5.75% to 6.875%, due 1998 to 2006.................. 1,950.0 1,050.0
Floating Rate Medium-Term Notes, Series G, due 1998............................. 25.0 25.0
Medium-Term Notes, Series H, 5.625% to 6.75%, due 2001 to 2006.................. 400.0 --
Medium-Term Notes, Series J, 6.55% due 2006..................................... 200.0 --
Floating Rate Euro Medium-Term Notes, due 2001.................................. 300.0 --
5.75% Senior Notes, due 1998.................................................... 100.0 100.0
6% Senior Notes, due 2000....................................................... 200.0 200.0
Senior Debt, 7.816% due 1996.................................................... -- 150.0
6.003% Senior Note, due 1997.................................................... 200.0 200.0
Floating Rate Senior Note, due 1996............................................. -- 330.0
ESOP Series A Notes, 8.42% due 1996............................................. -- 31.0
ESOP Series B Notes, 8.52% due 1999............................................. 13.3 13.3
9 1/4% Subordinated Capital Notes, due 1997..................................... 100.0 100.0
6 5/8 % Subordinated Notes, due 2003............................................ 200.0 200.0
6 3/4% Convertible Subordinated Debentures, due 2003............................ 0.1 0.1
6.65% Subordinated Debentures, due 2023......................................... 200.0 200.0
Other notes..................................................................... 7.5 5.2
--------- --------
Total .................................................................... 6,384.0 5,840.9
--------- --------
Norwest Financial, Inc. and its subsidiaries
Senior Notes, 5.125% to 8.65%, due 1997 to 2007................................. 4,080.9 3,864.5
Senior Subordinated Notes, 5.20% to 7.875%, due 1997 to 1998.................... 52.0 217.0
--------- --------
Total..................................................................... 4,132.9 4,081.5
--------- --------
Other consolidated subsidiaries
FHLB Notes and Advances, 3.15% to 8.38%, due 1997 through 2026.................. 477.2 465.0
Floating Rate FHLB Advances, due 1997 through 2011.............................. 2,050.0 3,202.7
12.25% Senior Notes, due 1998 to 2000........................................... 2.5 3.3
Floating Rate Senior Note, due 1997............................................. -- 20.0
Other notes and debentures, due 1997 through 2005............................... 18.7 44.9
Mortgages payable............................................................... 0.4 0.5
Capital lease obligations....................................................... 16.5 18.0
--------- --------
Total..................................................................... 2,565.3 3,754.4
--------- --------
Consolidated long-term debt............................................... $13,082.2 13,676.8
========= ========
Notes and debentures of the corporation and Norwest Financial, Inc. and its
subsidiaries are unsecured. During 1996, the corporation issued $1.5 billion of
Medium-Term Notes in the domestic market. Such issuances included $900 million
of Medium-Term Notes, Series G, $400 million of Medium-Term Notes, Series H and
$200 million of Medium-Term Notes, Series J. The corporation also issued $300
million in Euro Medium-Term Notes. During 1995, the corporation issued $2.875
billion of Medium-Term Notes, including $800 million of Medium-Term Notes,
Series E, $1 billion of Medium-Term Notes, Series F and $1.075 billion of
Medium-Term Notes, Series G. Medium-Term Notes represent senior, unsubordinated
debt and rank equally with all other unsecured and unsubordinated debt of the
corporation.
The corporation has entered into various interest rate swap agreements to
exchange the fixed interest rate on certain debt issuances for a variable rate.
Through the use of such instruments, the corporation has synthetically altered
the rate on certain notional amounts of outstanding Medium-Term notes with
resulting effective rates of interest as follows: Series D, $375 million ranging
from one-month LIBOR (London Inter-Bank Offered Rate) less 95 basis points to
three-month LIBOR plus seven basis points; Series E, $225 million ranging from
three-month LIBOR less seven basis points to three-month LIBOR
46
plus five basis points; Series F, $500 million ranging from three-month LIBOR
less 92 basis points to three-month LIBOR plus seven basis points; Series G,
$1,950 million ranging from three-month LIBOR less 19 basis points to
three-month LIBOR plus 16 basis points; Series H, $400 million at three-month
LIBOR less nine basis points to three-month LIBOR plus five basis points; and
Series J, $200 million at three-month LIBOR less one basis point.
The corporation has also entered into interest rate swap agreements to exchange
the fixed rate on other outstanding debt issuances for a variable rate of
interest as follows: 5 3/4% Senior Notes, $100 million at a rate of three-month
LIBOR less 46 basis points; 6 5/8% Subordinated Notes due 2003, $200 million at
a rate of one-month LIBOR less 37 basis points; and 9 1/4% Subordinated Capital
Notes, $50 million at a rate of six-month LIBOR plus 13 basis points.
The corporation has closed two interest rate swap agreements related to the
Medium-Term Notes, Series F. The corporation has also entered into and
subsequently closed an interest rate swap agreement on $50 million of the 6%
Senior Notes due 2000.
Rates on outstanding floating rate debt issuances are as follows: Floating Rate
Medium-Term Notes, Series C, three-month LIBOR plus 10 basis points; Floating
Rate Medium-Term Notes, Series D, three-month LIBOR plus five basis points;
Floating Rate Medium-Term Notes, Series E, three-month LIBOR plus five basis
points to three-month LIBOR plus 10 basis points; Floating Rate Medium-Term
Notes, Series G, three-month LIBOR plus eight basis points; and Euro Medium-Term
Notes, three-month LIBOR plus five basis points.
The corporation has the option to call $100 million of Medium-Term Notes,
Series F beginning May 10, 1998 upon 30 days notice. The corporation may call
$50 million of Medium-Term Notes, Series C, on March 20, 1997 and on any
interest payment date thereafter. The corporation has called $25 million of the
fixed rate Medium-Term Notes, Series E as of January 21, 1997.
The 9 1/4% Subordinated Capital Notes due 1997 are redeemable at the option of
the corporation at the principal amount in exchange for an equivalent market
value of common stock, perpetual preferred or other eligible primary capital
securities of the corporation or cash at the bondholder's election if the
corporation determines that the debt no longer constitutes primary capital or
ceases to be treated as primary capital by the regulatory authorities. The
corporation is required to sell or issue common stock, preferred stock or any
other capital securities, as determined by the regulatory authorities, and
dedicate the proceeds to the retirement or redemption of the principal amount of
these subordinated capital notes. Proceeds of equity offerings have been
designated to redeem the full amount of the subordinated debentures.
The 6 5/8% Subordinated Notes due 2003 are unsecured and subordinated to all
present and future senior debt of the corporation. Payment of principal may be
accelerated only in the case of bankruptcy of the corporation. There is no right
of acceleration in the case of a default in the payment of principal or interest
or in the lack of performance of any covenant or agreement of the corporation.
The 6 3/4% Convertible Subordinated Debentures due 2003 can be converted into
common stock of the corporation at $5 per share subject to adjustment for
certain events. Repayment is subordinated, but only to the extent described in
the indenture relating to the debentures, to the prior payment in full of all of
the corporation's obligations for borrowed money. The subordinated debentures
are redeemable at the principal amount plus a premium of 34 basis points in 1997
and thereafter without a premium.
The 6.65% Subordinated Debentures due 2023 are unsecured and subordinated to all
present and future senior debt of the corporation. There is no right of
acceleration in the case of a default in the payment of principal or interest or
in the lack of performance of any covenant of the corporation. Payment of
principal may be accelerated only in the case of bankruptcy of the corporation.
During 1996, Norwest Financial, Inc. issued a total of $525 million of senior
notes bearing interest at rates ranging from 6.375 percent to 6.68 percent and
due dates ranging from September 1999 to November 2003.
The floating rate FHLB advances bear interest at LIBOR less 17 basis points and
interest at rates ranging from one-month LIBOR less 15 basis points to the
one-month LIBOR less four basis points, and the three-month LIBOR less 15 basis
points to the three-month LIBOR less seven basis points. The maturities of the
FHLB advances are determined quarterly, based on the outstanding balance, the
then current LIBOR rate, and the maximum life of the advance. Based upon these
factors and the LIBOR rate in effect at December 31, 1996, the maturity dates
range from 1997 to 2011.
47
Mortgages payable consist of notes secured by deeds of trust on premises and
certain other real estate owned with a net book value of $0.4 million at
December 31, 1996. Interest rates on the mortgages payable range up to 12.0
percent with maturities through the year 1998.
Maturities of long-term debt at December 31, 1996 were:
Parent
In millions Consolidated Company Only
------------ ------------
1997......................................................... $ 2,742.4 905.4
1998......................................................... 1,467.7 543.3
1999......................................................... 1,681.0 980.8
2000......................................................... 1,543.4 826.5
2001......................................................... 1,083.0 801.4
Thereafter................................................... 4,564.7 2,326.6
--------- -------
Total.................................................... $13,082.2 6,384.0
========= =======
10. Stockholders' Equity
Preferred and Preference Stock The corporation is authorized to issue 5,000,000
shares of preferred stock without par value and 4,000,000 shares of preference
stock, without par value. Shares of preferred stock and preference stock have
such powers, preferences and rights as may be determined by the corporation's
board of directors, provided that each share of preference stock will not be
entitled to more than one vote per share. No shares of preference stock are
currently outstanding. A summary of the corporation's preferred stock at
December 31 is presented below.
Annual
Dividend Amount
In millions, except share and per share amounts Shares Outstanding Rate Outstanding
------------------------- -------- ---------------------
1996 1995 1996 1996 1995
---------- ---------- -------- ------ -----
Cumulative Tracking, $200 stated value...................... 980,000 980,000 9.30% $196.0 196.0
1996 ESOP Cumulative Convertible, $1,000 stated value....... 24,469 -- 8.50% 24.5 --
1995 ESOP Cumulative Convertible, $1,000 stated value....... 22,716 24,572 10.00% 22.7 24.5
ESOP Cumulative Convertible, $1,000 stated value............ 11,594 12,984 9.00% 11.6 13.0
10.24% Cumulative, $100 stated value........................ -- 1,127,125 -- -- 112.7
Less: Cumulative Tracking shares held by a subsidiary....... (25,000) (25,000) (5.0) (5.0)
--------- --------- ------ -----
1,013,779 2,119,681 249.8 341.2
========= =========
Unearned ESOP shares........................................ (61.0) (38.9)
------ ------
Total preferred stock................................... $188.8 302.3
====== ======
On February 26, 1996, the corporation issued 59,000 shares of 1996 ESOP
Cumulative Convertible Preferred Stock, $1,000 stated value per share (1996 ESOP
Preferred Stock). The corporation issued 63,000 shares of 1995 ESOP Cumulative
Convertible Preferred Stock, $1,000 stated value per share (1995 ESOP Preferred
Stock) on March 28, 1995 and 40,900 shares of ESOP Cumulative Convertible
Preferred Stock, $1,000 stated value per share, on March 31, 1994. All shares of
the 1996 ESOP Preferred Stock, 1995 ESOP Preferred Stock and the ESOP Cumulative
Convertible Preferred Stock (collectively, ESOP Preferred Stock) were issued to
a trustee acting on behalf of the Norwest Corporation Savings Investment Plan
and Master Savings Trust (the Plan). Dividends are cumulative from the date of
initial issuance and are payable quarterly at an annual rate of 8.50 percent for
the 1996 ESOP Preferred Stock, 10.00 percent for the 1995 ESOP Preferred Stock
and 9.00 percent for the ESOP Cumulative Convertible Preferred Stock. Each share
of ESOP Preferred Stock released from the unallocated reserve of the Plan is
convertible into shares of common stock of the corporation based on the stated
value of the ESOP Preferred Stock and the then current market price of the
corporation's common stock. In 1996, 37,777 shares of ESOP Preferred Stock were
converted into 985,155 shares of the corporation's common stock. During 1995 and
1994, 40,009 shares and 26,635 shares of ESOP Preferred Stock were converted
into 1,360,749 shares and 1,094,593 shares of common stock of the corporation,
respectively. The ESOP Preferred Stock is also convertible at the option of the
holder at any time, unless previously redeemed. The ESOP Preferred Stock is
redeemable at any time, in whole or in part, at the option of the corporation at
a redemption price per share equal to the higher of (a) $1,000 per share plus
accrued and unpaid dividends and (b) the fair market value, as defined in the
Certificates of Designation of the ESOP Preferred Stock.
48
In accordance with the American Institute of Certified Public Accountants
(AICPA) Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans," the corporation recorded a corresponding charge to unearned
ESOP shares in connection with the issuance of the ESOP Preferred Stock. The
unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are
committed to be released.
On December 30, 1994, the corporation issued 980,000 shares of Cumulative
Tracking Preferred Stock, $200 stated value per share, of which 25,000 shares
were held by a subsidiary at December 31, 1996 and 1995. Dividends on shares of
Cumulative Tracking Preferred Stock are cumulative from the date of issue and
are payable quarterly. The initial dividend rate is 9.30 percent per annum. The
dividend rate is reset on January 1, 2000, and on January 1 of each fifth year
thereafter. The reset rate is the greater of the 5-, 10-, 30-year Treasury rate
or three-month LIBOR plus 250 basis points. At the time of initial issuance of
the shares of Cumulative Tracking Preferred Stock, the holders thereof became
assignees of the corporation's beneficial interest in an equivalent number of
Class A preferred limited liability company interests of Residential Home
Mortgage, L.L.C., a subsidiary of the corporation. Holders of shares of
Cumulative Tracking Preferred Stock are entitled to receive, in addition to the
dividends, certain additional cash distributions that are based on the results
of operations of the limited liability company. The shares of Cumulative
Tracking Preferred Stock may be redeemed after December 31, 1999, at the option
of the corporation. The shares of Cumulative Tracking Preferred Stock rank on a
parity, both as to payment of dividends and the distribution of assets upon
liquidation, with the corporation's ESOP Preferred Stock. The Cumulative
Tracking Preferred Stock ranks prior, both as to payment of dividends and the
distribution of assets upon liquidation, to common stock and, if any, the
corporation's junior participating preferred stock. At December 31, 1996, there
were two holders of record of the Cumulative Tracking Preferred Stock.
All shares of the corporation's 10.24% Cumulative Preferred Stock, $100 stated
value, in the form of 4,508,500 depositary shares, were called for redemption on
January 2, 1996. Each depositary share represented one-quarter of a share of
such preferred stock. Dividends were cumulative from the date of issue and were
payable quarterly at 10.24 percent per annum. The shares were redeemed in
accordance with their terms at the stated value. During 1994, the corporation
repurchased 4,125 shares of 10.24% Cumulative Preferred Stock.
All shares of the corporation's Cumulative Convertible Preferred Stock, Series
B, $200 stated value per share, in the form of depositary shares, were called
for redemption on September 1, 1995. Each depositary share, which represented
one-quarter of a share of such preferred stock, was convertible at the option of
the stockholder into approximately 2.74 shares of the corporation's common stock
or redeemable at a price of $52.10 per depositary share plus accrued dividends.
Dividends were cumulative from the date of issue and had been payable quarterly
at a rate of 7.00 percent per annum. During 1995, 1,141,891 shares of Cumulative
Convertible Preferred Stock, Series B, were converted into 12,531,003 shares of
common stock of the corporation and 1,784 of such preferred shares were
redeemed. During 1994, 75 shares of Cumulative Convertible Preferred Stock,
Series B, were converted into 823 shares of common stock of the corporation.
In conjunction with the acquisition of First United in 1994, $30.2 million
of preferred stock of First United was converted into common stock of the
corporation.
Common Stock During 1996, 1995 and 1994, holders of $5,000, $135,000 and
$25,000, respectively, of convertible subordinated debentures exchanged such
debt for 1,000 shares, 27,000 shares and 5,000 shares, respectively, of the
corporation's common stock. At December 31, 1996, there were six holders of
record of the convertible subordinated debentures.
Under the corporation's dividend reinvestment and common stock purchase plan,
participants may purchase shares of common stock at market prices with
reinvested dividends and optional cash investments up to $30,000 per quarter.
49
The corporation had reserved shares of authorized but unissued common stock at
December 31, as follows:
1996 1995
------------ ------------
Stock incentive plans........................................................... 45,401,976 22,284,062
Convertible subordinated debentures and warrants*............................... 17,981,674 13,518,588
Dividend reinvestment........................................................... 1,672,130 155,872
Invest Norwest Program.......................................................... 1,120,993 1,471,126
Savings Investment Plans and Executive Incentive Compensation Plan.............. 4,399,384 6,581,393
Directors' Formula Stock Award and Stock Deferral Plans......................... 326,791 347,101
Employees' deferral plans....................................................... 942,340 1,038,214
---------- ----------
Total........................................................................... 71,845,288 45,396,356
========== ==========
*Includes warrants issued by the corporation to subsidiaries to purchase shares
of the corporation's common stock as follows: 4,464,086 shares at $80.00 per
share in 1996, 5,500,088 shares at $75.00 per share in 1995 and 8,000,000
shares at $70.00 per share in 1994.
Each share of the corporation's common stock includes one preferred share
purchase right. These rights will become exercisable only if a person or group
acquires or announces an offer to acquire 25 percent or more of the
corporation's common stock. This triggering percentage may be reduced to no less
than 15 percent by the Board prior to the time the rights become exercisable.
When exercisable, each right will entitle the holder to buy one four-hundredth
of a share of a new series of junior participating preferred stock at a price of
$175 for each one one-hundredth of a preferred share. In addition, upon the
occurrence of certain events, holders of the rights will be entitled to purchase
either the corporation's common stock or shares in an "acquiring entity" at
one-half of the then current market value. The corporation will generally be
entitled to redeem the rights at one-quarter cent per right at any time before
they become exercisable. The rights will expire on November 23, 1998, unless
extended, previously redeemed or exercised. The corporation has reserved 1.25
million shares of preferred stock for issuance upon exercise of the rights.
11. Employee Benefit and Stock Incentive Plans
Savings Investment Plans Under the Savings Investment Plan (SIP), each eligible
employee may contribute on a before-tax basis up to 12 percent of his or her
certified earnings, and the contributions will be matched 100 percent by the
corporation up to six percent of the employee's certified earnings. However, SIP
participants who are also eligible to participate in the Employees' Deferred
Compensation Plan may only contribute up to six percent of certified earnings.
The corporation's matching contributions vest 25 percent per year of
eligibility. All of the corporation's matching contributions are invested in the
corporation's common stock. The employee's contributions are invested in a
diversified bond, growth equity, S&P 500 Index, stable return or Norwest common
stock fund, or a combination thereof, at the employee's direction. The
corporation also maintains a Supplemental Savings Investment Plan under which
amounts otherwise available for contribution to the SIP, in excess of the
contribution limitations imposed by the Internal Revenue Code, are credited to
an account for the participant. Contribution expense for the plans amounted to
$33.0 million, $37.5 million and $30.4 million in 1996, 1995 and 1994,
respectively.
The corporation's SIP contains Employee Stock Ownership Plan (ESOP) provisions
under which the SIP may borrow money to purchase the corporation's common or
preferred stock. Beginning in 1994, the corporation has loaned money to the SIP
which has been used to purchase shares of the corporation's ESOP Preferred
Stock. As ESOP Preferred Stock is released and converted into common shares,
compensation expense is recorded equal to the current market price of the common
shares. Dividends on the common shares allocated as a result of the release and
conversion of the ESOP Preferred Stock are recorded as a reduction of retained
earnings and the shares are considered outstanding for purposes of earnings per
share computations. Dividends on the unallocated ESOP Preferred Stock are not
recorded as a reduction of retained earnings, and the shares are not considered
to be common stock equivalents for purposes of earnings per share computations.
Each quarter, the corporation makes contributions to the SIP which, along with
dividends paid on the ESOP Preferred Stock, are used to make loan principal and
interest payments. With each principal and interest payment, a portion of the
ESOP Preferred Stock is released and, after conversion of the ESOP Preferred
Stock into common shares, allocated to participating employees.
In 1989, the corporation loaned money to the SIP which was used to purchase
shares of the corporation's common stock (the 1989 ESOP shares). The corporation
accounts for the 1989 ESOP shares in accordance with AICPA Statement of
50
Position 76-3. Accordingly, the corporation's ESOP loans to the SIP related to
the purchase of the 1989 ESOP shares are recorded as a reduction of
stockholders' equity, and compensation expense based on the cost of the shares
is recorded as shares are released and allocated to participants' accounts. The
1989 ESOP shares are considered outstanding for purposes of earnings per share
computations and dividends on the shares are recorded as a reduction to retained
earnings. The 1989 ESOP shares also include ESOP shares acquired in conjunction
with business combinations accounted for under the pooling of interests method
of accounting. The loans from the corporation to the SIP are repayable in
monthly installments through April 26, 1999, with interest at 8.45 percent.
Interest income on these loans was $1.2 million, $1.1 million and $1.2 million
in 1996, 1995 and 1994, respectively, and is included as a reduction in salaries
and benefits expense. Total interest expense on the Series A and B ESOP Notes
was $3.7 million per year in 1996, 1995 and 1994. Total dividends paid to the
SIP on ESOP shares were as follows:
In millions 1996 1995 1994
----- ----- -----
ESOP Preferred Stock:
Common dividends........................................... $ 2.9 1.5 0.3
Preferred dividends........................................ 3.2 3.5 1.7
1989 ESOP shares:
Common dividends........................................... 9.1 7.7 6.8
----- ----- -----
Total......................................................... $15.2 12.7 8.8
===== ===== =====
The ESOP shares as of December 31 were as follows:
In millions, except shares 1996 1995
---------- ---------
ESOP Preferred Stock:
Allocated shares (common)...................................................... 3,290,423 2,305,807
Unreleased shares (preferred).................................................. 58,779 37,556
1989 ESOP shares:
Allocated shares............................................................... 7,691,061 7,108,304
Unreleased shares.............................................................. 996,989 1,249,799
Fair value of unearned ESOP shares............................................... $58.8 37.6
Norwest Financial Services, Inc. has a thrift and profit sharing plan for its
employees in which eligible employees may make basic contributions of up to 6%
of their compensation and supplemental contributions up to an additional 4% of
their compensation. Norwest Financial Services, Inc. makes a matching
contribution of 25 percent of the basic employee contributions. Norwest
Financial Services, Inc. may also make a profit sharing contribution with the
amount determined by the percentage return on equity of Norwest Financial
Services, Inc. and its subsidiaries. Contribution expense for the plan was $15.3
million, $12.1 million and $12.3 million in 1996, 1995 and 1994, respectively.
51
Retirement Plans The corporation's noncontributory defined benefit retirement
plans cover substantially all full-time employees. Pension benefits provided are
based on the employee's highest compensation in three consecutive years during
the last ten years of employment. The corporation's funding policy is to
maximize the federal income tax benefits of the contributions while maintaining
adequate assets to provide for both benefits earned to date and those expected
to be earned in the future.
The combined plans' funded status at December 31 is presented below.
In millions 1996 1995
-------- --------
Plan assets at fair value*...................................................... $1,111.3 891.5
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $693.1 and $613.3 in 1996 and 1995, respectively....................... 755.8 666.8
Projected benefit obligation for service rendered to date.................... 927.6 868.1
-------- -----
Plan assets greater than projected benefit obligation........................... (183.7) (23.4)
Unrecognized net gain from past
experience different from that assumed and
effects of changes in assumptions............................................ 155.6 45.1
Unrecognized net asset being amortized over
approximately 17 years....................................................... 10.1 11.5
Unrecognized prior service cost................................................. 0.6 1.7
-------- -----
(Prepaid pension assets) accrued pension liabilities
included in other (assets) liabilities....................................... $ (17.4) 34.9
======== =====
*Consists primarily of listed stocks and bonds and obligations of the U.S.
government and its agencies.
The components of net pension expense for the years ended December 31 are
presented below.
In millions 1996 1995 1994
------ ------- ------
Service cost-benefits earned during the year................. $ 42.8 45.4 43.5
Interest cost on projected benefit obligation................ 57.2 55.4 48.9
Actual return on plan assets................................. (156.4) (156.5) (6.0)
Net amortization and deferral*............................... 79.5 105.6 (17.8)
------ ------ ------
Net pension expense.......................................... $ 23.1 49.9 68.6
====== ====== ======
*Consists primarily of the net effects of the difference between the expected
investment return and the actual investment return and the amortization of the
unrecognized net gains and losses over five years.
The corporation also has established grantor trusts to be used to satisfy in
part its non-qualified pension benefit liabilities. The market value of these
trusts was $70.5 million and $52.0 million as of December 31, 1996 and 1995,
respectively, and is not included in plan assets as presented above.
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was seven percent for both 1996 and
1995. The rate of increase in future compensation levels used in actuarial
computations was five percent in 1996 and six percent in 1995. The expected
long-term rate of return on assets was eight percent in 1996 and six percent in
1995.
52
Other Postretirement Benefits The corporation sponsors medical plans for retired
employees. Substantially all employees become eligible for these benefits if
they retire under the corporation's retirement plans. The corporation's funding
policy is to maximize the federal income tax benefits of the contributions while
maintaining adequate assets to provide for both benefits earned to date and
those expected to be earned in the future. The combined plans' funded status at
December 31 is presented below.
In millions 1996 1995
------- -------
Plan assets at fair value*..................................................... $ 124.4 91.7
Accumulated postretirement benefit obligation:
Retirees................................................................... 77.2 86.5
Fully eligible active plan participants.................................... 0.8 0.5
Other active plan participants............................................. 124.8 112.3
------- -------
202.8 199.3
Plan assets less than accumulated
postretirement benefit obligation......................................... 78.4 107.6
Unrecognized net gain (loss)................................................... 15.9 (5.0)
Unrecognized prior service cost................................................ (1.9) (0.8)
------- -------
Accrued postretirement benefit liabilities included in
other liabilities......................................................... $ 92.4 101.8
======= =======
*Consists primarily of life insurance policies, listed stocks and bonds and
obligations of the U.S. government and its agencies.
The components of net periodic postretirement benefit expense for the years
ended December 31 are presented below.
In millions 1996 1995 1994
------- ------ ------
Service cost-benefits earned during the year.................. $ 11.6 10.7 9.0
Interest cost on accumulated postretirement
benefit obligation.......................................... 13.0 12.7 11.4
Actual return on plan assets.................................. (13.7) (15.2) 2.7
Net amortization and deferral*................................ 4.9 13.6 (1.7)
------ ------ ------
Net periodic postretirement benefit expense................... $ 15.8 21.8 21.4
====== ====== ======
*Consists primarily of the net effects of the difference between the expected
investment return and the actual investment return and amortization of gains
and losses over five years.
For measurement purposes, a 10.0 percent annual increase in the cost of covered
health care benefits is assumed in the first year. This rate is assumed to
decrease to eight percent after five years and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, a one percent increase in the health care trend
rate would increase the accumulated postretirement benefit obligation by
approximately $29.7 million at December 31, 1996, and the service and interest
components of the net periodic cost by $4.4 million for the year. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was seven percent in 1996 and 1995. The expected long-term rate of
return on plan assets after taxes was 4.8 percent for 1996 and 3.6 percent for
1995.
Stock Incentive Plans The corporation grants stock incentives to key employees
under the Long-Term Incentive Compensation Plan (LTICP) approved by the
stockholders in 1985. In 1988, 1991, 1993 and 1996, the stockholders approved
amendments which increased the number of shares that may be distributed under
the LTICP. Shares which are not used because the terms of an award are not met,
and shares which are used by a participant to pay all or part of the purchase
price of an option, may again be used for awards under the LTICP.
At the discretion of a committee comprised of non-management directors,
participants may be granted stock options, stock appreciation rights, restricted
stock, performance awards, and stock awards without restrictions. At December
31, 1996, 209,615 shares of restricted stock and options to acquire 13,635,898
shares of common stock were outstanding under the LTICP.
53
Stock options may be granted as incentive stock options or non-qualified
options, but may not be granted at prices less than market value at the dates of
grant. Options may be exercised during a period fixed by the committee of not
more than ten years. At the discretion of the committee, a stock option grant
may include the right to acquire an Accelerated Ownership Non-Qualified Stock
Option ("AO"). If an option grant contains the AO feature and if a participant
pays all or part of the purchase price of the option with shares of the
corporation's stock held by the participant for at least six months, then upon
exercise of the option the participant is granted an AO to purchase, at the fair
market value as of the date of the AO grant, the number of shares of common
stock of the corporation equal to the sum of the number of shares used in
payment of the purchase price and a number of shares with respect to taxes.
On July 23, 1996, the corporation's board of directors approved the Norwest
Corporation Best Practices PartnerShares Plan, a broad-based employee stock
option plan. In conjunction with the plan's approval, options for 4,875,950
shares, with an exercise price of $33.125 per share, were granted to full and
part-time employees who are not participants in the LTICP. Options are generally
exercisable upon the earlier of July 24, 2001, or the first date the closing
market value of the corporation's common stock equals or exceeds $60 per share.
The corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock incentive plans. Accordingly, no compensation cost has
been recognized for the fixed option plans. Proceeds from stock options
exercised are credited to common stock and surplus. There are no charges or
credits to expense with respect to the granting or exercise of options since the
options were issued at fair market value on their respective dates of grant. Had
compensation cost for the corporation's stock-based compensation plans been
determined consistent with FAS 123, the corporation's net income and earnings
per share would have been reduced to the pro forma amounts indicated below.
In millions, except per common share amounts
1996 1995
--------- ---------
Net income
As reported................................................................. $1,153.9 956.0
Pro forma................................................................... 1,143.8 953.2
Earnings per common share:
Primary
As reported............................................................. 3.07 2.76
Pro forma............................................................... 3.04 2.75
Fully diluted
As reported............................................................. 3.07 2.73
Pro forma............................................................... 3.04 2.72
The fair value for each option grant for the LTICP and the Best Practices
PartnerShares Plan utilized in the foregoing pro forma amounts is estimated on
the date of grant using an option pricing model. The model incorporates the
following weighted-average assumptions used for grants in 1996 and 1995: 15.45
percent dividend growth; 20 percent expected volatility; risk-free interest
rates ranging from 5.11 percent to 7.84 percent; and expected lives ranging from
1 to 5 years.
Stock Option Transactions In connection with the acquisition of Benson Financial
Corporation (Benson) in 1996, the corporation assumed Benson's obligations under
a stock option plan. As a result of the merger, all options under the plan were
converted into options to acquire 55,382 shares of the corporation's common
stock. At December 31, 1996, 26,900 of such options remain outstanding.
In connection with the 1994 acquisition of First National Bank of Kerrville
(Kerrville), the corporation assumed Kerrville's obligations under a stock
option plan. As a result of the acquisition, all options under the plan were
converted into options to acquire 181,300 shares of the corporation's common
stock, of which 69,200 options remain outstanding as of December 31, 1996.
In connection with the 1993 acquisition of Financial Concepts Bancorp, Inc.
(Financial Concepts), the corporation assumed Financial Concepts' obligations
under a stock option plan. As a result of the merger, all options under the plan
were converted into options to acquire 99,712 shares of the corporation's common
stock. At December 31, 1996, 39,264 of such options remain outstanding.
In connection with the 1993 acquisition of Lincoln Financial Corporation
(Lincoln), the corporation assumed Lincoln's obligations under two stock option
plans and a Director's Stock Compensation Plan. Under terms of the option plans,
stock
54
options were granted as either incentive stock options or non-qualified options,
at prices not less than market value at the dates of grant, and became
exercisable not less than one year from the date of grant. As of the effective
time of the acquisition, Lincoln's stock option plans were terminated and all
outstanding options were vested and converted into options to purchase shares of
the corporation's common stock. In addition, all restrictions on outstanding
restricted stock were terminated. At December 31, 1996, options to acquire
15,204 shares of common stock were outstanding under one of Lincoln's stock
option plans.
In connection with the United Banks of Colorado, Inc. (United) merger in 1992,
the corporation assumed United's obligations under two stock option plans and
the Outside Directors' Supplemental Compensation Plan. Exercise prices were
based upon the fair market value of United's common stock on the date of grant.
As a result of the merger, all options under these plans were vested and
converted into options to acquire the corporation's common stock. In addition,
immediately prior to the merger, all outstanding awards under the United
Restricted Stock Rights Award Plan were accelerated and converted into United's
common stock and this plan was terminated. At December 31, 1996, options to
acquire 15,250 shares were outstanding under one of United's stock option plans.
A summary of stock option activity under the LTICP and acquired plans is
presented below.
Options Weighted
Available Options Average
for Grant Outstanding Exercise Price
----------- ----------- --------------
December 31, 1993........................................... 16,230,153 9,361,601 $ 15.8135
Granted*.................................................. (8,301,975) 8,301,975 25.4183
Shares Swapped............................................ 802,038 --
Exercised................................................. -- (2,025,118) 13.4356
Cancelled................................................. 103,650 (103,650) 22.3140
Restricted Stock Awards................................... (68,500) --
Acquisition of Kerrville.................................. -- 181,300 5.7324
Termination of First United Plans......................... (842,827) --
---------- ---------- --------
December 31, 1994 (8,484,333 options exercisable)........... 7,922,539 15,716,108 21.0760
Granted* (Weighted average fair
value $3.9425 per option)................................ (1,860,221) 1,860,221 29.5770
Shares Swapped............................................ 615,809 --
Exercised................................................. -- (1,926,576) 16.0832
Cancelled................................................. 329,518 (329,636) 25.3011
Restricted Stock Awards................................... (43,700) --
---------- ---------- --------
December 31, 1995 (9,613,594 options exercisable)........... 6,963,945 15,320,117 22.6449
Shareholder amendment 17,500,000 --
Granted* (Weighted average fair
value $5.8286 per option)............................... (2,121,225) 2,121,225 36.0802
Shares Swapped............................................ 2,020,961 --
Exercised................................................. -- (3,433,829) 21.5336
Cancelled................................................. 261,179 (261,179) 27.3757
Restricted Stock Awards................................... (24,000) --
Acquisition of Benson..................................... -- 55,382 9.4820
---------- ---------- --------
December 31, 1996 (10,408,956 options exercisable).......... 24,600,860 13,801,716 $24.9636
========== ========== ========
*Includes 1,340,400, 589,138 and 1,040,750 AO grants at December 31, 1996, 1995
and 1994, respectively.
55
The following table summarizes information about stock options outstanding at
December 31, 1996 with respect to the LTICP and acquired plans.
Options Outstanding Options Exercisable
-------------------------------------------------------------- ---------------------------------------
Weighted Average
Number Remaining
Range of Outstanding at Contractual Life Weighted Average Number Exercisable Weighted Average
Exercise Prices December 31, 1996 in Years Exercise Price at December 31, 1996 Exercise Price
--------------------- ----------------- --------------------- ------------------- -------------------- -----------------
$4.4816 -4.99 47,200 5.2 $ 4.4816 47,200 $ 4.4816
5.00 -9.99 412,386 2.6 7.8970 412,386 7.8970
10.00 -14.99 1,800,860 3.1 13.3723 1,800,860 13.3723
15.00 -19.99 840,008 2.7 18.4182 840,008 18.4182
20.00 -24.99 827,263 3.9 22.2984 822,596 22.2990
25.00 -29.99 7,074,073 6.9 25.9741 4,673,915 26.0838
30.00 -34.99 1,627,713 8.4 32.9050 784,078 32.8277
35.00 -39.99 923,276 7.5 36.7117 848,476 36.7304
40.00 -44.99 141,058 6.3 42.3197 141,058 42.3197
45.00 -46.4375 107,879 9.0 46.2236 38,379 45.8364
---------- ----------
13,801,716 10,408,956
========== ==========
The weighted average fair value of options granted under the corporation's Best
Practices PartnerShares Plan during 1996 was $5.673 per option. With respect to
options granted under the Best Practices PartnerShares Plan during 1996,
4,412,900 options were outstanding at December 31, 1996, of which 4,300 are
currently exercisable. During 1996, 300 options were exercised and 462,750
options were cancelled.
12. Income Taxes
Components of income tax expense were:
In millions 1996 1995 1994
------ ------ ------
Current
Federal..................................................... $374.2 468.2 49.7
State....................................................... 10.5 41.7 6.2
Foreign..................................................... 37.1 27.3 11.6
------ ------ ------
Total current............................................ 421.8 537.2 67.5
------ ------ ------
Deferred
Federal..................................................... 173.5 (56.5) 278.5
State....................................................... 36.7 (11.4) 31.1
Foreign..................................................... (4.4) (2.5) 3.1
------ ------ ------
Total deferred........................................... 205.8 (70.4) 312.7
------ ------ ------
Total.................................................... $627.6 466.8 380.2
====== ====== ======
Income tax benefit applicable to net losses on investment securities for the
years ended December 31, 1996, 1995 and 1994 was $16.5 million, $14.6 million
and $29.3 million, respectively.
Income before income taxes from operations outside the United States was $85.5
million, $56.6 million, and $33.4 million for the years ended December 31, 1996,
1995 and 1994, respectively.
56
The net deferred tax liability (asset) included the following major temporary
differences at December 31:
In millions 1996 1995
--------- --------
Deferred tax liabilities
Depreciation............................................................. $ 38.9 35.5
Lease financing.......................................................... 252.0 181.2
Mark to market........................................................... 160.1 79.5
Mortgage servicing....................................................... 483.2 234.6
FAS 115 adjustment....................................................... 167.2 187.5
Other.................................................................... 121.3 57.4
--------- --------
Total deferred tax liabilities......................................... 1,222.7 775.7
--------- --------
Deferred tax assets
Provision for credit losses.............................................. (271.3) (259.0)
Expenses deducted when paid.............................................. (233.8) (178.2)
Postretirement benefits other than pensions.............................. (50.3) (34.3)
Other.................................................................... (213.1) (117.3)
--------- --------
Total deferred tax assets.............................................. (768.5) (588.8)
Valuation allowance............................................................ -- --
-------- --------
Deferred tax assets, net................................................. (768.5) (588.8)
--------- --------
Total net deferred tax liability............................................... $ 454.2 186.9
========= ========
The corporation has determined that it is not required to establish a valuation
reserve for any of the deferred tax assets since it is more likely than not that
these assets will be principally realized through carryback to taxable income in
prior years, and future reversals of existing taxable temporary differences,
and, to a lesser extent, future taxable income and tax planning strategies. The
corporation's conclusion that it is "more likely than not" that the deferred tax
assets will be realized is based on federal taxable income of over $2.0 billion
in the carryback period, substantial state taxable income in the carryback
period, as well as a history of growth in earnings and the prospects for
continued growth.
The deferred tax liability related to FAS 115 had no impact on 1996 or 1995
income tax expense as the effect of unrealized gains and losses, net of taxes,
was recorded in stockholders' equity.
A reconciliation of the federal income tax rate to effective income tax rates
follows:
1996 1995 1994
------ ------ -------
Federal income tax rate....................................... 35.0% 35.0 35.0
Adjusted for
State income taxes........................................ 1.7 1.4 2.0
Tax-exempt income......................................... (1.5) (1.9) (2.4)
Other, net................................................ -- (1.7) (2.4)
------ ------ -------
Effective income tax rate..................................... 35.2% 32.8 32.2
====== ====== =======
13. Commitments and Contingent Liabilities
At December 31, 1996, the corporation and its subsidiaries were obligated under
noncancelable leases for premises and equipment with terms, including renewal
options, ranging from one to approximately 100 years, which provide for
increased rentals based upon increases in real estate taxes, operating costs or
selected price indices.
Rental expense (including taxes, insurance and maintenance when included in
rent, and contingent rentals), net of sublease rentals, amounted to $227.6
million, $187.4 million and $174.1 million in 1996, 1995 and 1994, respectively.
57
Future minimum rental payments under capital leases and noncancelable operating
leases, net of sublease rentals, with terms of one year or more, at December 31,
1996 were:
Capital Operating
In millions Leases Leases
------- ---------
1997.............................................. $ 2.0 $ 164.1
1998.............................................. 2.0 116.3
1999.............................................. 2.0 101.5
2000.............................................. 2.0 88.8
2001.............................................. 2.0 85.5
Thereafter........................................ 29.3 610.1
------- ----------
Total minimum rental payments..................... 39.3 $ 1,166.3
==========
Less interest..................................... (22.8)
-------
Present value of net minimum rental payments...... $ 16.5
=======
To meet the financing needs of its customers and as part of its overall risk
management strategy, the corporation is a party to financial instruments with
off-balance sheet risk. These financial instruments include commitments to
extend credit, recourse obligations, options, standby letters of credit,
interest rate futures, caps and floors and interest rate swaps and forward
contracts. These instruments involve elements of credit and interest rate risk
in addition to amounts recognized in the financial statements.
The corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, recourse obligations, and financial guarantees
written is represented by the contractual amount of those instruments. The
corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The corporation also
uses the same credit and collateral policies in making loans which are
subsequently sold with recourse obligations as it does for loans not sold. Refer
to Note 15, Derivative Activities, for contractual or notional amounts of
derivatives held by the corporation and a discussion of risks associated with
such instruments.
A summary of the contractual amounts of these financial instruments at December
31 is as follows:
In millions 1996 1995
----------- ---------
Commitments to extend credit...................... $ 10,191.7 8,114.9
Standby letters of credit*........................ 1,117.3 1,051.9
Other letters of credit........................... 284.0 349.7
* Total standby letters of credit are net of participations sold to other
institutions of $386.4 million in 1996 and $336.6 million in 1995.
Commitments to extend credit generally have fixed expiration dates or other
termination clauses and usually require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
amount of collateral obtained is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include cash, marketable
securities, accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by subsidiaries of the corporation to guarantee the
performance of a customer to a third party. Outstanding standby letters of
credit at December 31, 1996 supported $625.0 million of industrial revenue
bonds, $346.9 million of supplier payment guarantees, $168.8 million of
insurance premium financing, $170.2 million of performance bonds and $192.8
million of other obligations of unaffiliated parties with maturities up to 21
years, six years, six years, nine years and five years, respectively. Risks
associated with such standby letters of credit are considered in the evaluation
of overall credit risk in determining the allowance for credit losses. The
collateral requirements are essentially the same as those involved in extending
loan facilities
58
to customers. As part of its overall risk management strategy, the corporation
does not believe it has any significant concentrations of credit risk.
Other commitments include sales of mortgage loans prior to 1985 in non-standard,
negotiated transactions, primarily with the Federal Home Loan Mortgage
Corporation, which provide for recourse to Norwest Mortgage, Inc. The
outstanding loan balances which relate to these sales transactions amounted to
$79.1 million and $194.7 million at December 31, 1996 and 1995, respectively.
The corporation has also provided a financial guarantee related to the sale of
certain mortgage participation certificates in the event LIBOR exceeds specified
levels. The liability under the foregoing arrangements is not material.
The corporation and certain subsidiaries are defendants in various matters of
litigation generally incidental to their business. Although it is difficult to
predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability will not materially affect
the consolidated financial position or results of operations of the corporation
and its subsidiaries.
14. Trading Revenues
The corporation conducts trading of debt and equity securities, money market
instruments, derivative products and foreign exchange contracts to satisfy the
investment and risk management needs of its customers and those of the
corporation. Trading activities are conducted within risk limits established and
monitored by the Asset and Liability Management Committee as further discussed
in the Interest Rate Sensitivity and Liquidity Management section of the
Financial Review. The table below provides a summary of the corporation's
trading revenues in the principal markets in which the corporation participates.
In millions 1996 1995 1994
---- ---- ----
Interest income:
Securities................................................ $ 24.7 11.2 13.9
Swaps and other interest rate contracts................... -- 3.6 10.7
------ ----- ------
Total interest income................................... 24.7 14.8 24.6
------ ----- ------
Non-interest income:
Gains on securities sold.................................. 26.7 15.6 8.4
Foreign exchange trading.................................. 9.2 7.8 6.5
Swaps and other interest rate contracts................... (0.9) 6.0 (39.9)
Options................................................... (3.0) 11.6 5.9
Futures................................................... 3.3 (1.1) 1.0
------ ----- ------
Total non-interest income............................... 35.3 39.9 (18.1)
------ ----- ------
Total trading revenues........................................ $ 60.0 54.7 6.5
====== ===== ======
15. Derivative Activities
Derivatives are financial instruments that are used by banks, corporations,
governments, and individuals to manage the financial risks associated with their
business activities. For example, a futures contract can be used to guard
against price fluctuations and a swap can be used to change fixed interest rate
payments into floating interest rate payments. In general terms, derivative
instruments are contracts or agreements whose value can be linked to interest
rates, exchange rates, security prices, or financial indices. A derivative
financial instrument is a futures, forward, swap, or option contract or other
financial instrument with similar characteristics. The corporation uses
derivatives in both its trading and its asset and liability management
activities. The corporation's trading activities include acting as a dealer to
satisfy the investment and risk management needs of its customers and, in
addition, the corporation assumes trading positions based on market expectations
and to benefit from price differentials between financial instruments and
markets. As an end-user, the corporation uses various types of derivative
products (principally interest rate swaps, interest rate caps and floors,
futures contracts and options) as part of its overall interest rate risk
management strategy.
59
As with on-balance sheet financial instruments such as loans and investment
securities, derivatives are subject to credit and market risk. Accordingly, the
corporation evaluates the risks associated with derivatives in much the same way
as the risks associated with on-balance sheet financial instruments. However,
unlike on-balance sheet financial instruments, where the risk of credit loss is
generally represented by the notional or principal value, the derivatives' risk
of credit loss is generally a small fraction of the notional value of the
instrument and is represented by the fair value of the derivative instrument.
For example, the notional amount for interest rate swaps does not represent the
amount at risk because the notional amount will not be exchanged. The notional
amount does, however, provide the basis for determining the contractual cash
flows, which are discounted to determine fair values of the related derivatives.
For foreign exchange forward contracts, the fair value is based on the gap
between the current forward market rate of the underlying currency and the
contractual rate.
The corporation attempts to limit its credit risk by dealing with creditworthy
counterparties, obtaining collateral where appropriate, and utilizing master
netting agreements in accordance with Financial Accounting Standards Board
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts" as
amended by Financial Accounting Standards Board Interpretation No. 41,
"Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements." The market risk of derivatives arises from the potential for
changes in value due to fluctuations in interest and foreign exchange rates and
in prices of debt and equity securities.
Derivative Financial Instruments Held or Issued for Trading Purposes The
following table provides the notional and fair value of the corporation's
derivatives included in its trading portfolio at December 31, 1996 and 1995, and
the average fair value of derivatives held or issued for trading purposes during
the years ended December 31, 1996 and 1995:
1996 1995
------------------------------------ -------------------------------------
Average Average
Notional Fair Daily Fair Notional Fair Daily Fair
In millions Value Value Value Value Value Value
----------- -------- ----------- --------- --------- -----------
Swaps:
In a favorable position...................... $ 226.0 2.8 4.0 602.0 4.6 8.0
In an unfavorable position................... 383.0 (1.5) (4.0) 504.0 (3.3) (6.0)
Caps and Floors:
In a favorable position...................... 450.0 2.1 1.0 231.0 1.4 2.0
In an unfavorable position................... 505.0 (2.0) (1.0) 261.0 (1.4) (1.0)
Options:
Purchased.................................... -- -- -- -- -- --
Written...................................... -- -- (3.0) -- -- (2.0)
Futures contracts:
In a favorable position...................... 434.0 -- -- 29.0 -- --
In an unfavorable position................... 449.0 -- -- 35.0 -- --
Foreign exchange contracts:
In a favorable position...................... 4.0 0.4 -- 475.0 5.9 10.0
In an unfavorable position................... 4.0 (0.4) -- 449.0 (5.2) (10.0)
Foreign exchange options:
Purchased.................................... 246.0 10.3 6.0 15.0 0.2 --
Written...................................... 290.0 (10.0) (5.0) 13.0 (0.3) --
Derivative Financial Instruments Held or Issued for Purposes Other Than Trading
The corporation and its subsidiaries, as end-users, utilize various types of
derivative products (principally interest rate swaps and interest rate caps and
floors) as part of an overall interest rate risk management strategy.
The use of interest rate contracts enables the corporation to synthetically
alter the repricing characteristics of designated assets and interest-bearing
liabilities. In the following information for cash flows and maturities,
variable rates are assumed to remain constant at December 31, 1996 levels. To
the extent that rates change, both the average notional and variable interest
rate information may change. Interest rate swaps generally involve the exchange
of fixed and floating rate interest payments based on an underlying notional
amount. Generic swaps' notional amounts do not change for the life of the
60
contract. The current outstanding amortizing swaps' average notional amounts
change based on a remaining principal amount of a pool of mortgage-backed
securities. Generally, as rates fall, the notional amounts decline more rapidly
and as rates increase notional amounts decline more slowly. Basis swaps are
contracts where the corporation receives an amount and pays an amount based on
different floating indices. Currently, interest rate floors, futures contracts
and options on futures contracts are principally being used by the corporation
in hedging its portfolio of mortgage servicing rights. The floors provide for
the receipt of payments when interest rates are below predetermined interest
rate levels. The unrealized gains (losses) on interest rate floors and futures
contracts are included, as appropriate, in determining the fair value of the
capitalized mortgage servicing rights. Option contracts allow the holder of the
option to purchase or sell a financial instrument at a specified price and
within a specified period of time from or to the seller or "writer" of the
option. The writer of the option receives a premium at the outset and then bears
the risk of an unfavorable change in the price of the underlying financial
instrument. The table below presents the maturity and weighted average rates for
end-user derivatives by type at December 31, 1996.
For the year ended December 31, 1996, end-user derivative activities increased
interest income by $9.8 million and reduced interest expense by $47.1 million,
for a total benefit to net interest income of $56.9 million. For 1995 and 1994,
end-user derivative activities decreased interest income by $2.7 million and
increased interest income by $7.7 million, respectively, and reduced interest
expense by $9.8 million and $4.6 million, respectively, for a total benefit to
net interest income of $7.1 million and $12.3 million, respectively.
Maturity
-------------------------------------------------------------------------------------
Dollars in millions 1997 1998 1999 2000 2001 Thereafter Total
-------- -------- ------- -------- --------- ---------- -----
Swaps:
Generic receive fixed--
Notional value........................ $ 650 650 766 225 500 1,811 4,602
Weighted average receive rate......... 6.77% 6.34 7.28 6.33 6.35 6.57 6.65
Weighted average pay rate............. 5.54% 5.56 5.60 5.57 5.51 5.52 5.53
Amortizing receive fixed--
Notional value........................ $ -- 63 20 -- -- -- 83
Weighted average receive rate......... --% 2.89 2.89 -- -- -- 2.89
Weighted average pay rate............. --% 5.89 5.92 -- -- -- 5.90
Generic pay fixed--
Notional value........................ $ 4 -- 100 50 -- 200 354
Weighted average receive rate......... 5.53% -- 5.61 5.28 -- 5.55 5.53
Weighted average pay rate............. 6.37% -- 6.04 5.85 -- 5.84 5.90
Basis--
Notional value........................ $ -- 29 -- -- -- -- 29
Weighted average receive rate......... --% 4.32 -- -- -- -- 4.32
Weighted average pay rate............. --% 3.66 -- -- -- -- 3.66
Interest rate caps and floors:*
Notional value........................ $ -- 577 2,400 5,750 6,250 1,000 15,977
Futures contracts:*
Notional value........................ $ 3,617 -- -- -- -- -- 3,617
Options on futures contracts:*
Notional value........................ $ 5,559 -- -- -- -- -- 5,559
Security options:*
Notional value........................ $ 825 -- -- -- -- -- 825
-------- ------- ------ ------ ------- ------ ------
Total notional value................ $ 10,655 1,319 3,286 6,025 6,750 3,011 31,046
======== ======= ====== ====== ======= ====== =======
Total weighted average rates on swaps:
Receive rate........................ 6.76% 5.97 6.99 6.14 6.35 6.47 6.49
======== ======= ====== ====== ======= ====== =======
Pay rate............................ 5.55% 5.52 5.66 5.62 5.51 5.55 5.56
======== ======= ====== ====== ======= ====== =======
*Average rates are not meaningful for interest rate caps and floors, futures,
contracts or options.
Note: Weighted average variable rates are the actual rates as of December 31,
1996.
61
Activity in the notional amounts of end-user derivatives for each of the three
years ended December 31, 1996, 1995, and 1994, is summarized as follows:
Swaps
--------------------------------------------
Interest Options
Generic Amortizing Generic Rate on
Receive Receive Pay Total Caps/ Futures Security Total
in millions Fixed Fixed Fixed Basis Swaps Floors Futures Contracts Options Derivatives
------- ---------- ------- ----- ----- -------- ------- --------- -------- -----------
Balance, December 31, 1993..... $ 375 500 300 -- 1,175 649 2,000 -- -- 3,824
Additions................... 900 1,900 30 229 3,059 400 -- -- -- 3,459
Amortizations and maturities -- 298 100 -- 398 298 -- -- -- 696
Terminations................ 250 2,102 100 -- 2,452 -- 2,000 -- -- 4,452
------ ------ ----- --- ------ -------- -------- ------- ----- --------
Balance, December 31, 1994..... 1,025 -- 130 229 1,384 751 -- -- -- 2,135
Additions................... 1,891 1,575 200 -- 3,666 7,100 -- -- 5,951 16,717
Amortizations and maturities -- -- -- -- -- 8 -- -- 3,670 3,678
Terminations................ 100 -- -- -- 100 -- -- -- 2,281 2,381
------ ------ ----- --- ------ -------- -------- ------- ----- --------
Balance, December 31, 1995..... 2,816 1,575 330 229 4,950 7,843 -- -- -- 12,793
Additions................... 2,911 522 154 -- 3,587 11,000 18,196 26,753 6,675 66,211
Amortizations and maturities 675 168 30 200 1,073 16 2,651 13,576 5,650 22,966
Terminations................ 450 1,846 100 -- 2,396 2,850 11,928 7,618 200 24,992
------ ------ ----- --- ------ ------- ------ ------- ----- --------
Balance, December 31, 1996..... $4,602 83 354 29 5,068 15,977 3,617 5,559 825 31,046
====== ====== ===== === ====== ======= ======== ======= ===== ========
62
The following table provides the gross gains and gross losses not yet recognized
in the consolidated financial statements for open end-user derivatives
applicable to certain hedged assets and liabilities as of December 31, 1996 and
1995:
Balance Sheet Category
-----------------------------------------------------------------------------
Loans Mortgage Interest- Short- Long-
Investment and Servicing bearing term term
In millions Securities Leases Rights Deposits Borrowings Debt Total
---------- ------ --------- -------- ---------- ------ -----
1996:
Swaps
Pay variable unrealized gains...... $ -- -- -- -- -- 59.7 59.7
Pay variable unrealized losses..... -- (0.1) (2.9) -- -- (17.8) (20.8)
-------- ------- ------- ------- ------- ------- -------
Pay variable net.............. -- (0.1) (2.9) -- -- 41.9 38.9
-------- ------- ------- ------- ------- ------- -------
Pay fixed unrealized gains......... -- 1.4 -- 3.9 -- -- 5.3
Pay fixed unrealized losses........ -- (0.2) -- -- -- -- (0.2)
-------- ------- ------- ------- ------- ------- -------
Pay fixed net................. -- 1.2 -- 3.9 -- -- 5.1
-------- ------- ------- ------- ------- ------- -------
Basis unrealized gains............. 0.3 -- -- -- -- -- 0.3
-------- ------- ------- ------- ------- ------- -------
Total unrealized gains............. 0.3 1.4 -- 3.9 -- 59.7 65.3
Total unrealized losses............ -- (0.3) (2.9) -- -- (17.8) (21.0)
-------- ------- ------- ------- ------- ------- -------
Total net..................... $ 0.3 1.1 (2.9) 3.9 -- 41.9 44.3
======== ======= ======= ======= ======= ======= =======
Interest rate caps/floors
Unrealized gains................... $ -- -- 22.6 -- -- -- 22.6
Unrealized losses.................. -- -- (34.5) (0.2) -- (0.2) (34.9)
-------- ------- ------- ------- ------- ------- -------
Total net........................ $ -- -- (11.9) (0.2) -- (0.2) (12.3)
======== ======= ======= ======= ======= ======= =======
Futures contracts
Unrealized gains................... $ -- 1.4 0.5 -- -- -- 1.9
======== ======= ======= ======= ======= ======= =======
Options on futures contracts
Unrealized gains................... $ -- 4.3 1.4 -- -- -- 5.7
Unrealized losses.................. -- (5.0) (9.3) -- -- -- (14.3)
-------- ------- ------- ------- ------- ------- -------
Total............................ $ -- (0.7) (7.9) -- -- -- (8.6)
======== ======= ======= ======= ======= ======= ========
Security options
Unrealized gains................... $ -- 0.6 -- -- -- -- 0.6
Unrealized losses.................. -- (2.5) -- -- -- -- (2.5)
-------- ------- ------- ------- ------- ------- -------
Total net........................ $ -- (1.9) -- -- -- -- (1.9)
======== ======= ======= ======= ======= ======= =======
Grand total unrealized gains........... $ 0.3 7.7 24.5 3.9 -- 59.7 96.1
Grand total unrealized losses.......... -- (7.8) (46.7) (0.2) -- (18.0) (72.7)
-------- ------- ------- ------- ------- ------- -------
Grand total net........................ $ 0.3 (0.1) (22.2) 3.7 -- 41.7 23.4
======== ======= ======= ======= ======= ======= =======
63
Balance Sheet Category
--------------------------------------------------------------------------
Loans Mortgage Interest- Short- Long-
Investment and Servicing bearing term term
In millions Securities Leases Rights Deposits Borrowings Debt Total
---------- ------- --------- -------- ---------- ------ -----
1995:
Swaps
Pay variable unrealized gains........... $ -- -- 1.5 9.6 -- 107.9 119.0
Pay variable unrealized losses.......... -- -- -- (0.6) -- (0.4) (1.0)
-------- ------- ------- ------- ------- ------- -------
Pay variable net................... -- -- 1.5 9.0 -- 107.5 118.0
-------- ------- ------- ------- ------- ------- -------
Pay fixed unrealized gains.............. -- -- -- 1.3 -- -- 1.3
Pay fixed unrealized losses............. -- (0.9) -- (0.9) -- -- (1.8)
-------- ------- ------- ------- ------- ------- -------
Pay fixed net...................... -- (0.9) -- 0.4 -- -- (0.5)
-------- ------- ------- ------- ------- ------- -------
Basis unrealized gains.................. 0.5 -- -- -- -- -- 0.5
-------- ------- ------- ------- ------- ------- -------
Total unrealized gains.................. 0.5 -- 1.5 10.9 -- 107.9 120.8
Total unrealized losses................. -- (0.9) -- (1.5) -- (0.4) (2.8)
-------- ------- ------- ------- ------- ------- -------
Total net.......................... $ 0.5 (0.9) 1.5 9.4 -- 107.5 118.0
======== ======= ======= ======= ======= ======= =======
Interest rate caps/floors
Unrealized gains........................ $ -- -- 86.8 -- -- -- 86.8
Unrealized losses....................... -- -- -- (0.3) (0.1) (0.3) (0.7)
-------- ------- ------- ------- ------- ------- -------
Total net......................... $ -- -- 86.8 (0.3) (0.1) (0.3) 86.1
======== ======= ======= ======= ======= ======= =======
Grand total unrealized gains................ $ 0.5 -- 88.3 10.9 -- 107.9 207.6
Grand total unrealized losses............... -- (0.9) -- (1.8) (0.1) (0.7) (3.5)
-------- ------- ------- ------- ------- ------- -------
Grand total net............................. $ 0.5 (0.9) 88.3 9.1 (0.1) 107.2 204.1
======== ======= ======= ======= ======= ======= =======
As a result of interest rate fluctuations, off-balance sheet derivatives have
resulting unrealized appreciation or depreciation in market values as compared
with their cost. As these derivatives hedge certain assets and liabilities of
the corporation, as noted in the table above, there has been offsetting
unrealized appreciation and depreciation in the assets and liabilities hedged.
Deferred gains and losses on terminated end-user derivatives were not material
at December 31, 1996 and 1995.
The corporation has entered into mandatory and standby forward contracts to
reduce interest risk on certain mortgage loans held for sale and other
commitments. The contracts provide for the delivery of securities at a specified
future date, at a specified future price or yield. At December 31, 1996 and
1995, the corporation had forward contracts totaling $19.8 billion and $11.2
billion, respectively. The contracts mature within 180 days. Gains and losses on
forward contracts are included in the determination of market value of mortgages
held for sale. The net unrealized gain (loss) on these contracts at December 31,
1996 and 1995, was $20.1 million and $(98.1) million, respectively.
16. Business Segments
The corporation's operations include three primary business segments: banking,
mortgage banking and consumer finance. The corporation, through its subsidiary
banks, offers diversified banking services including retail, commercial and
corporate banking, equipment leasing, and trust services; and through their
affiliates offers insurance, securities brokerage, investment banking and
venture capital investment. Mortgage banking activities include the origination
and purchase of residential mortgage loans for sale to various investors as well
as providing servicing of mortgage loans for others. Norwest Financial
(including Norwest Financial Services, Inc. and Island Finance) provides
consumer finance services, including direct installment loans to individuals,
purchase of sales finance contracts, private label and lease accounts receivable
financing, and other related products and services.
64
Selected financial information by business segment for each of the three years
ended December 31 is included in the following summary:
Organizational Total
In millions Revenues* Earnings* Assets
--------- --------- ------
1996:
Banking................................................... $ 5,672.7 764.6 59,282.8
Mortgage Banking.......................................... 1,423.2 125.0 11,939.8
Norwest Financial......................................... 1,787.0 264.3 8,952.8
--------- -------- --------
Total................................................... $ 8,882.9 1,153.9 80,175.4
========= ======== ========
1995:
Banking................................................... $ 5,008.9 602.2 53,479.4
Mortgage Banking.......................................... 999.0 104.9 10,089.3
Norwest Financial......................................... 1,557.6 248.9 8,565.7
--------- -------- --------
Total................................................... $ 7,565.5 956.0 72,134.4
========= ======== ========
1994:
Banking................................................... $ 3,892.4 507.1 48,564.3
Mortgage Banking.......................................... 921.3 70.8 4,608.1
Norwest Financial......................................... 1,218.3 222.5 6,143.5
--------- -------- --------
Total................................................... $ 6,032.0 800.4 59,315.9
========= ======== ========
*Revenues (interest income plus non-interest income), where applicable, and
organizational earnings by business segment are impacted by intercompany
revenues and expenses, such as interest on borrowings from the parent company,
corporate service fees and allocations of federal income taxes.
17. Mortgage Banking Activities
The components of mortgage banking non-interest income for each of the three
years ended December 31 is presented below:
In millions 1996 1995 1994
----- ----- -----
Origination and other closing fees............................ $305.3 198.4 153.6
Servicing fees................................................ 296.2 211.7 190.6
Net gains on sales of servicing rights........................ 57.4 81.3 130.0
Net gains (losses) on sales of mortgages...................... 13.1 (24.2) 74.5
Other......................................................... 149.5 68.3 32.3
------ ------ ------
Total mortgage banking non-interest income................ $821.5 535.5 581.0
====== ====== ======
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The outstanding balances of serviced loans were
$179.7 billion, $107.4 billion and $71.5 billion at December 31, 1996, 1995 and
1994, respectively.
65
Changes in capitalized mortgage loan servicing rights for each of the three
years ended December 31 were:
In millions 1996 1995 1994
--------- --------- -------
Mortgage servicing rights:
Balance at beginning of year.................................. $ 1,061.5 550.3 185.2
Originations............................................... 360.8 233.1 --
Purchases.................................................. 1,101.1 552.2 478.3
Sales...................................................... (65.6) (158.6) (65.2)
Amortization............................................... (247.0) (115.0) (47.4)
Other...................................................... (25.1) (0.5) (0.6)
--------- --------- -------
2,185.7 1,061.5 550.3
Less valuation allowance................................... (64.2) (64.2) --
--------- --------- -------
Balance at end of year........................................ $ 2,121.5 997.3 550.3
--------- --------- -------
Excess servicing rights receivable:
Balance at beginning of year.................................. $ 229.4 98.9 54.4
Additions.................................................. 357.6 204.9 83.1
Sales...................................................... (6.4) (43.5) (21.8)
Amortization............................................... (53.6) (24.6) (16.3)
Valuation adjustments...................................... -- (6.3) (0.5)
--------- --------- -------
Balance at end of year........................................ 527.0 229.4 98.9
--------- --------- -------
Mortgage servicing rights, net................................ $ 2,648.5 1,226.7 649.2
========= ========= =======
The fair value of capitalized mortgage servicing rights at December 31, 1996 was
approximately $3.2 billion, calculated using discount rates ranging from 500 to
700 basis points over the ten-year U.S. Treasury rate.
Changes in the valuation allowance for capitalized mortgage servicing rights for
the years ended December 31, 1996 and 1995 were:
In millions 1996 1995
---- ----
Balance at beginning of year................................................................. $64.2 --
Provision for capitalized mortgage servicing rights in excess of fair value.................. -- 64.2
----- -----
Balance at end of year....................................................................... $64.2 64.2
===== =====
66
18. Fair Value of Financial Instruments and Certain Non-financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FAS 107) requires the disclosure of estimated
fair values of all asset, liability and off-balance sheet financial instruments.
FAS 107 also allows the disclosure of estimated fair values of non-financial
instruments. Fair value estimates under FAS 107 are determined as of a specific
point in time utilizing various assumptions and estimates. The use of
assumptions and various valuation techniques, as well as the absence of
secondary markets for certain financial instruments, will likely reduce the
comparability of fair value disclosures between financial institutions.
Fair Values of Financial Instruments
1996 1995 1994
------------------------ ------------------------ ------------------------
Carrying Fair Carrying Fair Carrying Fair
In millions Amount Value Amount Value Amount Value
----------- ----------- ----------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents........................ $ 7,371.3 7,371.3 4,946.5 4,946.5 4,024.3 4,024.3
Trading account securities....................... 186.5 186.5 150.6 150.6 172.3 172.3
Investment securities............................ 712.2 745.2 760.5 795.8 1,235.1 1,268.7
Investment securities available for sale......... 3,290.2 3,290.2 2,754.0 2,754.0 1,427.6 1,427.6
Mortgage-backed securities available for sale.... 12,956.9 12,956.9 12,489.0 12,489.0 12,174.2 12,174.2
Loans held for sale.............................. 2,827.6 2,827.6 3,343.9 3,343.9 2,031.4 2,031.4
Mortgages held for sale.......................... 6,339.0 6,339.0 6,514.5 6,514.5 3,115.3 3,115.3
Loans and leases, net............................ 38,340.2 38,708.4 35,235.9 35,571.8 31,786.1 31,872.8
Interest receivable.............................. 487.5 487.5 461.8 461.8 367.7 367.7
Excess servicing rights receivable............... 527.0 609.8 229.4 279.7 98.9 139.4
----------- ----------- ----------- ----------- ----------- -----------
Total financial assets......................... 73,038.4 73,522.4 66,886.1 67,307.6 56,432.9 56,593.7
----------- ----------- ----------- ----------- ----------- -----------
Financial liabilities:
Non-maturity deposits............................ 33,813.2 33,813.2 28,270.3 28,270.3 24,475.6 24,475.6
Deposits with stated maturities.................. 16,317.0 16,290.3 13,758.5 13,840.4 11,948.4 11,696.9
Short-term borrowings............................ 7,572.6 7,572.6 8,527.2 8,527.2 7,850.2 7,850.2
Long-term debt................................... 13,082.2 13,022.2 13,676.8 13,799.4 9,186.3 8,825.5
Interest payable................................. 445.0 445.0 407.0 407.0 259.0 259.0
----------- ----------- ----------- ----------- ----------- -----------
Total financial liabilities.................... 71,230.0 71,143.3 64,639.8 64,844.3 53,719.5 53,107.2
----------- ----------- ----------- ----------- ----------- -----------
Off-balance sheet financial instruments:
Forward delivery commitments..................... 20.1 20.1 (98.1) (98.1) (2.3) (2.3)
Interest rate swaps.............................. 1.3 45.6 1.3 119.3 (1.5) (25.0)
Futures contracts and options
on futures contracts........................... 10.9 (17.6) -- -- -- --
Interest rate caps/floors........................ 150.4 138.1 96.6 182.7 5.8 12.5
Option contracts to sell......................... 3.7 1.8 -- -- (4.6) (4.6)
Foreign exchange contracts and options........... 0.3 0.3 0.6 0.6 0.6 0.6
----------- ----------- ----------- ----------- ----------- -----------
Total off-balance sheet financial instruments.. 186.7 188.3 0.4 204.5 (2.0) (18.8)
----------- ----------- ----------- ----------- ----------- -----------
Net financial instruments...................... $ 1,995.1 2,567.4 2,246.7 2,667.8 2,711.4 3,467.7
=========== =========== =========== =========== =========== ===========
Financial Instruments The fair value estimates disclosed in the table above are
based on existing on and off-balance sheet financial instruments and do not
consider the value of future business. Other significant assets and liabilities,
which are not considered financial assets or liabilities and for which fair
values have not been estimated, include premises and equipment, goodwill and
other intangibles, deferred taxes and other liabilities.
The following methods and assumptions are used by the corporation in estimating
its fair value disclosures for financial instruments.
Cash and Cash Equivalents The carrying value of cash and cash equivalents
approximates fair value due to the relatively short period of time between the
origination of the instruments and their expected realization.
67
Trading Account Securities, Investment Securities, Investment and
Mortgage-Backed Securities Available for Sale Fair values of these financial
instruments were estimated using quoted market prices, when available. If quoted
market prices were not available, fair value was estimated using quoted market
prices for similar assets.
Mortgages Held for Sale Fair values of mortgages held for sale are stated at
market.
Loans and Leases and Loans Held for Sale Fair values for loans and leases are
estimated based on contractual cash flows, adjusted for prepayment assumptions
and credit risk factors, discounted using the current market rate for loans and
leases. Variable rate loans, including loans held for sale, are valued at
carrying value since the loans reprice to market rates over short periods of
time. Credit card receivables are valued at carrying value since the receivables
are priced near market rates for such receivables and are short-term in life.
The fair value of the corporation's consumer finance subsidiaries' loans have
been reported at carrying value since the estimated life, assuming prepayments,
is short-term in nature.
Interest Receivable and Payable The carrying value of interest receivable and
payable approximates fair value due to the relatively short period of time
between accrual and expected realization.
Excess Servicing Rights Receivable Excess servicing rights receivable represents
the present value using applicable investor yields of estimated future servicing
revenues in excess of normal servicing revenues over the assumed life of the
servicing portfolio.
Deposits The fair value of fixed-maturity deposits is the present value of the
contractual cash flows, including principal and interest, and servicing costs,
discounted using an appropriate investor yield.
In accordance with FAS 107, the fair value of deposits with no stated maturity,
such as demand deposit, savings, NOW and money market accounts, are disclosed as
the amount payable on demand.
Short-Term Borrowings The carrying value of short-term borrowings approximates
fair value due to the relatively short period of time between the origination of
the instruments and their expected payment.
Long-Term Debt The fair value of long-term debt is the present value of the
contractual cash flows, discounted by the investor yield which considers the
corporation's credit rating.
Commitments to Extend Credit, Standby Letters of Credit and Recourse Obligations
The majority of the corporation's commitment agreements and letters of credit
contain variable interest rates and counterparty credit deterioration clauses
and therefore, the carrying value of the corporation's commitments to extend
credit and letters of credit approximates fair value. The fair value of the
corporation's recourse obligations are valued based on estimated cash flows
associated with such obligations. As any potential liabilities under such
recourse obligations are recognized on the corporation's balance sheet, the
carrying value of such recourse obligations approximates fair value.
Forward Delivery Commitments, Interest Rate Swaps, Futures Contracts, Option
Contracts To Sell, Interest Rate Caps and Floors and Foreign Exchange Contracts
and Options The fair value of forward delivery commitments, interest rate caps
and floors, swaps, option contracts to sell, futures contracts and foreign
exchange contracts and options is estimated, using dealer quotes, as the amount
that the corporation would receive or pay to execute a new agreement with terms
identical to those remaining on the current agreement, considering current
interest rates.
68
Certain Non-Financial Instruments
Supplemental fair value information for certain non-financial instruments as of
December 31 is set forth in the following table and explained below.
The supplemental fair value information, combined with the total fair value of
net financial instruments from the table on page 67, is presented below for
information purposes. This combination is not necessarily indicative of the
"franchise value" or the fair value of the corporation taken as a whole.
In millions, except per share amounts 1996 1995 1994
--------- -------- ---------
Non-financial instrument assets and liabilities:
Premises and equipment, net.................................. $ 1,200.9 1,034.1 955.2
Other assets................................................. 5,409.1 4,214.2 1,927.8
Accrued expenses and other liabilities....................... (2,881.2) (2,182.5) (1,750.0)
Other values:
Non-maturity deposits........................................ 2,806.7 2,035.2 2,684.1
Consumer finance network..................................... 4,026.4 3,702.1 3,207.1
Asset-based lending businesses............................... 1,012.2 473.7 64.5
Credit card.................................................. 281.9 273.5 259.9
Banking subsidiaries' consumer loans......................... 187.5 193.7 166.3
Mortgage servicing........................................... 848.3 549.0 867.0
Mortgage loan origination/wholesale network.................. 2,338.8 1,900.3 621.4
Trust department............................................. 1,111.1 812.4 709.8
--------- -------- ---------
Net fair value of certain non-financial instruments.............. 16,341.7 13,005.7 9,713.1
Fair value of net financial instruments.......................... 2,567.4 2,667.8 3,467.7
--------- -------- ---------
Stockholders' equity at the net fair value of financial
instruments and certain non-financial instruments*
Amount.................................................... $18,909.1 15,673.5 13,180.8
========= ======== ========
Per common share at December 31........................... $ 51.29 44.43 42.64
========= ======== ========
*Amounts do not include applicable deferred income taxes, if any.
The following methods and assumptions were used by the corporation in estimating
the fair value of certain non-financial instruments.
Non-Financial Instrument Assets and Liabilities The non-financial instrument
assets and liabilities are stated at carrying value, which approximates fair
value.
Non-Maturity Deposits The fair value table of financial instruments does not
consider the benefit resulting from the low-cost funding provided by deposit
liabilities as compared with wholesale funding rates. The fair value of
non-maturity deposits, considering these relational benefits, would be $31,006.5
million, $26,235.1 million, and $21,791.5 million at December 31, 1996, 1995 and
1994, respectively. Such amounts are based on a discounted cash flow analysis,
assuming a constant balance over ten years and taking into account the interest
sensitivity of each deposit category.
Consumer Finance Network The supplemental fair value table includes the
estimated fair value associated with the consumer finance network which is based
on current industry price/earnings ratios for similar networks. These current
price/earnings ratios are industry averages and do not consider the higher
earnings levels and the value of the data processing business associated with
the corporation's consumer finance network.
Asset-Based Lending Businesses The supplemental fair value table includes the
estimated fair value associated with the corporation's asset-based lending
businesses which is based on current industry price/earnings ratios for similar
businesses.
69
Credit Card The fair value of financial instruments excludes the fair value
attributed to the expected credit card balances in future years with the holders
of such cards. The fair value of such future balances in excess of book value is
presented in the supplemental fair value table. The fair value related to future
credit card receivable balances is based on a discounted cash flow analysis,
utilizing an investor yield on similar portfolio acquisitions.
Banking Subsidiaries' Consumer Loans For purposes of the table of fair values
of financial instruments on page 67, the fair value of the banking subsidiaries'
consumer loans is based on the contractual balances and maturities of existing
loans. The fair value of such financial instruments does not consider future
loans with customers. The fair value related to such future balances is
estimated by cash flow analysis, discounted utilizing an investor yield. The
expected balances for such purposes are estimated to extend ten years at a
constant rate of replacement.
Mortgage Servicing The fair value of mortgage servicing represents the
estimated current value of the servicing portfolio including off-balance sheet
servicing (other than excess servicing rights receivable included in the table
of fair values of financial instruments on page 67) in excess of book value.
Mortgage Loan Origination/Wholesale Network The supplemental fair value table
includes the fair value associated with the corporation's origination network
for mortgage loans. Such estimates are based on current industry price/earnings
ratios for similar networks.
Trust Department The fair value associated with the corporation's management of
trust assets is estimated based on current trust revenues using an industry
multiple.
19. Parent Company Financial Information
Condensed financial information for Norwest Corporation (parent company only)
follows:
Balance Sheets
In millions 1996 1995
--------- --------
At December 31,
- ---------------
Assets
Interest-bearing deposits with subsidiary banks................................. $ 12.7 174.7
Interest-bearing deposits with non-affiliates................................... 2.4 --
--------- --------
Total cash and cash equivalents......................................... 15.1 174.7
Advances to non-bank subsidiaries............................................... 5,450.4 4,548.9
Capital notes and term loans of subsidiaries
Banks..................................................................... 24.5 474.6
Non-banks................................................................. 1,466.8 1,680.7
--------- --------
Total capital notes and term loans of subsidiaries...................... 1,491.3 2,155.3
--------- --------
Investments in subsidiaries
Banks..................................................................... 4,108.5 3,849.9
Non-banks................................................................. 2,304.6 1,793.2
--------- --------
Total investments in subsidiaries....................................... 6,413.1 5,643.1
Investment securities available for sale........................................ 1,233.9 992.9
Other assets.................................................................... 495.2 424.1
--------- --------
Total assets............................................................ $15,099.0 13,939.0
========= ========
Liabilities and Stockholders' Equity
Short-term borrowings........................................................... $ 2,232.5 2,238.1
Accrued expenses and other liabilities.......................................... 408.8 493.3
Long-term debt with non-affiliates.............................................. 6,384.0 5,840.9
Stockholders' equity............................................................ 6,073.7 5,366.7
--------- --------
Total liabilities and stockholders' equity.............................. $15,099.0 13,939.0
========= ========
70
Statements of Income
In millions 1996 1995 1994
-------- -------- --------
Years Ended December 31,
- ------------------------
Income
Dividends from subsidiaries
Banks......................................................... $ 796.1 981.7 680.6
Non-banks..................................................... 713.3 268.0 170.1
-------- -------- --------
Total dividends from subsidiaries............................ 1,509.4 1,249.7 850.7
Interest from subsidiaries....................................... 430.7 332.6 142.2
Service fees from subsidiaries................................... 112.7 89.2 66.2
Other income..................................................... 157.5 66.6 45.3
-------- -------- --------
Total income................................................. 2,210.3 1,738.1 1,104.4
-------- -------- --------
Expenses
Interest to subsidiaries......................................... 10.6 10.6 0.7
Other interest................................................... 530.7 409.2 202.6
Other expenses................................................... 95.8 150.2 128.3
-------- -------- --------
Total expenses............................................... 637.1 570.0 331.6
-------- -------- --------
Income before income taxes and equity
in undistributed earnings of subsidiaries...................... 1,573.2 1,168.1 772.8
Income tax (provision) benefit................................... (32.3) 27.2 34.2
-------- -------- --------
Income before equity in
undistributed earnings of subsidiaries......................... 1,540.9 1,195.3 807.0
Equity in undistributed earnings of subsidiaries................. (387.0) (239.3) (6.6)
-------- -------- --------
Net income....................................................... $1,153.9 956.0 800.4
======== ======== ========
Federal law prevents the corporation and its non-bank subsidiaries from
borrowing from its subsidiary banks unless the loans are secured by specified
assets. Such secured loans by any subsidiary bank are generally limited to 10
percent of the subsidiary bank's capital and surplus and aggregate loans to the
corporation and its non-bank subsidiaries are limited to 20 percent of the
subsidiary bank's capital and surplus.
The payment of dividends to the corporation by subsidiary banks is subject to
various federal and state regulatory limitations. A national bank must obtain
the approval of the Comptroller of the Currency if the total of all dividends
declared in any calendar year exceeds that bank's net income for that year
combined with its retained net income for the preceding two calendar years, less
any required transfers to surplus or a fund for the retirement of preferred
stock. The Office of Thrift Supervision imposes substantially similar
restrictions on the payment of dividends to the corporation by its savings and
loan association subsidiary. The corporation also has several state bank
subsidiaries that are subject to state regulations limiting dividends. Under
these provisions, the corporation's national bank subsidiaries, savings and loan
association and state-chartered bank subsidiaries could have declared as of
December 31, 1996 aggregate dividends of at least $279.9 million without
obtaining prior regulatory approval and without reducing the capital below
minimum regulatory levels. In addition, the corporation's non-bank subsidiaries
could have declared dividends totaling $599.1 million at December 31, 1996.
71
Statements of Cash Flows
In millions 1996 1995 1994
-------- -------- --------
Years Ended December 31,
- ------------------------
Cash Flows From Operating Activities
Net income....................................................... $1,153.9 956.0 800.4
Adjustments to reconcile net
income to net cash flows from operating activities:
Equity in undistributed earnings of subsidiaries................. 387.0 239.3 6.6
Depreciation and amortization.................................... 20.6 20.0 17.0
Release of preferred shares to ESOP.............................. 37.8 40.0 26.6
Other assets, net................................................ (102.4) (146.8) (169.3)
Accrued expenses and other liabilities, net...................... (64.7) 205.4 97.0
-------- -------- --------
Net cash flows from operating activities......................... 1,432.2 1,313.9 778.3
-------- -------- --------
Cash Flows From Investing Activities
Advances to non-bank subsidiaries, net........................... (901.5) (2,096.5) (138.6)
Investment securities, net....................................... -- -- (63.2)
Investment securities available for sale, net.................... (222.3) (551.2) 6.7
Principal collected on capital notes and
term loans of subsidiaries..................................... 841.4 296.8 140.4
Capital notes and term loans made to subsidiaries................ (165.3) (1,318.5) (517.4)
Investments in subsidiaries, net................................. (851.7) (865.9) (455.6)
-------- -------- --------
Net cash flows used for investing activities..................... (1,299.4) (4,535.3) (1,027.7)
-------- -------- --------
Cash Flows From Financing Activities
Short-term borrowings, net....................................... (5.6) 689.9 (545.9)
Proceeds from issuance of long-term debt with non-affiliates..... 1,803.0 3,405.0 1,325.0
Repayment of long-term debt with non-affiliates.................. (1,259.6) (309.4) (107.6)
Issuances of common stock........................................ 82.4 65.4 49.8
Repurchases of common stock...................................... (402.0) (186.8) (482.1)
Issuance of stock warrants to subsidiaries....................... 1.8 1.1 1.6
Issuance of preferred stock...................................... -- -- 195.7
Repurchases of preferred stock................................... (112.7) (0.4) (8.4)
Net decrease in ESOP loans....................................... 3.7 -- 3.0
Dividends paid................................................... (403.4) (337.8) (268.0)
-------- -------- --------
Net cash flows (used for) from financing activities.............. (292.4) 3,327.0 163.1
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............. (159.6) 105.6 (86.3)
Cash and cash equivalents
Beginning of year.............................................. 174.7 69.1 155.4
-------- -------- --------
End of year.................................................... $ 15.1 174.7 69.1
======== ======== ========
72
Independent Auditors' Report
The Board of Directors and
Stockholders of Norwest Corporation
We have audited the consolidated balance sheets of Norwest Corporation and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, cash flows and stockholders' equity for each of the years
in the three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Norwest Corporation
and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 16, 1997
73
Management's Report
The management of Norwest Corporation has prepared and is responsible for the
content of the financial statements included in this annual report and the
information contained in other sections of this annual report, which information
is consistent with the content of the financial statements. Management believes
that the financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances to reflect, in
all material respects, the substance of events and transactions that should be
included. In preparing the financial statements, management makes judgments and
estimates of the expected effects of events and transactions that are accounted
for or disclosed.
Management has long recognized the importance of the corporation maintaining and
reinforcing the highest possible standards of conduct in all of its actions,
including the preparation and dissemination of statements fairly presenting the
financial condition of the corporation. In this regard, it has developed a
system of internal accounting control which plays an important role in assisting
management in fulfilling its responsibilities in preparing the corporation's
financial statements. The corporation's system of internal accounting control is
designed to provide reasonable assurance that assets are safeguarded and that
transactions are executed in accordance with management's authorizations. This
system is augmented by written policies, operating procedures and accounting
manuals, plus a strong program of internal audit carried out by qualified
personnel. Management recognizes that estimates and judgments are required to
assess and balance the relative costs and expected benefits of the controls and
errors or irregularities may nevertheless occur. However, management believes
that the corporation's internal accounting control system provides reasonable
assurance that errors or irregularities that could be material to the financial
statements are prevented or would be detected on a timely basis and corrected in
the normal course of business.
The board of directors oversees these financial statements through an audit and
examination committee comprised of outside directors. The committee meets
periodically with management and internal audit to monitor the discharge by each
of its responsibilities. The independent auditors, who are engaged to express an
opinion on the financial statements, meet periodically with and have free access
to the committee or the board, without management present, to discuss internal
accounting control, auditing and financial reporting matters.
/s/ RICHARD M. KOVACEVICH
Richard M. Kovacevich
Chairman and
Chief Executive Officer
/s/ JOHN T. THORNTON
John T. Thornton
Executive Vice President and
Chief Financial Officer
/s/ MICHAEL A. GRAF
Michael A. Graf
Senior Vice President
and Controller
January 16, 1997
74
Norwest Corporation and Subsidiaries
Six-Year Consolidated Financial Summary
In millions, except per common share amounts and ratios 1996 1995 1994 1993 1992 1991
------- ------- ------- ------ ------- -------
Years Ended December 31,
- ------------------------
Statements of Income
Interest income.................................... $6,318.3 5,717.3 4,393.7 3,946.3 3,806.4 4,025.9
Interest expense................................... 2,617.0 2,448.0 1,590.1 1,442.9 1,610.6 2,150.3
------- ------- ------- ------- ------- -------
Net interest income............................. 3,701.3 3,269.3 2,803.6 2,503.4 2,195.8 1,875.6
Provision for credit losses........................ 394.7 312.4 164.9 158.2 270.8 406.4
------- ------- ------- ------- ------- -------
Net interest income after provision for credit
losses.......................................... 3,306.6 2,956.9 2,638.7 2,345.2 1,925.0 1,469.2
Non-interest income................................ 2,564.6 1,848.2 1,638.3 1,585.0 1,273.7 1,064.0
Non-interest expenses.............................. 4,089.7 3,382.3 3,096.4 3,050.4 2,553.1 2,041.5
------- ------- ------- ------- ------- -------
Income before income taxes and cumulative effect of
a change in accounting for postretirement medical
benefits........................................ 1,781.5 1,422.8 1,180.6 879.8 645.6 491.7
Income tax expense................................. 627.6 466.8 380.2 266.7 175.6 73.4
Cumulative effect on years ended prior to
December 31, 1992 of a change in accounting for
postretirement medical benefits, net of tax..... -- -- -- -- (76.0) --
------- ------- ------- ------- ------- -------
Net income......................................... $1,153.9 956.0 800.4 613.1 394.0 418.3
======== ======== ======= ======= ======= =======
Per Common Share
Net income (a)
Primary......................................... $ 3.07 2.76 2.45 1.89 1.19 1.33
Fully diluted................................... 3.07 2.73 2.41 1.86 1.19 1.32
Dividends declared................................. 1.050 0.900 0.765 0.640 0.540 0.470
Stockholders' equity............................... 15.94 14.20 10.79 11.00 9.88 9.29
Stock price range.................................. 46 7/8-30 1/2 34 3/4-22 5/8 28 1/4-21 29-20 5/8 22 1/8-16 5/8 18 7/16-9 3/8
Selected Consolidated Balance Sheet Data At
December 31,
Assets............................................. $80,175 72,134 59,316 54,665 50,037 45,974
Investment securities.............................. 712 761 1,235 1,694 2,031 13,958
Investment and mortgage-backed securities available
for sale........................................ 16,247 15,243 13,602 11,023 10,932 --
Loans, leases, and loans and mortgages held for
sale(b)......................................... 48,548 46,012 37,723 36,201 31,667 26,328
Deposits........................................... 50,130 42,029 36,424 35,977 31,609 31,331
Long-term debt..................................... 13,082 13,677 9,186 6,851 4,553 3,686
Stockholders' equity............................... 6,064 5,312 3,846 3,761 3,372 3,193
Ratios(c)
Per $100 of average assets
Net interest income (tax-equivalent basis)...... $ 4.88 4.98 5.14 4.98 4.81 4.43
Provision for credit losses..................... 0.52 0.47 0.30 0.31 0.58 0.94
------- ------ ------ ------ ------ ------
Net interest income after provision for credit
losses.......................................... 4.36 4.51 4.84 4.67 4.23 3.49
Non-interest income............................. 3.35 2.82 2.97 3.11 2.74 2.45
Non-interest expenses........................... 5.34 5.13 5.62 5.99 5.50 4.70
------- ------ ------ ------ ------ ------
Income before income taxes and cumulative effect
of a change in accounting for postretirement
medical benefits................................ 2.37 2.20 2.19 1.79 1.47 1.24
Income tax expense.............................. 0.82 0.71 0.69 0.52 0.38 0.17
Less tax equivalent adjustment.................. 0.04 0.05 0.05 0.07 0.08 0.11
Cumulative effect on years ended prior to
December 31, 1992 of a change in accounting for
postretirement medical benefits, net of tax .. -- -- -- -- (0.16) --
------- ------ ------ ------ ------ ------
Net income(a)...................................... $ 1.51 1.44 1.45 1.20 0.85 0.96
======= ====== ====== ====== ====== ======
Leverage(d)........................................ 13.5x 14.3 14.3 14.2 13.2 15.3
Return on realized common equity(a)(e)............. 21.9% 22.3 21.4 18.2 11.7 15.3
Return on realized total equity(a)(e).............. 21.5% 20.9 20.3 17.1 11.2 14.7
Stockholders' equity to average assets............. 7.4% 7.0 7.0 7.1 7.6 6.5
Dividend payout ratio.............................. 34.2% 32.6 31.2 33.9 45.4 35.3
Tier 1 capital ratio at December 31................ 8.63% 8.11 9.89 9.71 9.74 10.00
Tier 1 and Tier 2 capital ratio at December 31..... 10.42% 10.18 12.23 12.39 12.42 13.78
Leverage ratio..................................... 6.15% 5.65 6.94 6.46 6.62 6.63
(a) Excluding the cumulative effect of a change in accounting for
postretirement medical benefits, 1992 primary net income per common share
would have been $1.44, fully diluted net income per common share would have
been $1.42, return on realized common equity would have been 14.2%, return
on realized total equity would have been 13.4%, and net income per $100 of
average assets would have been $1.01.
(b) Net of unearned discount.
(c) Based on average balances and net income for the periods.
(d) The ratio of average assets to average stockholders' equity.
(e) Realized equity excludes unrealized gains (losses) on securities available
for sale. Including net unrealized gains (losses) on securities available
for sale, return on common equity was 20.8% and return on total equity was
20.4% in 1996. In 1995 and 1994, return on common equity was 21.9% and
22.1%, respectively, and return on total equity was 20.6% and 20.8%,
respectively.
75
Norwest Corporation and Subsidiaries
Consolidated Average Balance Sheets and Related Yields and Rates*
1996 1995 1994
-------------------------- --------------------------- ------------------
Interest Average Interest Average Interest
Average Income/ Yields/ Average Income/ Yields/ Average Income/
In millions, except ratios Balance Expense Rates Balance Expense Rates Balance Expense
------- ------- ------- -------- -------- ------- -------- --------
Assets
Money market investments................... $1,156 $ 63.0 5.47% $ 604 $ 35.7 5.92% $ 472 $ 21.9
Trading account securities................. 378 25.2 6.62 180 15.2 8.48 250 25.2
Investment securities
U.S. Treasury and federal agencies...... -- -- -- 28 1.3 4.96 26 1.3
State, municipal and housing-tax exempt. -- -- -- 695 71.1 10.22 680 71.6
Other investment securities............. 806 36.2 4.49 672 34.1 5.08 412 19.5
Mortgage-backed securities
Federal agencies........................ -- -- -- -- -- -- -- --
Collateralized mortgage obligations..... -- -- -- -- -- -- -- --
Investment securities available for sale... 3,291 206.8 7.13 1,899 122.5 7.12 2,137 122.6
Mortgage-backed securities available for
sale.................................... 13,376 988.2 7.41 12,628 945.8 7.46 10,407 715.7
------ ------- ------- ------- ------ -------
Total investment securities............. 17,473 1,231.2 7.23 15,922 1,174.8 7.44 13,662 930.7
Loans held for sale........................ 2,897 254.3 8.78 2,232 195.7 8.77 1,563 111.4
Mortgages held for sale.................... 6,358 468.5 7.37 4,804 366.2 7.62 3,757 257.2
Loans and leases (net of unearned discount)
Commercial.............................. 12,728 1,165.2 9.15 10,754 1,003.1 9.33 9,301 749.9
Real estate............................. 13,850 1,345.0 9.71 13,113 1,232.3 9.40 11,445 997.2
Consumer................................ 11,966 1,798.1 15.03 11,694 1,727.8 14.78 9,498 1,329.2
------ ------- ------- ------- ------ -------
Total loans and leases................ 38,544 4,308.3 11.18 35,561 3,963.2 11.14 30,244 3,076.3
Allowance for credit losses............. (1,005) (861) (801)
------ ------- ------
Net loans and leases.................. 37,539 34,700 29,443
------ ------- ------- ------- ------ -------
Total earning assets
(before the allowance for credit
losses)........................... 66,806 6,350.5 9.57 59,303 5,750.8 9.72 49,948 4,422.7
------- ------- -------
Cash and due from banks.................... 3,594 3,214 2,974
Other assets............................... 7,107 4,597 2,952
------ ------- ------
Total assets.......................... $76,502 $66,253 $55,073
======= ======= =======
Liabilities and Stockholders' Equity
Noninterest-bearing deposits............... $12,212 $ 9,985 $8,704
Interest-bearing deposits
Savings and NOW accounts................ 7,017 120.9 1.72 4,992 98.9 1.98 4,617 85.0
Money market accounts................... 11,062 348.1 3.15 10,595 332.9 3.14 10,487 247.4
Savings certificates.................... 12,420 677.3 5.45 10,809 583.1 5.39 9,794 446.9
Certificates of deposit and other time.. 2,862 161.8 5.65 1,860 106.7 5.73 1,544 69.9
Foreign time............................ 381 16.8 4.41 609 34.7 5.70 328 14.2
------ ------- ------- ------- ------ -------
Total interest-bearing deposits....... 33,742 1,324.9 3.93 28,865 1,156.3 4.01 26,770 863.4
Short-term borrowings...................... 8,554 454.1 5.31 8,738 515.8 5.90 6,628 290.3
Long-term debt............................. 13,667 838.0 6.13 11,918 776.0 6.51 7,508 436.4
------ ------- ------- ------- ------ -------
Total interest-bearing liabilities.... 55,963 2,617.0 4.68 49,521 2,448.1 4.94 40,906 1,590.1
Capitalized interest expense............... -- (0.1) --
------- ------- -------
Net interest expense.................. 2,617.0 2,448.0 1,590.1
Other liabilities.......................... 2,677 2,109 1,620
Stockholders' equity....................... 5,650 4,638 3,843
------ ------- ------
Total liabilities and stockholders'
equity................................ $76,502 $66,253 $55,073
======= -------- ======= ------- ======= --------
Net Interest income (tax-equivalent basis). $3,733.5 $3,302.8 $2,832.6
======== ======= ========
Yield spread............................... 4.89 4.78
Net interest income to earning assets...... 5.63 5.58
Interest-bearing liabilities to earning
assets..................................... 83.77 83.50
* Interest income/expense and yields/rates are calculated on a tax-equivalent
basis utilizing a federal incremental tax rate of 35% in 1996, 1995, 1994 and
1993 and 34% in 1992 and 1991. Non-accrual loans and the related negative
income effect have been included in the calculation of average rates.
NM -- Not meaningful
76
1993 1992 1991 Average Balance
--------- --------------------------- --------------------------- --------------------------- -------------------
Average Interest Average Interest Average Interest Average 5 Year % Change
Yields/ Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ Growth 1996 Over
Rates Balance Expense Rates Balance Expense Rates Balance Expense Rates Rate % 1995
--------- -------- ------- ------- -------- -------- -------- ------- -------- ------- ------ ---------
4.66% $ 624 $ 19.8 3.18% $ 779 $ 28.9 3.71% $ 1,143 $ 76.7 6.72% 0.2% 91.4 %
10.11 254 30.3 11.90 344 23.9 6.95 157 11.6 7.39 19.2 110.0
4.84 881 44.0 5.00 2,132 132.1 6.20 2,199 178.6 8.13 (100.0) (100.0)
10.53 739 79.7 10.79 917 98.1 10.70 1,028 116.0 11.29 (100.0) (100.0)
4.74 226 17.3 7.65 434 29.6 6.81 451 36.3 8.01 12.3 19.9
-- 159 8.2 5.16 7,183 562.7 7.83 7,993 715.3 8.95 (100.0) --
-- 22 1.1 4.90 228 21.5 9.39 431 35.9 8.32 (100.0) --
5.98 1,662 120.4 7.25 228 17.1 7.53 -- -- -- NM 73.3
6.73 8,827 592.4 6.71 2,093 164.9 7.88 -- -- -- NM 5.9
------- ------- ------- ------- ------ -------
6.74 12,516 863.1 6.90 13,215 1,026.0 7.76 12,102 1,082.1 8.94 7.6 9.7
7.13 1,266 85.3 6.74 345 24.2 6.99 -- -- -- NM 29.8
6.85 4,932 326.8 6.63 3,639 279.4 7.68 2,100 192.1 9.15 24.8 32.3
8.06 8,433 648.3 7.69 8,105 670.8 8.28 8,922 877.4 9.83 7.4 18.4
8.71 10,720 934.7 8.72 8,478 834.3 9.84 7,762 856.3 11.03 12.3 5.6
13.99 7,415 1,071.3 14.45 6,749 956.8 14.18 6,855 977.5 14.26 11.8 2.3
------ ------- ------- ------- ------ -------
10.17 26,568 2,654.3 9.99 23,332 2,461.9 10.55 23,539 2,711.2 11.52 10.4 8.4
(791) (721) (660) 8.8 16.7
------ ------- ------
25,777 22,611 22,879 10.4 8.2
------ ------- ------- ------- ------- --------
8.83 46,160 3,979.6 8.62 41,654 3,844.3 9.23 39,041 4,073.7 10.43 11.3 12.7
------- ------- --------
2,871 2,566 2,437 8.1 11.8
2,647 2,904 2,619 22.1 54.6
------ ------- -------
$50,887 $46,403 $43,437 12.0 15.5
======= ======= =======
$7,726 $ 6,225 $ 5,377 17.8 22.3
1.84 4,244 85.3 2.01 3,872 107.5 2.78 3,508 150.6 4.30 14.9 40.6
2.36 9,106 201.1 2.21 8,159 205.9 2.52 7,565 370.0 4.89 7.9 4.4
4.56 9,582 473.1 4.94 10,352 603.9 5.83 10,641 764.5 7.18 3.1 14.9
4.53 1,650 77.7 4.71 1,754 94.7 5.40 2,713 186.2 6.86 1.1 53.9
4.34 489 15.1 3.09 112 3.6 3.23 200 11.2 5.60 13.8 (37.4)
------ --------- ------- ------- ------- --------
3.23 25,071 852.3 3.40 24,249 1,015.6 4.19 24,627 1,482.5 6.02 6.5 16.9
4.38 7,316 238.1 3.25 7,058 277.9 3.94 5,890 352.4 5.98 7.7 (2.1)
5.82 5,871 352.6 6.01 4,086 317.3 7.77 3,492 315.4 9.03 31.4 14.7
------ --------- ------- ------- ------- --------
3.89 38,258 1,443.0 3.77 35,393 1,610.8 4.55 34,009 2,150.3 6.32 10.5 13.0
(0.1) (0.2) --
--------- -------- --------
1,442.9 1,610.6 2,150.3
1,315 1,276 1,206 17.3 26.9
3,588 3,509 2,845 14.7 21.8
------ ------- -------
$50,887 $46,403 $43,437 12.0 15.5
======= --------- ======= -------- ======= --------
$ 2,536.7 $2,233.7 $1,923.4
========= ======== ========
4.94 4.85 4.68 4.11
5.66 5.50 5.36 4.93
81.90 82.88 84.97 87.11
77
Norwest Corporation and Subsidiaries
Income Statement Data
1996 Over 1995 1995 Over 1994
--------------------------------- --------------------------------
In millions Volume Yield/Rate Total Volume Yield/Rate Total
---------- ------------- ------- ---------- ------------ -------
Changes in Tax-Equivalent Net Interest Income*
Interest income
Loans and leases................................... $ 332.5 12.6 345.1 540.8 346.1 886.9
Investment securities.............................. (45.0) (25.3) (70.3) 22.8 (8.7) 14.1
Investment and mortgage-backed securities
available for sale.............................. 132.5 (5.8) 126.7 118.5 111.5 230.0
-------- -------- -------- -------- -------- --------
Total investment securities................... 87.5 (31.1) 56.4 141.3 102.8 244.1
Money market and trading account securities........ 48.6 (11.3) 37.3 4.2 (0.4) 3.8
Loans held for sale................................ 58.3 0.3 58.6 47.6 36.7 84.3
Mortgages held for sale............................ 118.5 (16.2) 102.3 71.7 37.3 109.0
-------- -------- -------- -------- -------- --------
Total......................................... 645.4 (45.7) 599.7 805.6 522.5 1,328.1
-------- -------- -------- -------- -------- --------
Interest expense
Interest-bearing deposits.......................... 195.4 (26.8) 168.6 67.6 225.3 292.9
Short-term borrowings.............................. (10.9) (50.8) (61.7) 92.3 133.2 225.5
Long-term debt..................................... 113.9 (51.8) 62.1 256.5 83.0 339.5
-------- -------- -------- -------- -------- --------
Total......................................... 298.4 (129.4) 169.0 416.4 441.5 857.9
-------- -------- -------- -------- -------- --------
Net interest income................................ $ 347.0 83.7 430.7 389.2 81.0 470.2
======== ======== ======== ======== ======== ========
*Changes in the average balance/rate are allocated entirely to the yield/rate changes.
Analysis of Selected Non-interest Expenses
1996 % Change 1995 % Change 1994 1993 1992
-------- -------- -------- -------- -------- --------- -------
Salaries and benefits
Salaries............................... $1,780.1 24.5% $1,430.2 13.4% $1,260.9 1,210.8 991.0
Benefits............................... 317.0 0.7 314.9 0.7 312.8 263.5 184.4
-------- -------- --------- ------- -------
Total............................. $2,097.1 20.2% $1,745.1 10.9% $1,573.7 1,474.3 1,175.4
======== ======== ========= ======= =======
Business development
Advertising............................ $ 96.3 31.9% $ 73.0 (26.0)% $ 98.6 73.0 52.6
Other business development............. 131.6 32.7 99.2 7.9 91.9 78.3 64.9
-------- -------- -------- ------- -------
Total............................. $ 227.9 32.3% $ 172.2 (9.6)% $ 190.5 151.3 117.5
======== ======== ======== ======= =======
Other non-interest expenses
Professional fees...................... $ 115.7 28.0% $ 90.4 50.2% $ 60.2 60.2 53.8
Insurance claims....................... 81.9 49.2 54.9 28.6 42.7 42.2 25.7
Other employment....................... 65.0 37.1 47.4 3.9 45.6 38.7 32.4
Other real estate owned, net........... 19.6 39.0 14.1 219.5 (11.8) 3.3 7.1
FDIC assessment and regulatory
examination fees.................... 40.1 (49.0) 78.6 (10.3) 87.6 79.7 75.2
Other.................................. 188.7 13.3 166.6 (38.3) 270.0 458.0 385.9
-------- -------- -------- ------- -------
Total............................. $ 511.0 13.1% $ 452.0 (8.6)% $ 494.3 682.1 580.1
======== ======== ======== ======= =======
78
Norwest Corporation and Subsidiaries
Loan Information
In millions, except ratios 1996 1995 1994 1993 1992 1991
--------- ------- ------- ------ -------- --------
Loans and Leases at December 31,
Commercial, financial and industrial............... $ 10,205 9,327 7,434 6,686 6,577 6,440
Agricultural....................................... 1,108 1,091 956 938 830 814
Construction and land development.................. 944 742 568 566 454 518
Real Estate
Secured by 1-4 family residential properties.... 10,376 8,593 8,959 8,321 7,582 5,067
Secured by other properties..................... 4,749 4,174 3,590 3,418 3,186 3,277
Consumer........................................... 10,431 10,521 8,305 6,879 6,046 6,714
Credit card........................................ 1,566 1,666 2,511 1,727 994 813
Lease financing.................................... 812 816 765 699 627 600
Foreign
Consumer installment............................ 703 652 444 425 425 --
Real estate secured by 1-4 family residential
properties..................................... 72 53 42 30 15 --
Other........................................... 188 196 130 93 62 61
--------- ------ ------- ------- ------- --------
Total loans and leases........................ 41,154 37,831 33,704 29,782 26,798 24,304
Unearned discount............................. (1,773) (1,678) (1,128) (1,021) (1,015) (984)
--------- ------ ------- ------- ------- --------
Total loans and leases net of unearned
discount.................................... $ 39,381 36,153 32,576 28,761 25,783 23,320
========= ====== ======= ======= ======= ========
Allowance for Credit Losses
Balance at beginning of year....................... $ 917.2 789.9 789.2 773.1 704.3 577.0
Allowances related to assets acquired, net......... 111.3 119.1 29.0 36.2 23.4 42.5
Provision for credit losses........................ 394.7 312.4 164.9 158.2 270.8 406.4
Credit losses
Commercial, financial and industrial............ 53.9 41.3 31.0 58.9 90.9 146.4
Agricultural.................................... 6.1 2.7 4.5 2.6 4.2 3.9
Construction and land development............... 0.6 0.6 2.8 11.9 15.8 21.4
Real estate..................................... 26.5 20.8 44.2 53.2 68.4 99.6
Consumer........................................ 301.8 201.7 130.5 116.4 118.9 131.9
Credit card..................................... 83.5 121.8 73.2 46.1 36.9 35.7
Lease financing................................. 4.5 2.6 2.3 2.2 2.6 3.8
Foreign.........................................
Consumer installment.......................... 33.7 27.5 17.4 18.5 2.9 --
Other......................................... 1.2 2.2 8.9 0.5 0.5 1.8
--------- ------ ------- ------- ------- --------
Total credit losses........................... 511.8 421.2 314.8 310.3 341.1 444.5
--------- ------ ------- ------- ------- --------
Recoveries
Commercial, financial and industrial............ 33.1 26.9 34.0 39.4 41.4 47.3
Agricultural.................................... 1.9 2.6 2.5 4.0 4.9 4.0
Construction and land development............... 1.3 4.5 7.2 7.2 2.4 6.9
Real estate..................................... 15.5 17.5 26.9 36.6 24.9 23.6
Consumer........................................ 54.4 44.6 35.4 32.1 30.1 27.5
Credit card..................................... 13.8 13.0 10.6 7.8 6.7 5.5
Lease financing................................. 1.0 2.1 0.7 0.3 0.6 0.3
Foreign
Consumer installment.......................... 5.6 4.3 3.5 3.5 -- --
Other......................................... 2.8 1.5 0.8 1.1 4.7 7.8
--------- ------ ------- ------- ------- --------
Total recoveries.............................. 129.4 117.0 121.6 132.0 115.7 122.9
--------- ------ ------- ------- ------- --------
Net credit losses.................................. 382.4 304.2 193.2 178.3 225.4 321.6
--------- ------ ------- ------- ------- --------
Balance at end of year............................. $ 1,040.8 917.2 789.9 789.2 773.1 704.3
========= ====== ======= ======= ======= ========
Allocation of Allowance for Credit Losses
Commercial......................................... $ 208.6 186.4 151.9 137.4 154.5 185.9
Consumer........................................... 285.7 276.5 209.0 195.2 155.4 140.6
Real estate........................................ 150.3 171.8 163.5 203.4 220.6 152.8
Foreign............................................ 32.3 27.0 20.0 21.2 22.0 5.0
Unallocated........................................ 363.9 255.5 245.5 232.0 220.6 220.0
--------- ------ ------- ------- ------- --------
Total......................................... $ 1,040.8 917.2 789.9 789.2 773.1 704.3
========= ====== ======= ======= ======= ========
Credit Quality Ratios
Net credit losses as a percent of average loans and
leases.......................................... 0.99% 0.86 0.64 0.67 0.97 1.37
Allowance for credit losses to
Total loans and leases at year-end............ 2.64% 2.54 2.42 2.74 3.00 3.02
Net credit losses............................. 2.72x 3.02 4.09 4.43 3.43 2.19
Provision for credit losses to average loans and
leases.......................................... 1.02% 0.88 0.55 0.60 1.16 1.73
Earnings coverage of net credit losses............. 5.69x 5.70 6.96 5.82 3.53 2.79
79
Norwest Corporation and Subsidiaries
Other Balance Sheet Data
In millions, except ratios
Maturity of Total Investment Securities (a)
Carrying Value
------------------------------------------------------------------------------------ Total
Within 1 Year 1-5 Years 5-10 Years After 10 Years Total Market
Amount/Yield Amount/Yield Amount/Yield Amount/Yield Amount/Yield Value
------------- ------------- -------------- ---------------- -------------- ---------
At December 31, 1996
- --------------------
Investment securities
available for sale:
U.S. Treasury and federal
agencies............. $ 405.6 5.97% $ 613.5 6.25% $ 97.3 5.35% $ 63.7 7.32% $ 1,180.1 6.13% $1,180.1
State, municipal and
housing-tax exempt (b) 56.8 6.33 257.3 6.18 144.6 6.64 493.2 7.38 951.9 6.87 951.9
Other................... 187.4 7.25 424.6 4.55 130.4 7.30 415.8 7.84 1,158.2 6.82 1,158.2
------- ------- ------ ------- --------- -------
Total investment
securities
available for sale 649.8 6.28 1,295.4 5.88 372.3 6.52 972.7 7.57 3,290.2 6.56 3,290.2
------- ------- ------ --------- -------
Mortgage-backed
securities:
Federal agencies........ 129.7 6.88 390.9 6.76 142.0 7.40 12,121.6 7.47 12,784.2 7.44 12,784.2
Collateralized mortgage
obligations.......... 3.1 5.60 19.0 5.60 10.0 8.12 140.6 7.51 172.7 7.34 172.7
------- ------- ------ ------- --------- -------
Total mortgage-backed
securities available
for sale.......... 132.8 6.84 409.9 6.72 152.0 7.45 12,262.2 7.47 12,956.9 7.44 12,956.9
------- ------- ------ -------- ------- -------
Total securities
available for sale... 782.6 6.36 1,705.3 6.11 524.3 6.79 13,234.9 7.48 16,247.1 7.28 16,247.1
------- ------- ------ -------- ------- -------
Other investment
securities held for
investment........... -- -- 294.8 0.34 -- -- 417.4 8.56 712.2 5.16 745.2
------- ------- ------ -------- ------- -------
Total investment
securities........... $ 782.6 6.36 $2,000.1 5.16 $524.3 6.79 $13,652.3 7.51 $16,959.3 7.19 $16,992.3
======= ======= ====== ========= ========= ========
Maturity of Loans (c) Within 1 Year 1-5 Years After 5 Years Total
------------- --------- ------------- --------
Commercial .................................................. $6,409 3,936 968 11,313
Construction and land development ........................... 646 219 79 944
Real estate ................................................. 905 2,145 1,699 4,749
Foreign ..................................................... 76 85 27 188
------ ----- ----- ------
Total ....................................................... $8,036 6,385 2,773 17,194
====== ===== ===== ======
Predetermined interest rates ................................ $3,872 3,197 1,455 8,524
Floating interest rates...................................... 4,164 3,188 1,318 8,670
------ ----- ----- ------
Total........................................................ $8,036 6,385 2,773 17,194
====== ===== ===== ======
Maturity of Time Deposits of $100,000 or more Within 3 Months 3-6 Months 6-12 Months Over 12 Months Total
--------------- ---------- ----------- -------------- --------
Certificates of deposit and other time............... $ 1,265 604 658 655 3,182
Foreign time......................................... 233 19 16 7 275
------- ----- ----- ----- -------
Total................................................ $ 1,498 623 674 662 3,457
======= ===== ===== ===== =======
Deposits at December 31, 1996 1995 1994 1993 1992
------- ----- ----- ----- -------
Noninterest-bearing deposits......................... $14,296 11,624 9,283 9,054 7,382
Interest-bearing deposits
Savings and NOW accounts.......................... 8,069 5,378 4,790 4,421 4,310
Money market accounts............................. 11,418 11,268 10,403 10,592 8,422
Savings certificates.............................. 12,814 11,244 9,773 10,043 9,683
Certificates of deposit and other time (d)........ 3,187 2,316 1,528 1,678 1,655
Foreign time (e).................................. 346 199 647 189 157
------- ------ ------ ------ -------
Total deposits....................................... $50,130 42,029 36,424 35,977 31,609
======= ====== ====== ====== =======
(a) Based on contractual maturities.
(b) The yield on state, municipal and housing securities is increased by the
benefit of tax exemption, assuming a 35% federal income tax rate. For the
year ended December 31, 1996, the amount of the increases in the yields for
these securities and for total securities available for sale is 2.88% and
0.15%, respectively.
(c) Excludes leases of $812 million and consumer and residential mortgage loans
of $23,148 million.
(d) Includes $5 million of time deposits less than $100,000 in 1996.
(e) Includes $71 million of foreign time deposits less than $100,000 in 1996.
80
Norwest Corporation and Subsidiaries
Quarterly Condensed Consolidated Financial Information
1996 Quarters 1995 Quarters
------------------------------------------------- ----------------------------------------------------------
In millions, except
per common share
amounts and
ratios Fourth Third Second First Fourth Third Second First
------------- ------- --------- ------------ ------------- ------------- ------------- -------------
Interest income...... $1,608.2 1,611.1 1,575.0 1,524.0 1,564.0 1,476.2 1,389.1 1,288.0
Interest expense..... 661.9 663.4 658.5 633.2 676.4 636.4 590.9 544.3
-------- ------- ------- ------- ------- ------- ------- -------
Net interest income.. 946.3 947.7 916.5 890.8 887.6 839.8 798.2 743.7
Provision for
credit losses....... 113.6 105.9 87.4 87.8 95.9 86.5 74.7 55.3
Non-interest income.. 738.1 631.8 641.9 552.8 522.3 483.7 447.4 394.8
Non-interest
expenses............ 1,103.0 1,032.4 1,011.1 943.2 934.9 866.2 822.0 759.2
-------- ------- ------- ------- ------- ------- ------- -------
Income before
income taxes........ 467.8 441.2 459.9 412.6 379.1 370.8 348.9 324.0
Income tax expense... 159.7 152.2 174.5 141.2 119.4 125.6 114.6 107.2
-------- ------- ------- ------- ------- ------- ------- -------
Net income........... $ 308.1 289.0 285.4 271.4 259.7 245.2 234.3 216.8
======== ======= ======= ======= ======= ======= ======= =======
Per Common Share
Net income
Primary............ $ 0.81 0.76 0.76 0.74 0.72 0.70 0.68 0.66
Fully diluted...... 0.81 0.76 0.76 0.74 0.72 0.69 0.67 0.65
Dividends declared... 0.27 0.27 0.27 0.24 0.24 0.24 0.21 0.21
Stockholders'
equity.............. 15.94 15.53 14.71 14.64 14.20 13.73 12.91 11.96
Stock price range.... 46 7/8-40 3/4 41-32 37 1/2-33 37 1/8-30 1/2 34 3/4-29 1/4 32 3/4-26 7/8 29 3/8-25 1/8 26 1/4-22 5/8
Period end stock
price............... 43 1/2 40 3/4 34 7/8 36 3/4 33 32 1/2 28 3/4 25 3/8
Tax-equivalent Yields
and Rates
Money market
investments......... 5.41% 5.97 5.14 5.63 6.17 5.52 6.15 5.78
Trading account
securities.......... 6.83 6.95 6.66 6.14 6.13 7.72 11.27 9.75
Investment
securities.......... 4.74 4.05 4.73 4.50 7.59 7.52 7.75 7.72
Investment and
mortgage-backed
securities available
for sale............ 7.38 7.38 7.29 7.42 7.60 7.40 7.33 7.32
Total investment
securities........ 7.27 7.22 7.16 7.27 7.60 7.41 7.37 7.36
Mortgages held for
sale................ 7.33 7.84 7.45 6.83 7.47 7.29 8.19 8.11
Loans held for sale.. 7.75 7.77 8.94 10.19 9.30 8.46 8.65 8.57
Loans and leases..... 11.15 11.15 11.13 11.28 11.33 11.32 11.13 10.78
Total earning
assets............ 9.48 9.59 9.50 9.71 9.80 9.76 9.81 9.49
Interest-bearing
deposits............ 3.94 3.91 3.91 3.95 4.05 4.05 4.02 3.90
Short-term
borrowings.......... 5.32 5.31 5.22 5.39 5.82 5.75 6.12 6.00
Long-term debt....... 6.14 6.14 6.04 6.21 6.40 6.55 6.62 6.52
Total interest-
bearing
liabilities....... 4.65 4.66 4.65 4.75 4.97 4.97 4.99 4.84
Yield spread......... 4.83 4.93 4.85 4.96 4.83 4.79 4.82 4.65
Net interest income
to earning assets... 5.60 5.66 5.54 5.69 5.60 5.59 5.66 5.49
Ratios*
Return on assets..... 1.55% 1.48 1.50 1.51 1.42 1.43 1.48 1.46
Leverage............. 13.19x 13.54 13.76 13.71 14.16 14.30 13.92 14.84
Return on realized
common equity....... 22.0% 21.0 22.1 22.7 22.0 22.3 22.6 22.2
(Continued on page 82)
*Based on average balances and net income for the periods.
81
Norwest Corporation and Subsidiaries
Quarterly Condensed Consolidated Financial Information (Continued from page 81)
In millions 1996 Quarters 1995 Quarters
------------------------------------- -------------------------------------
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
Average Assets
Money market investments.................. $2,633 629 790 559 677 364 408 973
Trading account securities................ 253 365 498 398 201 212 165 141
Investment securities..................... 723 864 839 796 1,460 1,437 1,384 1,296
Investment and mortgage-backed securities
available for sale..................... 17,053 17,540 16,827 15,237 15,572 14,622 13,909 13,989
------- ------ ------ ------ ------ ------ ------ ------
Total investment securities.......... 17,776 18,404 17,666 16,033 17,032 16,059 15,293 15,285
Mortgages held for sale................... 5,553 6,385 7,160 6,344 6,757 5,923 3,657 2,824
Loans held for sale....................... 2,691 2,493 2,970 3,440 2,482 2,089 2,202 2,153
Loans and leases, net of unearned discount 39,654 39,431 38,049 37,020 37,262 36,265 35,444 33,219
------- ------ ------ ------ ------ ------ ------ ------
Total average earning assets......... 68,560 67,707 67,133 63,794 64,411 60,912 57,169 54,595
Allowance for credit losses............... (1,041) (1,034) (991) (952) (913) (869) (851) (809)
Cash and due from banks................... 3,691 3,503 3,632 3,551 3,549 3,074 3,155 3,074
Other assets.............................. 7,902 7,663 6,938 5,909 5,533 5,044 4,232 3,553
------- ------ ------ ------ ------ ------ ------ ------
Total average assets................. $79,112 77,839 76,712 72,302 72,580 68,161 63,705 60,413
======= ====== ====== ====== ====== ====== ====== ======
Average Liabilities and Stockholders' Equity
Noninterest-bearing deposits.............. $13,243 12,499 11,926 11,167 11,050 10,415 9,526 8,921
Interest-bearing deposits................. 35,272 34,545 33,553 31,573 30,371 29,021 28,272 27,767
Short-term borrowings..................... 8,135 8,825 8,986 8,269 10,020 9,693 7,582 7,616
Long-term debt............................ 13,299 13,409 14,279 13,689 13,744 12,203 11,603 10,081
Other liabilities......................... 3,165 2,814 2,393 2,330 2,271 2,062 2,145 1,957
Stockholders' equity...................... 5,998 5,747 5,575 5,274 5,124 4,767 4,577 4,071
------ ------- ------- ------ ------ ------- ------- -------
Total average liabilities and
stockholders' equity.............. $79,112 77,839 76,712 72,302 72,580 68,161 63,705 60,413
======= ====== ====== ====== ====== ====== ====== ======
The financial information on pages 81 and 82 is unaudited. In the opinion of
management, all adjustments necessary (which are of a normal recurring nature)
have been included for a fair presentation of the results of operations.
82