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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, 1994
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
ON
TITLE OF EACH CLASS WHICH REGISTERED
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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
Depositary Shares Representing New York Stock Exchange
10.24% Cumulative Preferred Stock
Depositary Shares Representing Cumulative New York Stock Exchange
Convertible Preferred Stock, Series B
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, 1995, 310,641,508 SHARES OF COMMON STOCK WERE OUTSTANDING
HAVING AN AGGREGATE MARKET VALUE, BASED UPON A CLOSING PRICE OF $24.00 PER
SHARE, OF $7,455.4 MILLION. AT THAT DATE, THE AGGREGATE MARKET VALUE OF THE
VOTING STOCK HELD BY NON-AFFILIATES WAS IN EXCESS OF $6,651.4 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 25, 1995, are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
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 operates through subsidiaries
engaged in banking and in 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, 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, and
venture capital investments.
At December 31, 1994, the corporation and its subsidiaries employed
approximately 38,800 persons, had consolidated total assets of $59.3 billion,
total deposits of $36.4 billion, and total stockholders' equity of $3.8
billion. Based on total assets at December 31, 1994, the corporation was the
13th largest bank holding company in the United States.
As a holding company, the corporation's role is to coordinate the
establishment of goals, objectives, policies and strategies, to monitor
adherence to policies and to provide capital funds to its subsidiaries. In
addition, the corporation provides its subsidiaries with strategic planning
support, asset and liability management services, investment administration and
portfolio planning, tax planning, new product and business development support,
advertising, administrative services and human resources management. 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 17 in the Appendix, discusses
developments in the corporation's business during 1994 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 15 of the corporation's consolidated
financial statements for additional information about the corporation's
business segments.
BANKING
The corporation's subsidiary banks, located in 15 states with 619 locations,
offer diversified financial services including community and corporate banking,
trust, capital management, data processing and credit card services. Investment
services are provided to customers through Norwest Investment Services, Inc.,
which operates in 15 states with 140 offices, primarily in banking locations.
Norwest Insurance, Inc., its subsidiaries and ATI Title Company operate
insurance agencies in 17 states with 139 offices offering complete lines of
commercial, personal, and title coverages to customers. A subsidiary of the
corporation operates one of the nation's top two crop insurance managing
general agencies. In addition to insurance company subsidiaries owned by
Norwest Financial Services, Inc., there are 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.
Norwest Bank Minnesota, N.A. is the largest bank in the group with total
assets of $15.5 billion at December 31, 1994. Eleven other banks in the group
equaled or exceeded $1.0 billion in total assets: Norwest Bank Iowa, N.A. ($6.6
billion), Norwest Bank South Dakota, N.A. ($4.3 billion), Norwest Bank
Colorado, N.A. ($3.9 billion), Norwest Bank Arizona, N.A. ($2.2 billion),
Norwest Bank Nebraska, N.A. ($2.0 billion), Norwest Bank Indiana, N.A. ($1.9
billion), Norwest Bank New Mexico, N.A. ($1.9 billion), Norwest Bank Wyoming,
N.A. ($1.7 billion), Norwest Bank Wisconsin, N.A. ($1.6 billion), Norwest Bank
Texas, N.A. ($1.2 billion), and Norwest Bank North Dakota, N.A. ($1.1 billion).
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Norwest Venture Capital consists of a group of five affiliated companies
engaged in making and managing investments in start-up businesses, emerging
growth companies, management buy-outs, acquisitions and corporate
recapitalizations. During 1994, Norwest Venture Capital made new investments of
$75 million in 48 companies. In addition, the $200 million Norwest Equity
Partners V was formed to continue to provide equity capital to businesses in
all stages of corporate life cycles. 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 information processing,
microelectronics, biotechnology, computer software, medical products, health
care delivery, telecommunications, industrial automation, environmental related
businesses and 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
The corporation, through its mortgage banking operations, originates and
purchases residential first mortgage loans for sale to various investors and
provides 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 683
offices in all 50 states. Approximately 55 percent of the mortgages are FHA and
VA mortgages guaranteed by the federal government and sold as GNMA securities.
In 1994 the company funded $24.9 billion of mortgages, with the average loan
being approximately $97,600. This compares with $33.7 billion of fundings in
1993 and $21.0 billion in 1992. The five states with the highest originations
in 1994 are: California $4,846.1 million; Minnesota $1,796.0 million; Colorado
$1,494.2 million, Illinois $1,119.8 million and Virginia $1,101.1 million. The
originations in these five states comprise approximately 42 percent of total
originations in 1994. As of December 31, 1994 the mortgage banking servicing
portfolio totaled $71.5 billion with a weighted average coupon of 7.53 percent,
as compared with $45.7 billion and 7.22 percent, respectively, at December 31,
1993. During 1994, approximately $18.2 billion of servicing was acquired,
including $8.6 billion from Michigan National Bank. In 1994, sales of servicing
rights were $11.7 billion with gains on sales of $130.0 million, compared with
$2.9 billion and $61.7 million, respectively, during 1993,and $7.2 billion and
$62.4 million, respectively, in 1992. The sales of servicing in 1994 were in
consideration of the mix of the portfolio and opportunistic pricing spreads.
CONSUMER FINANCE
Consumer finance activities, provided through the corporation's subsidiary,
Norwest Financial Services, Inc. and its subsidiaries ("Norwest Financial"),
include providing direct installment loans to individuals, purchasing of sales
finance contracts, providing private label and lease accounts receivable
services and providing other related products and services. Norwest Financial
provides consumer finance products and services through 1,042 stores in 46
states, Guam, and all 10 Canadian provinces. At December 31, 1994, consumer
finance receivables accounted for 91 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 $435.0 million; Texas $214.2
million; Florida $210.4 million; Ohio $162.1 million; and Illinois $159.7
million. Canadian consumer finance receivables totaled $427.8 million at
December 31, 1994. The consumer finance receivables of Canada and the five
states listed above comprise approximately 38 percent of total consumer finance
receivables at year-end 1994. The average installment loan made during 1994 was
approximately $2,797, while sales finance contracts purchased during the year
averaged approximately $1,001. Comparable amounts in 1993 and 1992 were $2,799
and $976, and $2,652 and $932, 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
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Financial's consumer finance business. Property, involuntary unemployment and
non-filing insurance also is 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.
COMPETITION
Legislative and regulatory changes coupled with technological advances have
significantly increased competition in the financial services industry. The
corporation's banks and financial services subsidiaries compete with other
commercial banks and financial institutions including savings and loan
associations, credit unions, finance companies, mortgage banking companies,
brokerage houses and insurance agencies.
GOVERNMENT POLICIES, SUPERVISION AND REGULATION
GENERAL
As a bank holding company, the corporation is subject to supervision and
examination by the Federal Reserve Board. The corporation's banking
subsidiaries are subject to supervision and examination by applicable federal
and state banking agencies. Deposits of all of the corporation's banking
subsidiaries are insured, and therefore the subsidiaries are subject to
regulation by the Federal Deposit Insurance Corporation (FDIC). 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.
DIVIDEND RESTRICTIONS
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 (OCC)
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
profits, as defined by regulation, for that year combined with its retained net
profits for the preceding two years less any required transfers to surplus or a
fund for the retirement of any preferred stock. In addition, a national bank
may not pay a dividend in an amount greater than its net profits then on hand
after deducting its losses and bad debts. For this purpose, bad debts are
defined to include, generally, loans which have matured and are in arrears with
respect to interest by six months or more, other than such loans which are well
secured and in the process of collection. Under these provisions the
corporation's national bank subsidiaries could have declared, as of December
31, 1994, aggregate dividends of $361.4 million without obtaining prior
regulatory approval and without reducing the capital of the respective banks
below regulatory minimum levels. The corporation also has several state bank
subsidiaries that are subject to state regulations limiting dividends; however,
the amount of dividends payable by the corporation's state bank subsidiaries,
with or without state regulatory approval, would represent an immaterial
contribution to the corporation's revenues. Additionally, the corporation's
non-bank subsidiaries could have declared dividends totaling $1,144.3 million
at December 31, 1994.
If, in the opinion of the applicable regulatory authority, a bank under its
jurisdiction is engaged in an unsafe or unsound practice (which, depending on
the financial condition of the bank, could include the payment of dividends),
such authority may require, after notice and hearing, that such bank cease and
desist from such practice. The Federal Reserve Board, the OCC, and the FDIC
have issued policy statements which provide that FDIC insured banks and bank
holding companies should generally pay dividends only out of current operating
earnings.
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 is necessarily subject to the prior
claims of creditors
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of such subsidiary, except to the extent that the corporation may be a
creditor. The principal sources of the corporation's revenues are dividends and
service 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% of the bank's capital and surplus and, with respect to the
corporation and all non-bank subsidiaries, to an aggregate of 20% 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 it. 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 by, 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 shareholder of all
but two of its subsidiary banks, is subject to such provisions.
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 43 in the Appendix regarding acquisitions by the corporation
since 1992.
The acquisition of banking institutions and other companies by the
corporation is subject to the prior approval of the Board of Governors of the
Federal Reserve System (the "Board") and may be subject to the prior approval
of other federal and state regulatory authorities. The Board may not approve
the acquisition of a bank located outside of the state of Minnesota unless the
acquisition is authorized by the law of the state where the bank to be acquired
is located. State law may also impose conditions and limitations on such
acquisitions, including prior approval of state regulatory authorities.
Effective September 29, 1995, under the interstate banking provisions of the
Reigle-Neal Interstate Banking and Branching Act of 1994, (the "Reigle-Neal
Act") the corporation will be permitted to acquire banks in any state subject
to the prior approval of the Board, certain limited conditions that a state may
impose and deposit concentration limits of 30% in any one state, unless it is
the initial entry of a banking institution into that state, and 10% nationwide.
Effective June 1, 1997, under the interstate branching provisions of the
Reigle-Neal Act, banking subsidiaries of the corporation will be permitted to
acquire directly a banking institution located in a state other than the state
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in which the acquiring bank is located, through merger, consolidation, or
purchase of assets and assumption of liabilities, ("interstate bank merger")
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. An
interstate bank merger may occur before June 1, 1997, if each of the states in
which the merging banks is located has enacted a law authorizing interstate
bank mergers. Interstate bank mergers are subject to the prior approval of the
applicable federal and state regulatory authority, 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.
CAPITAL REQUIREMENTS
The Federal Reserve Board has issued risk-based capital guidelines for bank
holding companies, such as the corporation, that specify a minimum ratio of
total capital to risk-adjusted assets (including certain off-balance sheet
items, such as stand-by letters of credit) of eight percent. At least half of
the total capital is to be composed of common equity, retained earnings, and a
limited amount of noncumulative perpetual preferred stock ("Tier 1 capital").
The remainder ("Tier 2 capital") may consist of hybrid capital instruments,
perpetual debt, mandatory convertible debt securities, a limited amount of
subordinated debt, other preferred stock, and a limited amount of allowance for
credit losses. Additionally, the risk-based capital guidelines specify that all
intangibles, including core deposit intangibles, purchased mortgage servicing
rights ("PMSRs"), and purchased credit card relationships ("PCCRs") be deducted
from Tier 1 capital. The guidelines, however, grandfather identifiable assets
(other than PMSRs 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) PMSRs 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,
PMSRs 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. The
OCC has adopted substantially similar regulations. 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 percent 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, 1994, the corporation's Tier 1 and total capital (the sum of Tier
1 and Tier 2 capital) to risk-adjusted assets ratios were 9.89 percent and
12.23 percent, respectively, and the corporation's leverage ratio was 6.94
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.
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 revises the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and
makes revisions to several other federal banking statutes.
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Among other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. FDICIA establishes five capital tiers: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized", and "critically undercapitalized".
A depository institution's capital tier will depend upon where its capital
levels are in relation to various relevant capital measures, which will include
a risk-based capital measure and a leverage ratio capital measure, and certain
other factors.
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, 1994, 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 intended to
facilitate the early identification of problems in financial management of
depository institutions. Regulations or guidelines relating to the other
management and operational standards have not been issued. The impact of such
regulations or guidelines on the corporation cannot be ascertained.
7
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 than 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, 1994, all of the corporation's banking
subsidiaries were well capitalized and, therefore, were not subject to these
restrictions.
FDIC INSURANCE
Effective January 1, 1993, the deposit insurance assessment rate for the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF")
increased as part of the adoption by the FDIC of a transitional risk-based
assessment system. In June 1993, the FDIC published final regulations making
the transitional system permanent effective January 1, 1994, but left open the
possibility that it may consider expanding the range between the highest and
lowest assessment rates at a later date. An institution's risk category is
based upon whether the institution is well capitalized, adequately capitalized,
or less than adequately capitalized. Each insured depository institution is
also to be assigned to one of the following "supervisory subgroups": Subgroup
A, B, or C. Subgroup A institutions are financially sound institutions with few
minor weaknesses; Subgroup B institutions are institutions that demonstrate
weaknesses 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. Based on its
capital and supervisory subgroups, each BIF or SAIF member institution is
assigned an annual FDIC assessment rate ranging from 23 cents per $100 of
domestic deposits (for well capitalized Subgroup A institutions) to 31 cents
(for undercapitalized Subgroup C institutions). Adequately capitalized
institutions are assigned assessment rates ranging from 26 cents to 30 cents.
The FDIC has proposed regulations that would assign an annual FDIC assessment
rate for BIF member institutions ranging from 4 cents per $100 of domestic
deposits (for well capitalized Subgroup A institutions) to 31 cents (for
undercapitalized Subgroup C institutions). The corporation incurred $79.2
million of FDIC assessment expense in 1994 as compared with $72.4 million in
1993.
ITEM 2. PROPERTIES
The corporation operates 619 banking locations, of which 429 are owned
directly by subsidiary banks and 190 are leased from outside parties. The
mortgage banking operation leases its headquarters facilities and servicing
center in Des Moines, Iowa, leases a servicing center in Minneapolis,
Minnesota, owns an additional servicing center located in Springfield, Ohio,
and leases all mortgage production offices nationwide. 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 51 and
67 in the Appendix contain additional information with respect to premises and
equipment and commitments under noncancellable leases for premises and
equipment.
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ITEM 3. LEGAL PROCEEDINGS
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 of the corporation and its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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 the 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 56 through 58, 81,
and 90 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, 1995
were:
TITLE OF CLASS NUMBER OF HOLDERS
-------------- -----------------
6 3/4% Convertible Subordinated Debentures Due 2003.... 8
Depositary Shares Representing Cumulative Convertible
Preferred Stock, Series B............................. 91
Common Stock, par value $1 2/3 per share............... 30,035
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data begins on page 84 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 17 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 33 in the Appendix. The report of independent certified public
accountants on the corporation's consolidated financial statements is presented
on page 82 in the Appendix.
Selected quarterly financial data is presented on pages 90 and 91 in the
Appendix.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
10
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.
11
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.
(b)REPORTS ON FORM 8-K
The corporation filed Current Reports on Form 8-K dated November 1,
1994, reporting consolidated operating results of the corporation
for the quarter and nine months ended September 30, 1994; and dated
November 15, 1994, filing certain documents in connection with the
offering of Medium-Term Notes, Series E.
(c)EXHIBITS
3(a). Restated Certificate of Incorporation, as amended, incor-
porated by reference to Exhibit 3(b) to the corporation's
Current Report on Form 8-K dated June 28, 1993.
3(b). Certificate of Designations of powers, preferences and
rights relating to the corporation's ESOP Cumulative Con-
vertible Preferred Stock incorporated by reference to Ex-
hibit 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). 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), 3(b), 3(c), and 3(d) of Item 14(c), above.
4(b). Rights Agreement, dated as of November 22, 1988, between
the corporation and Citibank, N.A. incorporated by refer-
ence to Exhibit 1 to the corporation's Form 8-A, dated De-
cember 6, 1988, and Certificates of Adjustment pursuant to
Section 12 of the Rights Agreement incorporated by refer-
ence 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). 1985 Long-Term Incentive Compensation Plan, as amended,
incorporated by reference to Exhibit 99(a) to the corpora-
tion's Registration Statement No. 033-50309.
*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 incorporated by ref-
erence to Exhibit 10 to the corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994.
*10(d). Executive Incentive Compensation Plan incorporated by ref-
erence to Exhibit 19(a) to the corporation's Quarterly Re-
port on Form 10-Q for the quarter ended June 30, 1988.
Amendment to Executive Incentive Compensation Plan incor-
porated by reference to Exhibit 19(b) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1989.
12
*10(e). Performance-Based Compensation Policy for Covered Execu-
tive 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, incorpo-
rated by reference to Exhibit 10(e) to the corporation's
Annual Report on Form 10-K for the year ended December 31,
1992.
*10(g). Executive Financial Counseling Plan incorporated by refer-
ence 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 Re-
port on Form 10-K for the year ended December 31, 1990.
Amendment to Supplemental Long Term Disability Plan, in-
corporated by reference to Exhibit 10(g) to the corpora-
tion's Annual Report on Form 10-K for the year ended De-
cember 31, 1992.
*10(i). Deferred Compensation Plan for Non-Employee Directors in-
corporated by reference to Exhibit 10(g) to the corpora-
tion's Annual Report on Form 10-K for the year ended De-
cember 31, 1987.
*10(j). Retirement Plan for Non-Employee Directors incorporated by
reference to Exhibit 10(h) to the corporation's Annual Re-
port on Form 10-K for the year ended December 31, 1987.
Amendment to Retirement Plan for Non-Employee Directors
incorporated by reference to Exhibit 19 to the corpora-
tion's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990.
*10(k). Directors' Formula Stock Award Plan, as amended, incorpo-
rated by reference to Exhibit 10(c) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1994.
*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.
*10(o). Form of agreement executed in March 1991, between the cor-
poration and 13 executive officers, including two direc-
tors, incorporated by reference to Exhibit 19(f) to the
corporation's Quarterly Report on Form 10-Q for the quar-
ter ended March 31, 1991. Amendments dated March 16, 1992
to the agreements between the corporation and Lloyd P.
Johnson and Richard M. Kovacevich incorporated by refer-
ence to Exhibit 19(a) to the corporation's Quarterly Re-
port on Form 10-Q for the quarter ended March 31, 1992.
*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 Pre-
ferred Stock Dividends.
21. Subsidiaries of the Corporation
23. Consent of Experts.
24. Powers of Attorney.
27. Financial Data Schedule Article 9.
13
- --------
* 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.
14
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 28TH DAY OF
FEBRUARY, 1995.
Norwest Corporation
(Registrant)
/s/ Richard M. Kovacevich
By __________________________________
Richard M. Kovacevich
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON THE 28TH DAY OF FEBRUARY, 1995, BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
/s/ John T. Thornton
By __________________________________
John T. Thornton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Michael A. Graf
By __________________________________
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 William A. Hodder to sign this document on their behalf.
David A. Christensen Richard M. Kovacevich
Gerald J. Ford Richard S. Levitt
Pierson M. Grieve Cynthia H. Milligan
Charles M. Harper John E. Pearson
N. Berne Hart Ian M. Rolland
George C. Howe Stephen E. Watson
Lloyd P. Johnson Michael W. Wright
Reatha Clark King
/s/ William A. Hodder
By __________________________________
William A. Hodder
Director and Attorney-in-Fact
February 28, 1995
15
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, 1994
CONTENTS
PAGE
----
Financial Review .......................................................... 17
Financial Statements ...................................................... 33
Independent Auditors' Report .............................................. 82
Management's Report ....................................................... 83
Six-Year Consolidated Financial Summary ................................... 84
Consolidated Average Balance Sheets and Related Yields and Rates .......... 86
Quarterly Condensed Consolidated Financial Information..................... 90
16
FINANCIAL REVIEW
This financial review should be read with the consolidated financial
statements and accompanying notes presented on pages 33 through 81 and other
information presented on pages 84 through 91.
EARNINGS PERFORMANCE
Norwest Corporation (the "corporation") reported record net income of $800.4
million in 1994, a 30.6 percent increase over 1993 earnings of $613.1 million,
which were up 55.6 percent over the $394.0 million earned in 1992. Net income
per common share was $2.45 in 1994, compared with $1.89 in 1993 and $1.19 in
1992, an increase of 29.6 percent and 58.8 percent, respectively. Return on
realized common equity was 21.4 percent and return on assets was 1.45 percent
for 1994, compared with 18.2 percent and 1.20 percent, respectively, in 1993,
and 11.7 percent and 0.85 percent, respectively, in 1992.
The corporation's results for periods prior to 1994 have been restated to
include the results of First United Bank Group, Inc. (First United) which was
acquired by the corporation effective January 14, 1994 and has been accounted
for using the pooling of interests method of accounting. Included in 1993
earnings are First United's $16.5 million of additional provision for credit
losses for the purpose of conforming First United's credit loss practices and
policies to those of the corporation and $83.2 million of merger and transition
related expenses.
The corporation's results for periods prior to 1993 were previously restated
to include the results of Lincoln Financial Corporation (Lincoln), which was
acquired by the corporation effective February 9, 1993 and was accounted for
using the pooling of interests method of accounting. Included in 1992 earnings
were Lincoln's $60.0 million of additional provision for credit losses for the
purpose of conforming Lincoln's credit loss practices and policies to those of
the corporation and $33.5 million of merger and transition related expenses and
restructuring costs.
Net income per common share amounts for periods prior to 1993 have been
restated to reflect the two-for-one split of the outstanding shares of common
stock of the corporation effected in the form of a 100 percent stock dividend
distributed on June 28, 1993.
The 1992 results include a one-time special charge of $76.0 million after
tax, or 25 cents per common share, related to the corporation's early adoption
of Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" (FAS 106). Excluding the
cumulative effect of the change in accounting for postretirement medical
benefits, 1992 net income was $470.0 million, or $1.44 per common share, return
on common equity was 14.2 percent and return on assets was 1.01 percent.
17
NORWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME SUMMARY
IN MILLIONS
5 YEAR
GROWTH
1994 CHANGE 1993 CHANGE 1992 1991 1990 RATE
-------- ------ -------- ------ -------- -------- -------- ------
Interest income (tax-
equivalent basis)...... $4,422.7 11.1% $3,979.6 3.5% $3,844.3 $4,073.7 $3,945.0 3.7%
Interest expense........ 1,590.1 10.2 1,442.9 (10.4) 1,610.6 2,150.3 2,320.1 (6.4)
-------- -------- -------- -------- --------
Net interest income.. 2,832.6 11.7 2,536.7 13.6 2,233.7 1,923.4 1,624.9 13.9
Provision for credit
losses................. 164.9 4.2 158.2 (41.6) 270.8 406.4 433.0 (6.7)
-------- -------- -------- -------- --------
Net interest income
after provision for
credit losses....... 2,667.7 12.2 2,378.5 21.2 1,962.9 1,517.0 1,191.9 16.5
Non-interest income..... 1,638.3 3.4 1,585.0 24.4 1,273.7 1,064.0 896.3 17.6
Non-interest expenses... 3,096.4 1.5 3,050.4 19.5 2,553.1 2,041.5 1,744.5 15.2
-------- -------- -------- -------- --------
Income before income
taxes................. 1,209.6 32.5 913.1 33.6 683.5 539.5 343.7 22.1
Income tax expense...... 380.2 42.6 266.7 51.9 175.6 73.4 115.1 30.9
Tax-equivalent
adjustment............. 29.0 (12.9) 33.3 (12.1) 37.9 47.8 59.2 (14.4)
-------- -------- -------- -------- --------
Income before cumulative
effect of a change in
accounting for
postretirement medical
benefits............... 800.4 30.6 613.1 30.5 470.0 418.3 169.4 23.0
Cumulative effect on
years ended prior to
December 31, 1992 of a
change in accounting
for postretirement
medical benefits....... -- -- -- NM (76.0) -- -- --
-------- -------- -------- -------- --------
Net income.............. $ 800.4 30.6% $ 613.1 55.6% $ 394.0 $ 418.3 $ 169.4 23.0%
======== ===== ======== ===== ======== ======== ======== =====
- --------
NM--Not meaningful
ORGANIZATIONAL EARNINGS
Banking. The Banking Group reported record earnings of $507.1 million in
1994, a 42.1 percent increase over 1993 earnings of $356.7 million, which
increased 38.5 percent over the $257.6 million earned in 1992. Included in the
1993 Banking Group results are First United's additional provision for credit
losses and merger and transition related expenses totaling $99.7 million before
income taxes. The Banking Group earnings increases in 1994 and 1993 reflect a
17.1 percent and 7.0 percent growth in tax-equivalent net interest income,
respectively, primarily due to increases in average earning assets and net
interest margin, and 10.3 percent and 71.8 percent decreases in the provision
for credit losses, respectively, reflecting continued decreases in net credit
losses and non-performing assets. Non-interest income in the Banking Group
decreased 9.7 percent from 1993 due largely to securities losses in 1994. Non-
interest income in 1993 increased 10.5 percent over 1992 primarily due to
continued increases in trust fee income, service charges on deposits and
insurance revenues. The Banking Group non-interest expenses decreased 1.5
percent in 1994. In 1993, non-interest expenses increased 10.2 percent over
1992 primarily as a result of acquisition-related charges, writedowns of excess
facilities and other assets, and increased charitable contributions.
The venture capital subsidiaries realized $77.1 million of net gains in 1994,
compared with net gains of $59.5 million in 1993 and net gains of $29.7 million
in 1992. Virtually all appreciated securities included in the $59.5 million
venture capital gains in 1993 were contributed to the Norwest Foundation,
compared with $19.6 million in 1994. Contribution amounts of these appreciated
securities, which included cost basis, were $69.8 million in 1993 and $21.8
million in 1994. Net unrealized appreciation in the venture capital investment
portfolio was $61.3 million at December 31, 1994 and $118.3 million at December
31, 1993.
Mortgage Banking. Mortgage banking operations earned $70.8 million in 1994,
$56.3 million in 1993, and $53.4 million in 1992. The 25.9 percent increase in
1994 earnings was principally due to growth in the
18
servicing portfolio. A 60.2 percent increase in residential mortgage fundings
over 1992 contributed to the increase in 1993 earnings. Fundings were $24.9
billion in 1994, compared with $33.7 billion in 1993 and $21.0 billion in 1992.
Approximately 16.0 percent of the 1994 fundings were due to refinancings,
compared with 45.6 percent in 1993. Net gains on the sale of mortgages were
$74.5 million in 1994, compared with $140.5 million in 1993 and $19.8 million
in 1992. Net servicing retained during 1994 was $25.8 billion, compared with
$24.1 billion in 1993 and $13.0 billion in 1992. The servicing portfolio
increased to $71.5 billion at December 31, 1994, compared with $45.7 billion at
December 31, 1993. In 1994, sales of servicing rights were $11.7 billion with
gains on sales of $130.0 million, compared with $2.9 billion and $61.7 million,
respectively, during 1993 and $7.2 billion and $62.4 million, respectively, in
1992.
Norwest Financial Services, Inc. Norwest Financial Services, Inc. (Norwest
Financial) reported record earnings of $222.5 million in 1994, an 11.2 percent
increase over 1993 earnings of $200.1 million, which were 25.9 percent over the
$159.0 million earned in 1992. The increases were primarily due to increases in
tax-equivalent net interest income of 12.5 percent and 27.1 percent,
respectively, for 1994 and 1993. The increase in tax-equivalent net interest
income was due to 14.4 percent and 18.1 percent increases in average finance
receivables in 1994 and 1993, respectively. Net interest margin decreased 29
basis points in 1994, reflecting higher funding costs. The margin improved 107
basis points in 1993 over 1992 due primarily to lower short-term borrowing
rates and benefits from refinancing long-term debt at lower interest rates.
Norwest Financial's non-interest expenses increased 10.0 percent and 21.5
percent in 1994 and 1993, respectively, primarily due to the acquisitions of
Community Credit Co. in March 1994 and the consumer finance business of Trans
Canada Credit Corporation Limited during the fourth quarter of 1992.
NORWEST CORPORATION AND SUBSIDIARIES
ORGANIZATIONAL EARNINGS*
IN MILLIONS
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992 1991 1990
------ ----- ----- ----- -----
Banking........................................ $507.1 356.7 257.6 263.4 46.1
Mortgage banking............................... 70.8 56.3 53.4 31.4 17.0
Norwest Financial Services, Inc. and
subsidiaries.................................. 222.5 200.1 159.0 123.5 106.3
------ ----- ----- ----- -----
Consolidated income before cumulative effect of
a change in accounting for postretirement
medical benefits.............................. 800.4 613.1 470.0 418.3 169.4
Cumulative effect on years ended prior to
December 31, 1992 of a change in accounting
for postretirement medical benefits........... -- -- (76.0) -- --
------ ----- ----- ----- -----
Net income..................................... $800.4 613.1 394.0 418.3 169.4
====== ===== ===== ===== =====
- --------
*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
was 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 1994, tax-equivalent net interest income
provided 63.4 percent of the corporation's net revenues, compared with 61.5
percent in 1993 and 63.7 percent in 1992.
Total tax-equivalent net interest income was $2,832.6 million in 1994, an
11.7 percent increase over the $2,536.7 million reported in 1993. Growth in
tax-equivalent net interest income over 1993 was primarily due
19
to an 8.2 percent increase in average earning assets and a 16 basis point
increase in net interest margin. The increase in average earning assets was
primarily due to a 13.8 percent increase in average loans and leases,
principally consumer-related loans, and a 9.2 percent increase in investment
securities. The 1993 increase of 13.6 percent over the $2,233.7 million
reported in 1992 was due to a 10.8 percent increase in average earning assets
and a 14 basis point increase in net interest margin. Non-accrual and
restructured loans reduced net interest income by $12.3 million in 1994, $13.9
million in 1993 and $18.4 million in 1992. Detailed analyses of net interest
income appear on pages 85, 86 and 87.
Net interest margin, the ratio of tax-equivalent net interest income divided
by average earning assets, was 5.66 percent in 1994, 5.50 percent in 1993 and
5.36 percent in 1992. The increase in margin in 1994 was due to an improvement
in the yield spread of nine basis points, from 4.85 percent in 1993 to 4.94
percent in 1994, and a shift in the mix of earning assets to higher-yielding
loans. Average loans and leases comprised 60.6 percent of average earning
assets in 1994, compared with 57.6 percent in 1993. The increase in margin in
1993 over 1992 reflects the downward repricing of core deposits, refinancing of
long-term debt at lower interest rates and the repurchase of securitized credit
card receivables, partially offset by lower yields on earning assets.
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
$164.9 million in 1994, $158.2 million in 1993 and $270.8 million in 1992. The
provision for credit losses was 0.55 percent of average loans and leases in
1994, compared with 0.60 percent in 1993 and 1.16 percent in 1992. The
provision for credit losses was higher in 1994, compared with 1993, due to
higher net charge-offs and additional provisioning related to loan growth.
However, as a percentage of average loans, both net charge-offs and provision
declined in 1994 compared with 1993. The decrease in the provision for credit
losses in 1993 over 1992 reflects the continued reduction in the corporation's
net credit losses and non-performing assets which were down $107.7 million from
December 31, 1992. Also, as previously discussed, the provision for credit
losses includes additional provisions for credit losses taken by First United
of $16.5 million in 1993 and $60.0 million taken by Lincoln in 1992.
Net credit losses were $193.2 million in 1994, $178.3 million in 1993 and
$225.4 million in 1992. Net credit losses as a percent of average loans and
leases were 0.64 percent in 1994, compared with 0.67 percent in 1993 and 0.97
percent in 1992. The increase in net credit losses in 1994 over 1993 was due to
increases in consumer and credit card net charge-offs totaling $35.1 million,
partially offset by a $17.0 million reduction in commercial loan net charge-
offs. The higher consumer-related net charge-offs reflect growth in the loan
portfolio rather than a deterioration in credit quality. The net charge-off
ratio for Norwest Financial was 2.00 percent in 1994 compared with 2.16 percent
in 1993; Norwest Card Services' net charge-off ratio was 3.07 percent in 1994
compared with 3.54 percent in 1993. The decrease in net credit losses in 1993
from 1992 reflects significantly lower commercial, consumer, construction and
land development and real estate loan charge-offs resulting from lower levels
of non-performing loans. These decreases were partially offset by higher
foreign loan charge-offs as a result of Norwest Financial's fourth quarter 1992
acquisition of the consumer finance business of Trans Canada Credit Corporation
Limited and higher credit card charge-offs.
Non-Interest Income. Non-interest income is a significant source of the
corporation's revenue, representing 36.6 percent of tax-equivalent net revenues
in 1994, compared with 38.5 percent in 1993 and 36.3 percent in 1992.
Consolidated non-interest income increased 3.4 percent in 1994 to $1,638.3
million, compared with $1,585.0 million in 1993. This increase was after net
investment securities losses of $79.2 million in 1994, which provided an
opportunity to reinvest at higher yields. In 1993 and 1992, net investment
securities gains were realized of $48.8 million and $66.2 million,
respectively. Excluding gains (losses) on investment/mortgage-backed securities
and investment/mortgage-backed securities available for sale and venture
capital gains, non-interest income increased 11.1 percent in 1994 and 25.4
percent in 1993 over the respective preceding year. Contributing to the
increase in non-interest income in 1994 were higher mortgage banking revenues,
insurance fees, trust fees and deposit service charges, partially offset by a
decrease in other non-interest income.
20
The growth in mortgage banking revenues principally reflects increased
servicing fees resulting from growth in the corporation's servicing portfolio.
The higher servicing fees, coupled with an increase in gains on sales of
servicing rights, more than offset decreases in origination fees and gains on
sales of mortgages that resulted from higher market interest rates. Servicing
fees are expected to increase as the servicing portfolio grows through
retention of servicing generated and through future acquisitions, including the
acquisition of Directors Mortgage Loan Corporation (Directors Mortgage), with a
servicing portfolio of approximately $13 billion, expected to close in the
first quarter of 1995 and the purchase of the $15 billion servicing portfolio
of BarclaysAmerican/Mortgage Corporation, expected to close in the second
quarter of 1995. Sales of servicing rights of $11.7 billion were recorded in
1994 in consideration of the portfolio mix and opportunistic pricing spreads.
In 1993, there were sales of servicing rights of $2.9 billion under an
obligation in a long-term contract. Future sales of such rights are largely
dependent upon portfolio characteristics and prevailing market conditions.
The increase in insurance fees is attributed largely to commissions on credit
life insurance, related to the growth in the consumer loan portfolio. The
increases in trust fees and deposit service charges are evidence of increased
business activity and marketing efforts. Credit card fees were $116.5 million
in 1994, up slightly from $114.3 million in 1993 as revenues from higher
activity levels were partially offset by the repurchase of $858 million of
credit card receivables from the securitized credit card receivable trusts
during 1993 and 1994. The repurchase program was completed during the second
quarter of 1994. Revenues on securitized credit card receivables are recorded
in non-interest income rather than net interest income, where revenues are
recorded after the repurchases. Other non-interest income decreased $38.8
million from 1993 primarily due to lower trading revenues, as discussed below.
Net venture capital gains were $77.1 million in 1994 compared with $59.5
million in 1993. Sales of venture capital securities generally relate to
holdings becoming publicly traded and subsequent market conditions, causing
venture capital gains to be unpredictable in nature.
Consolidated non-interest income increased 24.4 percent in 1993 to $1,585.0
million, primarily due to increased mortgage banking revenues, venture capital
gains and growth in various fee-based services, partially offset by decreases
in credit card fees and net gains on investment/mortgage-backed securities. The
growth in mortgage banking revenues reflected growth in mortgage loan fundings
and the servicing portfolio. Credit card revenues decreased $19.9 million from
1992 primarily due to the repurchase of $525 million of credit card receivables
from the securitized credit card receivable trusts during 1993. Other non-
interest income increased $43.8 million from 1992 primarily due to increases of
$20.8 million in trading revenues and $9.9 million in gains on sales of student
loans available for sale.
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 Asset and Liability Management section of
the Financial Review.
Interest income derived from trading account securities was $24.6 million,
$28.9 million and $22.9 million for the three years ended December 31, 1994,
1993 and 1992, respectively. Non-interest trading revenues (losses) during
1994, 1993 and 1992, were $(18.1) million, $41.7 million and $20.9 million,
respectively. The table on trading revenues in Note 14 to the consolidated
financial statements on page 70 provides a summary of the corporation's trading
results in the principal markets in which the corporation participates.
Non-Interest Expenses. Consolidated non-interest expenses increased 1.5
percent in 1994 to $3,096.4 million reflecting higher salaries and benefits
costs, occupancy charges and equipment expenses, primarily due to acquisitions
and an increased number of stores at Norwest Financial. Offsetting these
increases were lower charitable contributions, as well as First United's non-
recurring 1993 charges totaling $81.3 million, which included systems and
operations costs of $39.8 million, severance and transitional benefits of $9.3
million, other real estate write-downs of $7.1 million and other asset write-
downs of $25.1 million.
21
Of the $99.4 million increase in personnel expense in 1994, $50.1 million is
attributable to salaries expense and $49.3 million is due to benefits expense,
representing increases over 1993 of 4.1 percent and 18.7 percent, respectively.
Benefits expense was higher due to increases in pension and savings plan
expenses as well as higher medical costs. Changes in personnel expenses by
business segment for 1994 include an increase of 14.6 percent for Norwest
Financial, an increase of 6.9 percent for the Banking Group excluding
acquisitions, and a decrease of 8.5 percent for mortgage banking.
Of the 1994 increases of $38.1 million in net occupancy expenses and $33.4
million in equipment rentals, depreciation and maintenance, mortgage banking
contributed $13.8 million and $15.7 million, respectively.
Other noninterest expenses decreased by $195.7 million to $406.7 million in
1994. Charitable contributions decreased $48.0 million due to the funding
status of the Norwest Foundation. Included in 1993 were the $81.3 million of
merger and transition expenses related to the First United acquisition
previously discussed. Additionally, other one-time special charges were
recorded in 1993 and are explained in the following paragraph.
Consolidated non-interest expenses increased 19.5 percent in 1993 to $3,050.4
million. The increase was primarily due to increased salaries and benefits at
both the mortgage banking operations, to support large origination and
servicing increases in that business, and at Norwest Financial due to its
fourth quarter 1992 acquisition of the consumer finance business of Trans
Canada Credit Corporation Limited, as well as increased salaries and benefits
due to numerous acquisitions completed by the corporation during 1993. The
increase in non-interest expenses also reflects a $47.1 million increase in
charitable contributions and certain non-recurring items. Depreciable lives on
mainframe computers were shortened, due to changing technology, with increased
depreciation recorded of $7.0 million. The amortizable life of goodwill was
capped at 15 years, the current maximum life allowed by the Office of the
Comptroller of the Currency, with increased amortization recorded of $11.3
million. A cumulative adjustment of $9.4 million and increased 1993
amortization of $5.6 million was recorded in conjunction with accelerating the
amortization for other intangibles. Losses on excess facilities of $55.5
million were recorded, based on the present value of future lease payments or
on market values of owned facilities. Other asset write-downs amounted to $24.0
million.
In 1992, the corporation recorded certain non-recurring charges including
$52.2 million for write-downs of, or losses on disposal of, excess facilities,
$10.1 million for write-downs of obsolete equipment, miscellaneous receivable
adjustments of $8.3 million and other asset write-downs of $11.7 million.
Income Taxes. The corporation's income tax planning is based upon the goal of
maximizing long-term, after-tax profitability. Income tax expense is
significantly impacted by the mix of taxable versus tax-exempt revenues from
investment securities and the loan and lease portfolio and the utilization of
net operating loss carryforwards. The effective income tax rate was 32.2
percent in 1994, compared with 30.3 percent in 1993 and 24.9 percent in 1992.
The higher effective tax rate in 1994 was primarily due to lower charitable
contributions. The increase in the effective tax rate in 1993 from 1992 was
primarily due to the utilization in 1992 of net operating loss tax benefits of
$31.2 million related to United Banks of Colorado, Inc.'s 1990 net operating
loss. For more information on income taxes, see Note 12 to the consolidated
financial statements on page 65.
CONSOLIDATED BALANCE SHEET ANALYSIS
Earning Assets. At December 31, 1994, earning assets were $53.3 billion,
compared with $50.0 billion at December 31, 1993. This increase was primarily
due to a $2.1 billion increase in total investment securities and a $4.5
billion increase in loans and leases, and student loans held for sale,
including $1.2 billion of loans and leases acquired in acquisitions completed
during 1994. These increases were partially offset by a $3.0 billion decrease
in mortgages held for sale.
Average earning assets were $49.9 billion in 1994, an increase of 8.2 percent
over 1993. This increase was primarily due to a 13.8 percent increase in
average loans and leases, and a 9.2 percent increase in average
22
total investment securities, partially offset by a 23.8 percent decrease in
average mortgages held for sale due to decreased residential mortgage fundings.
Leverage, the ratio of average assets to average total stockholders' equity,
was 14.3 times during 1994 versus 14.2 times during 1993. This increase is due
to an 8.2 percent increase in average assets, partially offset by a 7.1 percent
increase in average stockholders' equity.
In 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which was adopted by the corporation as of January
1, 1994. The Statement requires that investments classified as available for
sale be reported at fair value with unrealized gains and losses reported, net
of tax, as a separate component of stockholders' equity. The corporation
previously accounted for investments classified as available for sale using the
lower of cost or market accounting method. As of December 31, 1994 and 1993,
net unrealized gains (losses) before income taxes related to investments and
mortgage-backed securities available for sale were $(559.9) million and $482.1
million, respectively.
In Note 17 to the consolidated financial statements on page 74 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."
As of December 31, 1994, the fair value of net financial instruments totaled
$3.5 billion, a decrease of $0.5 billion from December 31, 1993. This decrease
was primarily due to a reduction in mortgages held for sale and higher
borrowing levels, partially offset by growth in loans and leases as well as
mortgage-backed securities available for sale. During the same period, the net
fair value of certain non-financial instruments increased $2.4 billion to $9.6
billion as of December 31, 1994. The fair value of the mortgage servicing
portfolio increased $0.4 billion due to increases in the servicing portfolio.
The fair value of the consumer finance network increased $0.1 billion and the
fair value of the mortgage loan origination/wholesale network decreased $0.2
billion due to lower mortgage loan originations. The fair value of non-maturity
deposits increased $1.4 billion due to increased deposits.
As of December 31, 1993, the fair value of net financial instruments totaled
$4.0 billion, an increase of $1.0 billion from December 31, 1992. This increase
was primarily due to growth in mortgages held for sale and loans and leases,
which were partially offset by reductions in investment securities, including
securities available for sale. During the same period, the net fair value of
certain non-financial instruments increased $1.1 billion to $7.3 billion as of
December 31, 1993. The fair value of the consumer finance network increased
$0.8 billion. The fair value of the mortgage servicing portfolio and the
mortgage loan origination/wholesale network increased $0.4 billion in 1993 due
to increases in the servicing portfolio and growth in the origination and
wholesale network.
Credit Risk Management. The corporation manages exposure to credit risk
through loan portfolio diversification by customer, product, industry and
geography. As a result, there is no undue concentration in any single sector.
The corporation's Banking Group operates in 15 states, largely in the Midwest
and Rocky Mountain regions of the country. Distribution of average loans by
region in 1994 was approximately 57 percent in the north central Midwest, 16
percent in the south central Midwest and 27 percent in the Rocky
Mountain/Southwest region. In general, the economy in these regions is
noticeably stronger than last year. Norwest Card Services, Norwest Mortgage and
Norwest Financial operate on a nationwide basis. With respect to Norwest Card
Services, 43 percent of the credit card portfolio is within the 15-state
banking region. Approximately 56 percent of the portfolio is accounted for by
the states of Massachusetts, Minnesota, Iowa, New York, Connecticut, Colorado,
California, Illinois, Nebraska and Oklahoma. No one state accounts for more
than 10 percent of the total credit card portfolio. Norwest Mortgage operates
in all 50 states, representing the largest retail mortgage network in the
country. Norwest Financial engages in consumer
23
finance activities in 46 states and all 10 Canadian provinces. The general
strength of the consumer sector of the national economy and the extent of the
geographic diversification exercised by Norwest Mortgage and Norwest Financial
help to mitigate the credit risk in their loan portfolios.
Credit risk management also 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 50.
As of December 31, 1994 the corporation's commercial real estate portfolio of
loans to investors, developers and builders, including construction and land
development loans (development loans), was $2,082.0 million, of which $27.9
million, or 1.3 percent, were non-performing, compared with $1,632.3 million at
December 31, 1993, of which $40.0 million, or 2.5 percent, were non-performing.
These loans do not include loans on owner-occupied real estate which the
corporation views as having the same general credit risk as commercial loans.
Development loans represent 6.4 percent of the corporation's total loan
portfolio. The total number of development loans is approximately 7,750 with an
average loan size of approximately $0.3 million. The largest development loan
is $13.9 million. The industry composition of development loans consists of
office/warehouse (24 percent), retail (22 percent), residential (31 percent)
and other (23 percent).
Geographically, over 98 percent of the development loan portfolio is within
the 15 state area where the corporation has its principal banking franchise.
Approximately 55 percent of the total portfolio is secured by property located
in Minnesota, Colorado, New Mexico and Texas. Within the 15 state area, the
Minneapolis/St. Paul area has the largest concentration of developer activity.
As noted above, the corporation has spread its construction and commercial real
estate loans among numerous borrowers and has limited the size of loans
retained on its books. Accordingly, the corporation believes its exposure to
future commercial real estate loan losses is limited.
The corporation is not aware of any loans classified for regulatory purposes
at December 31, 1994, 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, 1994.
Allowance for Credit Losses. At December 31, 1994, the allowance for credit
losses was $789.9 million, or 2.42 percent of loans and leases outstanding,
compared with $789.2 million, or 2.74 percent, at December 31, 1993. The ratio
of the allowance for credit losses to the total non-performing assets and 90-
day past due loans and leases was 361.8 percent at December 31, 1994, compared
with 246.8 percent at December 31, 1993.
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 88 presents the allocation of
the allowance for credit losses to major categories of loans.
Non-accrual, Restructured and Past Due Loans and Other Real Estate Owned. The
table on page 25 presents data on the corporation's non-accrual, restructured
and 90-day past due loans and leases and other
24
real estate owned. 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.
Non-performing assets, including non-accrual, restructured and other real
estate owned, and 90-day past due loans and leases, totaled $218.3 million, or
0.4 percent of total assets, at December 31, 1994, compared with $319.8
million, or 0.6 percent of total assets, at December 31, 1993. This decline is
principally due to decreases in real estate and commercial non-accrual loans of
$20.0 million and $21.2 million, respectively, and a $33.4 million decrease in
other real estate owned, partially offset by a $7.6 million increase in 90-day
past due loans. The reduction in primary earnings per share due to total non-
accrual and restructured loans was three cents in 1994 and 1993 and four cents
in 1992.
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan," (FAS 114) was issued by the Financial Accounting
Standards Board in May 1993 and subsequently amended by Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," (FAS 118) in October 1994. FAS 114,
as amended, requires a creditor to measure impairment of a loan 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 corporation will adopt the provisions of FAS 114 and FAS 118 in
1995. The adoption of these Statements is not expected to have a material
effect on the corporation's consolidated financial statements.
NORWEST CORPORATION AND SUBSIDIARIES
NON-ACCRUAL, RESTRUCTURED AND PAST DUE LOANS AND LEASES AND OTHER REAL ESTATE
OWNED
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
AT DECEMBER 31,
-----------------------------------------
1994 1993 1992 1991 1990 1989
------ ----- ----- ----- ----- -----
Non-accrual loans and leases....... $128.5 195.7 257.6 355.5 396.6 281.0
Restructured loans and leases...... 1.8 10.3 5.4 18.0 18.5 28.9
------ ----- ----- ----- ----- -----
Total non-accrual and
restructured loans and leases. 130.3 206.0 263.0 373.5 415.1 309.9
Other real estate owned............ 29.6 63.0 113.7 151.2 182.2 139.4
------ ----- ----- ----- ----- -----
Total non-performing assets.... 159.9 269.0 376.7 524.7 597.3 449.3
Loans and leases past due 90-days
or more*.......................... 58.4 50.8 51.9 82.4 88.3 69.1
------ ----- ----- ----- ----- -----
Total non-performing assets and
90-day past due loans and
leases........................ $218.3 319.8 428.6 607.1 685.6 518.4
====== ===== ===== ===== ===== =====
Interest income as originally
contracted on non-accrual and
restructured loans and leases..... $ 15.4 19.4 26.5 41.6 51.9 33.6
Interest income recognized on non-
accrual and restructured loans and
leases............................ (3.1) (5.5) (8.1) (14.2) (19.5) (9.1)
------ ----- ----- ----- ----- -----
Reduction of interest income due to
non-accrual and restructured loans
and leases........................ $ 12.3 13.9 18.4 27.4 32.4 24.5
====== ===== ===== ===== ===== =====
Reduction in primary earnings per
share due to non-accrual and
restructured loans and leases..... $ .03 .03 .04 .06 .08 .06
- --------
* Excludes non-accrual and restructured loans and leases.
25
FUNDING SOURCES
Interest-bearing Liabilities. At December 31, 1994, interest-bearing
liabilities totaled $44.2 billion, an increase of $4.4 billion over December
31, 1993. The increase was principally due to a $1.9 billion increase in short-
term borrowings, largely from acquisitions, and a $2.3 billion increase in
long-term debt.
Average interest-bearing liabilities were $40.9 billion in 1994, compared
with $38.3 billion in 1993, primarily due to a 6.8 percent increase in average
interest-bearing deposits and a 27.9 percent increase in average long-term
debt, partially offset by a 9.4 percent decrease in short-term borrowings.
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 63 percent of the corporation's total
funding sources during 1994 and approximately 62 percent in 1993. 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 69 percent of total funding sources during 1994, compared with 68
percent in 1993.
Purchased Deposits. In addition to core deposits, purchased deposits are an
important 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 4 percent of the corporation's total funding sources in 1994 and
1993. There were no brokered certificates of deposit at December 31, 1994 and
1993.
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, Inc. 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 60 to 90 days. Norwest Financial, Inc. utilized
funds generated through its own commercial paper sales program to fund
approximately 22 percent of its average earning assets in 1994 compared with 23
percent in 1993.
The commercial paper/short-term debt of the corporation and Norwest
Financial, Inc. are currently rated TBW-1 by Thomson BankWatch, P1 by Moody's,
A1+ by Standard & Poor's, Duff-1+ by Duff & Phelps and F-1+ by Fitch Investors
Services, Inc. IBCA has also rated the corporation's commercial paper/short-
term debt A1+. On average, total short-term borrowings represented
approximately 12.4 percent of the corporation's total funding sources during
1994 and approximately 14.8 percent during 1993.
At December 31, 1994, the corporation had available lines of credit totaling
$1,282.7 million, including lines of credit totaling $1,082.7 million at
Norwest Financial, Inc. These financing arrangements require the maintenance of
compensating balances or payment of fees, which are not material.
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 14.0 percent of the corporation's consolidated average funding
sources during 1994 compared with approximately 11.8 percent in 1993. The
corporation utilizes long-term debt primarily to meet the long-term funding
requirements of its subsidiaries, with outstandings of $6,093.7 million as of
December 31, 1994 compared with $4,109.2 million as of December 31, 1993.
Twenty-two banking 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, 1994 these banking subsidiaries had
advances outstanding totaling $2,712.3 million, an increase of $265.7 million
from December 31, 1993. Long-term debt plays an even more significant role at
Norwest Financial, Inc. which utilizes this source of financing to fund
approximately 57 percent of its average earning assets. At December 31, 1994,
Norwest Financial, Inc.'s long-term debt outstanding was $3,092.6 million. Note
9 to the consolidated financial statements on page 53 presents the
corporation's outstanding consolidated long-term debt as of December 31, 1994
and 1993.
26
Thomson BankWatch has assigned their 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, AA by IBCA, Fitch Investors
Services, Inc. and Duff & Phelps, 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 Services, Inc., AA by Duff & Phelps, AA- by
Standard & Poor's and Aa3 by Moody's.
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, which meets weekly, forms 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, regional and affiliate levels,
and compliance with such policies is monitored at regular intervals by ALCO.
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. There are two basic
ways of defining interest rate risk in the financial services industry: the
risk to reported earnings, sometimes referred to as the accounting perspective,
and the risk to the market value of the balance sheet, sometimes referred to as
the economic perspective.
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 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.
Both perspectives have their advantages and disadvantages. The corporation
believes that the two perspectives are complementary, and should be used
together to provide a more complete picture of interest rate risk than would be
provided by either perspective alone.
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
a given time period. While providing a rough measure of rate risk, the gap
report has a number of drawbacks, including the fact that it is a static (i.e.
point-in-time) measurement, it does not capture basis risk, and it does not
capture risk that varies either asymmetrically or non-proportionately with rate
movements.
Because of the drawbacks of gap reports, 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. An example of the difference between the two methods of
measurement is the tendency of consumer deposit rates to lag substantially
behind changes in market interest rates. The lag relationship may depend on a
number of factors, such as the direction and speed of rate movements and the
absolute level of rates. This relationship is difficult to show in a gap
report, but can be captured in a simulation model.
27
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. The management of interest rate risk is
governed by an interest sensitivity policy. The policy places a limit on the
amount of earnings that may be put at risk to rate movements. While this
determines the limits of the corporation's sensitivity position, the position
that is maintained at any given time is a function of balance sheet trends,
asset opportunities, and interest rate expectations. The sensitivity position
at any given time is normally well within the policy limits, which is the case
with the current position.
The simulation model is used to determine the one year and three year gap
levels which correspond to the limit in which the corporation has placed
earnings at risk to interest rate movement, and these gap levels constitute the
limits within which the corporation will manage its interest sensitivity
position. Thus, gap reports are used, in conjunction with the simulation model,
to monitor rate risk, but gaps are not used as the primary measure of rate
risk.
With regard to market valuation risk, the market valuation model is used to
measure the sensitivity of the market value of equity to a wide range of
interest rate changes. These results are reviewed with ALCO on a quarterly
basis. No specific policy limits have yet been set on market valuation risk.
The process of modeling market valuation risk is new to the financial services
industry, and no standards exist within the industry for structuring the
modeling process or using the results to define policy limits. The process of
developing an understanding of all the issues raised in the measurement and
interpretation of this risk is still evolving.
Changes In Interest Sensitivity. The table below presents the corporation's
interest sensitivity gaps for December 1994. The cumulative gap within one year
was $(2,569) million, or 4.4 percent of assets. This compares with a one year
gap of $260 million, or 0.5 percent of assets, in December 1993. The cumulative
gap within three years was $243 million, or 0.4 percent of assets, in December
1994, compared to $3,053 million, or 6.0 percent of assets, in December 1993.
The 1993 gaps have been restated to reflect changes to sensitivity assumptions
made during the year. The movement of the gap in the negative direction during
the year reflects primarily changes in the investment portfolio. The volume of
fixed rate mortgage-backed securities increased during the year, and the
average lives of existing mortgage-backed securities increased as prepayment
rates on the underlying mortgages decreased. The effect of the current interest
sensitivity position is to make the corporation's earnings almost indifferent
to interest rate changes, while benefiting from the positive slope in the short
end of the yield curve. The current sensitivity position is well within the
risk limits set by the corporation's interest sensitivity policy.
28
NORWEST CORPORATION AND SUBSIDIARIES
INTEREST RATE SENSITIVITY
IN MILLIONS
REPRICING OR MATURING
---------------------------------------------
WITHIN AFTER
6 6 MONTHS- 1 YEAR 3 YEARS 5
MONTHS 1 YEAR -3 YEARS -5 YEARS YEARS
------- --------- -------- -------- ------
AVERAGE BALANCES FOR DECEMBER,
1994
Loans and leases................. $14,178 3,464 5,894 3,811 4,921
Investment securities............ 56 90 159 101 748
Investment securities available
for sale........................ 331 101 452 144 398
Mortgage-backed securities
available for sale.............. 2,529 2,507 1,467 1,185 4,546
Student loans available for sale. 1,872 -- -- -- --
Mortgages held for sale.......... 3,099 -- -- -- --
Other earning assets............. 590 3 1 -- 1
Other assets..................... -- -- -- -- 5,177
------- ------ ----- ----- ------
Total assets................. $22,655 6,165 7,973 5,241 15,791
======= ====== ===== ===== ======
Non-interest bearing deposits.... $ 3,151 45 166 128 5,774
Interest bearing deposits........ 12,331 3,123 3,672 1,250 6,284
Short-term borrowings............ 7,556 -- -- -- --
Long-term debt................... 4,053 263 1,385 1,106 2,073
Other liabilities and equity..... -- -- 377 -- 5,088
------- ------ ----- ----- ------
Total liabilities and equity. $27,091 3,431 5,600 2,484 19,219
======= ====== ===== ===== ======
Swaps and options................ $ (867) -- 439 271 157
Gap*............................. $(5,303) 2,734 2,812 3,028 (3,271)
Cumulative gap................... $(5,303) (2,569) 243 3,271 --
Gap as a percent of total assets. (9.2)% (4.4)% 0.4% 5.7% --
- --------
* [assets - (liabilities + equity) + swaps and options] The gap includes the
effect of off-balance sheet instruments on the corporation's interest
sensitivity, with the exception of purchased interest rate floors, whose
downside risk is limited.
Liquidity Management. Liquidity management involves planning to meet
anticipated funding needs at a reasonable cost, as well as contingency plans to
meet unanticipated funding needs or a loss of funding sources. Liquidity
management for the corporation is governed by policies formulated and monitored
by ALCO, which take into account the marketability of assets, the sources and
stability of funding, and the level of unfunded commitments. While each
affiliate is responsible for managing its own liquidity position within overall
guidelines, ALCO monitors the overall liquidity position.
The corporation has a significant liquidity reserve in its
investment/mortgage-backed securities portfolio: approximately 87 percent of
the $14.8 billion portfolio consists of Treasury or federal agency securities.
These securities are highly marketable. 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, as well as the geographic diversity of the customer base.
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,
29
total capital (Tier 1 plus Tier 2) to risk-based 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
profits, as defined by regulation, for that year combined with its retained net
profits for the preceding two years. Under these provisions the corporation's
national bank subsidiaries could have declared, as of December 31, 1994,
aggregate dividends of at least $361.4 million without obtaining prior
regulatory approval and without reducing the capital of the respective banks
below minimum levels. The corporation also has several state bank subsidiaries
that are subject to state regulations limiting dividends; however, the amount
of dividends payable by the corporation's state bank subsidiaries, with or
without state regulatory approval, would represent an immaterial contribution
to the corporation's revenues. Additionally, the corporation's non-bank
subsidiaries could have declared dividends totaling $1,144.3 million at
December 31, 1994.
Through the implementation of its capital policies, the corporation has
achieved a strong capital position. The corporation's Tier 1 capital ratio at
December 31, 1994 was 9.89 percent and its total capital to risk-based assets
ratio was 12.23 percent, compared with 9.71 percent and 12.39 percent at
December 31, 1993, respectively. The corporation's leverage ratio was 6.94
percent at December 31, 1994, compared with 6.46 percent at December 31, 1993.
These ratios compare favorably to the regulatory minimums of 4.0 percent for
Tier 1, 8.0 percent for total capital to risk-based assets, and 3.0 percent for
the leverage ratio.
Common stockholders' equity was $3,334.4 million at December 31, 1994,
compared with $3,380.9 million at December 31, 1993. The corporation's internal
capital growth rate (ICGR) in 1994 was 15.2 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 Dividend Reinvestment Plan, the Savings-Investment Plans, the
1985 Long-Term Incentive Compensation Plan, and other stock issuance
requirements other than acquisitions accounted for as pooling of interests. In
January 1995, the corporation's board of directors authorized additional
purchases, at management's discretion, of 10,000,000 shares of the
corporation's common stock.
During 1994, the corporation repurchased 5,668,000 shares of its common stock
for issuance in conjunction with specific purchase acquisitions that were
consummated during the year or for which a definitive agreement had been
executed, but the consummation remained pending at December 31, 1994. In
addition, approximately 13,250,000 shares were repurchased during 1994 for
benefit plans, preferred stock conversions and other ongoing needs. During
1993, 587,000 shares were repurchased for acquisition purposes and 4,203,000
shares were repurchased for benefit plans and other ongoing needs.
In 1992, the corporation stated its intention to engage in open market or
privately negotiated purchases of depositary shares representing its 10.24%
Cumulative Preferred Stock and its Cumulative Convertible Preferred Stock,
Series B. The corporation has not established any specific objectives for the
amount of the depositary shares that it may repurchase. In 1994, the
corporation repurchased 16,500 depositary shares (representing 4,125 shares of
stock), or 0.4 percent of total outstanding shares of the 10.24% Cumulative
Preferred Stock. Total depositary shares repurchased since 1992 include 91,500,
or 2.0 percent of total outstanding shares, and 25,000, or 0.5 percent of total
outstanding shares, of the 10.24% Cumulative Preferred Stock and Cumulative
Convertible Preferred Stock, Series B, respectively.
30
On December 30, 1994, the corporation issued 980,000 shares of Cumulative
Tracking Preferred Stock, $200 stated value per share, of which 125,000 shares
were held by a subsidiary at December 31, 1994.
The corporation increased its quarterly dividend 12.1 percent to 18.5 cents
per common share on March 1, 1994 and again on December 1, 1994 to 21 cents per
common share, an increase of 13.5 percent. These dividend increases reflect 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 1993, the corporation increased the
quarterly cash dividend paid to common stockholders from 14.5 cents per share
to 16.5 cents per share. This represented a 13.8 percent increase in the
quarterly dividend rate. Also during the second quarter of 1993, the
corporation declared a two-for-one stock split in the form of a 100 percent
stock dividend payable June 28, 1993 to holders of record as of June 4, 1993.
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.
The corporation acquired Alexandria Securities and Investment Company, a $59
million bank holding company located in Alexandria, Minnesota, on December 9,
1994, and issued 341,039 common shares. Also on December 9, 1994, the
corporation acquired First National Bank of Kerrville, a $206 million bank
located in Kerrville, Texas, and issued 1,225,000 common shares. On December 2,
1994, the corporation acquired Texas National Bankshares, Inc., a $188 million
bank holding company located in Midland, Texas, for cash of $24.5 million. The
corporation acquired Bank of Scottsdale, a $93 million bank located in
Scottsdale, Arizona, on October 21, 1994, for cash of $13.6 million. On October
2, 1994, the corporation acquired Copper Bancshares, Inc., a $98 million bank
holding company located in Silver City, New Mexico, and issued 524,920 common
shares. On September 15, 1994, the corporation acquired LaPorte Bancorp., a
$137 million bank holding company located in Hammond, Indiana, and issued
564,553 common shares. On July 1, 1994, the corporation acquired American Land
Title Company of Kansas City, Inc. and issued 166,666 common shares. On May 1,
1994, the corporation completed its acquisition of Double Eagle Financial
Corporation, which owns a title insurance agency located in Phoenix, Arizona,
and issued 307,700 common shares. On April 28, 1994, the corporation completed
its acquisition of D.L. Bancshares, Inc., a $78 million bank holding company
located in Detroit Lakes, Minnesota, for cash of $11.9 million. On April 15,
1994, the corporation completed its acquisition of Bank of Montana System with
assets of $807 million, located in Great Falls, Montana, and issued 4,174,105
common shares. On March 15, 1994, the corporation completed its acquisition of
Community Credit Co., a $173 million consumer finance company located in
Minneapolis, Minnesota, and issued 3,726,871 common shares. On February 2,
1994, the corporation completed its acquisition of First National Bank of
Arapahoe County, First National Bank of Lakewood and First National Bank of
Southeast Denver, with assets of $36 million, $61 million and $134 million,
respectively, located in the Denver, Colorado metro area, and issued 260,896,
337,582 and 803,439 common shares, respectively. Also on February 2, 1994, the
corporation completed its acquisition of Lindeberg Financial Corporation, a $55
million bank holding company located in Forest Lake, Minnesota, and issued
413,599 common shares. On January 1, 1994, the corporation completed its
acquisition of St. Cloud National Bank & Trust Co., a $119 million bank, and on
January 6, 1994, acquired St. Cloud Metropolitan Agency, Inc., an insurance
agency, and issued 1,105,820 and 32,969 common shares, respectively.
The acquisitions of Bank of Montana System, Community Credit Co., First
National Bank of Arapahoe County, First National Bank of Lakewood, First
National Bank of Southeast Denver, Lindeberg Financial Corporation and St.
Cloud National Bank & Trust Co. were accounted for using the pooling of
interests method of accounting; however, the financial results of the
corporation for periods prior to these acquisitions have not been restated
because the effect of these acquisitions on the corporation's financial
statements was not material. The acquisitions of Alexandria Securities and
Investment Company, First National Bank of Kerrville, Texas National
Bankshares, Inc., Bank of Scottsdale, Copper Bancshares, Inc., LaPorte
Bancorp., American Land Title Company of Kansas City, Inc., D.L. Bancshares,
Inc., Double Eagle Financial Corporation and St. Cloud Metropolitan Agency,
Inc. were accounted for using the purchase method.
31
On January 14, 1994, the corporation completed its acquisition of First
United Bank Group, Inc. (First United), a multibank holding company
headquartered in Albuquerque, New Mexico, with total assets of $3.9 billion.
The corporation issued 17,784,916 shares of its common stock in connection with
the acquisition. The acquisition was accounted for using the pooling of
interests method of accounting and, accordingly, the corporation's financial
statements have been restated for all periods prior to the acquisition to
include the accounts and operations of First United.
As of December 31, 1994, the corporation had 15 other pending acquisitions
with total assets of approximately $4.2 billion and it is anticipated that cash
of $965.9 million and approximately 18.2 million common shares will be issued
upon completion of these acquisitions. These pending acquisitions, subject to
approval by the regulatory agencies, are expected to be completed during 1995
and are not significant to the financial statements of the corporation, either
individually or in the aggregate.
32
NORWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
IN MILLIONS, EXCEPT SHARES
AT DECEMBER 31,
-------------------
1994 1993
--------- --------
ASSETS
------
Cash and due from banks................................... $ 3,431.2 2,844.4
Interest-bearing deposits with banks...................... 41.1 55.9
Federal funds sold and resale agreements.................. 552.0 707.7
--------- --------
Total cash and cash equivalents....................... 4,024.3 3,608.0
Trading account securities................................ 172.3 279.1
Investment securities (fair value $1,268.7 in 1994 and
$1,597.6 in 1993)........................................ 1,235.1 1,542.7
Mortgage-backed securities (fair value $153.1 in 1993).... -- 151.0
Investment securities available for sale (fair value
$2,260.9 in 1993)........................................ 1,427.6 2,001.2
Mortgage-backed securities available for sale (fair value
$9,244.0 in 1993)........................................ 12,174.2 9,021.6
--------- --------
Total investment securities........................... 14,836.9 12,716.5
Student loans available for sale.......................... 2,031.4 1,349.2
Mortgages held for sale................................... 3,115.3 6,090.7
Loans and leases.......................................... 33,703.6 29,781.9
Unearned discount......................................... (1,127.6) (1,021.1)
Allowance for credit losses............................... (789.9) (789.2)
--------- --------
Net loans and leases.................................. 31,786.1 27,971.6
Premises and equipment, net............................... 955.2 842.1
Interest receivable and other assets...................... 2,394.4 1,807.8
--------- --------
Total assets.......................................... $59,315.9 54,665.0
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits
Noninterest-bearing..................................... $ 9,283.1 9,054.3
Interest-bearing........................................ 27,140.9 26,922.2
--------- --------
Total deposits........................................ 36,424.0 35,976.5
Short-term borrowings..................................... 7,850.2 5,996.8
Accrued expenses and other liabilities.................... 2,009.0 2,079.9
Long-term debt............................................ 9,186.3 6,850.9
--------- --------
Total liabilities..................................... 55,469.5 50,904.1
Preferred stock........................................... 526.7 380.0
Unearned ESOP shares...................................... (14.7) --
--------- --------
Total preferred stock................................. 512.0 380.0
Common stock, $1 2/3 par value--authorized 500,000,000
shares:
Issued 323,084,474 and 309,255,558 shares in 1994 and
1993, respectively..................................... 538.5 515.4
Surplus................................................... 578.8 503.3
Retained earnings......................................... 2,950.0 2,433.3
Net unrealized losses on securities available for sale.... (360.4) --
Notes receivable from ESOP................................ (13.3) (16.3)
Treasury stock--13,939,617 and 1,956,803 common shares in
1994 and 1993, respectively.............................. (350.9) (51.5)
Foreign currency translation.............................. (8.3) (3.3)
--------- --------
Total common stockholders' equity..................... 3,334.4 3,380.9
--------- --------
Total stockholders' equity............................ 3,846.4 3,760.9
--------- --------
Total liabilities and stockholders' equity............ $59,315.9 54,665.0
========= ========
See notes to consolidated financial statements.
33
NORWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS
YEARS ENDED DECEMBER 31,
-------------------------
1994 1993 1992
-------- ------- -------
INTEREST INCOME ON
Loans and leases..................................... $3,071.2 2,648.2 2,454.9
Investment securities................................ 71.5 117.1 230.0
Mortgage-backed securities........................... -- 9.3 584.2
Investment securities available for sale............. 120.2 118.5 16.9
Mortgage-backed securities available for sale........ 715.7 592.4 164.9
Student loans available for sale..................... 111.4 85.3 24.2
Mortgages held for sale.............................. 257.2 326.8 279.4
Money market investments............................. 21.9 19.8 28.9
Trading account securities........................... 24.6 28.9 23.0
-------- ------- -------
Total interest income............................ 4,393.7 3,946.3 3,806.4
-------- ------- -------
INTEREST EXPENSE ON
Deposits............................................. 863.4 852.3 1,015.6
Short-term borrowings................................ 290.3 238.1 277.9
Long-term debt....................................... 436.4 352.5 317.1
-------- ------- -------
Total interest expense........................... 1,590.1 1,442.9 1,610.6
-------- ------- -------
NET INTEREST INCOME.................................. 2,803.6 2,503.4 2,195.8
Provision for credit losses.......................... 164.9 158.2 270.8
-------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES.............................................. 2,638.7 2,345.2 1,925.0
-------- ------- -------
NON-INTEREST INCOME
Trust................................................ 210.3 187.2 168.9
Service charges on deposit accounts.................. 234.4 211.6 190.7
Mortgage banking..................................... 581.0 472.3 275.3
Data processing...................................... 61.6 65.5 66.1
Credit card.......................................... 116.5 114.3 134.2
Insurance............................................ 207.4 176.8 155.1
Other fees and service charges....................... 182.3 163.3 145.6
Net investment and mortgage-backed securities gains
(losses)............................................ (0.2) 0.1 10.7
Net investment and mortgage-backed securities
available for sale gains (losses)................... (79.0) 48.7 55.5
Net venture capital gains............................ 77.1 59.5 29.7
Other................................................ 46.9 85.7 41.9
-------- ------- -------
Total non-interest income........................ 1,638.3 1,585.0 1,273.7
-------- ------- -------
NON-INTEREST EXPENSES
Salaries and benefits................................ 1,573.7 1,474.3 1,175.4
Net occupancy........................................ 227.3 189.2 181.7
Equipment rentals, depreciation and maintenance...... 235.4 202.0 175.8
Business development................................. 190.5 151.3 117.5
Communication........................................ 184.8 168.6 145.7
Data processing...................................... 113.4 108.2 100.5
FDIC assessment and regulatory examination fees...... 87.6 79.7 75.2
Intangible asset amortization........................ 77.0 74.7 76.4
Other................................................ 406.7 602.4 504.9
-------- ------- -------
Total non-interest expenses...................... 3,096.4 3,050.4 2,553.1
-------- ------- -------
(Continued on page 35)
34
NORWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME--(CONTINUED FROM PAGE 34)
IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS
YEARS ENDED DECEMBER 31,
------------------------
1994 1993 1992
-------- ------- -------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A
CHANGE IN METHOD OF ACCOUNTING FOR POSTRETIREMENT
MEDICAL BENEFITS.................................... $1,180.6 879.8 645.6
Income tax expense................................... 380.2 266.7 175.6
-------- ------- -------
Income before cumulative effect of a change in
accounting for postretirement medical benefits...... 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, net of tax......... -- -- (76.0)
-------- ------- -------
NET INCOME........................................... $ 800.4 613.1 394.0
======== ======= =======
Average Common and Common Equivalent Shares.......... 315.1 307.7 303.4
PER COMMON SHARE
NET INCOME
Primary:
Before cumulative effect of a change in
accounting for postretirement medical benefits.. $ 2.45 1.89 1.44
Cumulative effect on years ended prior to
December 31, 1992 of a change in accounting for
postretirement medical benefits................. -- -- (0.25)
-------- ------- -------
Net income....................................... $ 2.45 1.89 1.19
======== ======= =======
Fully Diluted:
Before cumulative effect of a change in
accounting for postretirement medical benefits.. $ 2.41 1.86 1.42
Cumulative effect on years ended prior to
December 31, 1992 of a change in accounting for
postretirement medical benefits................. -- -- (0.23)
-------- ------- -------
Net income....................................... $ 2.41 1.86 1.19
======== ======= =======
DIVIDENDS............................................ $ 0.765 0.640 0.540
See notes to consolidated financial statements.
35
NORWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 800.4 613.1 394.0
Adjustments to reconcile net income to net
cash flows used for operating activities:
Cumulative effect on years ended prior
to December 31, 1992 of a change in
accounting for postretirement medical
benefits, net of tax.................... -- -- 76.0
Writedown of intangible and other
assets.................................. -- 84.8 150.0
Provision for credit losses.............. 164.9 158.2 270.8
Depreciation and amortization............ 232.2 206.4 178.7
Gains on other real estate owned, net.... (16.6) (0.6) (5.2)
Losses on sales of premises and
equipment............................... 4.5 4.3 29.5
Gains on sales of mortgages held for
sale.................................... (74.5) (140.5) (19.8)
(Gains) losses on sales of investment,
mortgage-backed and venture capital
securities.............................. 0.2 (0.1) (37.9)
(Gains) losses on sales of investment,
mortgage-backed and venture capital
securities available for sale........... 1.9 (108.2) (58.0)
Gains on sales of student loans
available for sale...................... (6.6) (12.4) (0.3)
Release of preferred shares to ESOP...... 26.6 -- --
Trading account securities (gains)
losses.................................. 18.1 (41.7) (20.9)
Purchases of trading account securities.. (109,556.3) (64,057.2) (30,912.7)
Proceeds from sales of trading account
securities.............................. 109,561.2 63,932.1 30,940.9
Originations of mortgages held for sale.. (24,905.1) (33,706.4) (21,037.7)
Proceeds from sales of mortgages held
for sale................................ 27,962.8 32,484.0 19,338.3
Proceeds from sales of investment and
mortgage-backed securities available
for sale................................ -- 2,351.6 2,590.1
Purchases of investment and mortgage-
backed securities available for sale.... -- (4,784.4) (199.8)
Proceeds from maturities and paydowns of
investment and mortgage-backed
securities available for sale........... -- 3,120.4 691.1
Originations of student loans available
for sale................................ (1,351.7) (1,035.7) --
Proceeds from sales of student loans
available for sale...................... 745.1 855.4 172.0
Deferred income taxes.................... 312.7 (20.0) (116.3)
Interest receivable...................... (66.9) 31.0 8.8
Interest payable......................... 20.5 36.2 (44.1)
Other assets, net........................ (540.6) (22.2) (99.1)
Other accrued expenses and liabilities,
net..................................... (425.0) 284.1 103.8
----------- ---------- ----------
Net cash flows from operating
activities............................ 2,907.8 232.2 2,392.2
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and paydowns of:
Investment and mortgage-backed
securities.............................. 949.5 854.9 3,798.4
Investment and mortgage-backed
securities available for sale........... 2,781.4 -- --
Proceeds from sales and calls of:
Investment and mortgage-backed
securities.............................. 98.8 0.7 1,411.7
Investment and mortgage-backed
securities available for sale........... 3,741.6 -- --
Purchases of:
Investment and mortgage-backed
securities.............................. (509.0) (657.9) (7,355.8)
Investment and mortgage-backed
securities available for sale........... (8,635.6) -- --
Proceeds from sales of consumer loans by
banking subsidiaries..................... -- 25.6 278.8
Net increase in banking subsidiaries'
loans and leases......................... (1,786.2) (1,278.8) (3,702.0)
Principal collected on non-bank
subsidiaries' loans and leases........... 4,081.8 4,048.4 3,241.1
Non-bank subsidiaries' loans and leases
originated............................... (5,342.5) (4,523.9) (3,494.1)
Purchases of premises and equipment....... (266.0) (226.3) (191.3)
Proceeds from sales of premises and
equipment................................ 12.1 1.3 16.3
Proceeds from sales of other real estate
owned.................................... 119.7 129.7 138.5
Purchases of subsidiaries, net of cash and
cash equivalents acquired................ 124.8 2,181.8 (204.5)
Divestiture of branches, net of cash and
cash equivalents paid.................... (55.1) -- --
----------- ---------- ----------
Net cash flows from (used for)
investing activities.................. (4,684.7) 555.5 (6,062.9)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits, net............................. (1,247.2) 310.9 11.8
Short-term borrowings, net................ 1,736.8 (2,896.1) 2,720.2
Long-term debt borrowings................. 3,508.7 4,301.8 1,571.2
Repayments of long-term debt.............. (1,270.1) (2,038.7) (700.3)
Issuances of preferred stock.............. 170.7 -- --
Repurchases of preferred stock............ (8.4) (0.7) (2.9)
Issuances of common stock................. 49.8 55.9 35.8
Repurchases of common stock............... (482.1) (124.3) (86.0)
Net decrease in notes receivable from
ESOP..................................... 3.0 3.2 3.0
Dividends paid............................ (268.0) (219.7) (185.7)
----------- ---------- ----------
Net cash flows from (used for)
financing activities.................. 2,193.2 (607.7) 3,367.1
----------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents...................... 416.3 180.0 (303.6)
Cash and cash equivalents
Beginning of year...................... 3,608.0 3,428.0 3,731.6
----------- ---------- ----------
End of year............................ $ 4,024.3 3,608.0 3,428.0
=========== ========== ==========
See notes to consolidated financial statements.
36
NORWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
IN MILLIONS, EXCEPT FOR SHARES
NET
UNREALIZED
GAINS
(LOSSES)
ON
UNEARNED SECURITIES NOTES FOREIGN
PREFERRED ESOP COMMON RETAINED AVAILABLE RECEIVABLE TREASURY CURRENCY
STOCK SHARES STOCK SURPLUS EARNINGS FOR SALE FROM ESOP STOCK TRANSLATION TOTAL
--------- -------- ------ ------- -------- ---------- ---------- -------- ----------- -------
Balance, December 31,
1991, as originally
reported............... $345.0 -- 240.6 584.6 1,846.0 -- (22.5) (8.9) -- 2,984.8
Adjustments for pooling
of interests........... 51.5 -- 22.6 70.3 63.1 -- -- -- -- 207.5
------ ----- ----- ------ ------- ------ ------ ------ ---- -------
Balance, December 31,
1991, restated......... 396.5 -- 263.2 654.9 1,909.1 -- (22.5) (8.9) -- 3,192.3
Net income.............. -- -- -- -- 394.0 -- -- -- -- 394.0
Dividends on
Common stock........... -- -- -- -- (153.6) -- -- -- -- (153.6)
Preferred stock........ -- -- -- -- (32.1) -- -- -- -- (32.1)
Issuance of 4,395,318
common shares.......... -- -- 1.9 42.7 (27.8) -- -- 34.9 -- 51.7
Issuance of 899,972
common shares for
acquisitions........... -- -- -- (11.0) -- -- -- 16.7 -- 5.7
Repurchase of 4,590,105
common shares.......... -- -- -- (0.1) -- -- -- (85.9) -- (86.0)
Repurchase of 18,550
preferred shares....... (2.5) -- -- 0.1 (0.5) -- -- -- -- (2.9)
Cash payments received
on notes receivable
from ESOP.............. -- -- -- -- -- -- 3.0 -- -- 3.0
Foreign currency
translation............ -- -- -- -- -- -- -- -- (0.3) (0.3)
------ ----- ----- ------ ------- ------ ------ ------ ---- -------
Balance, December 31,
1992................... 394.0 -- 265.1 686.6 2,089.1 -- (19.5) (43.2) (0.3) 3,371.8
Net income.............. -- -- -- -- 613.1 -- -- -- -- 613.1
Dividends on
Common stock........... -- -- -- -- (188.5) -- -- -- -- (188.5)
Preferred stock........ -- -- -- -- (31.2) -- -- -- -- (31.2)
Stock split............. -- -- 244.2 (244.2) -- -- -- -- -- --
Issuance of 4,787,158
common shares.......... -- -- 1.6 73.8 (59.5) -- -- 66.6 -- 82.5
Issuance of 4,054,562
common shares for
acquisitions........... -- -- 2.4 (24.2) 10.1 -- -- 49.4 -- 37.7
Repurchase of 4,789,658
common shares.......... -- -- -- -- -- -- -- (124.3) -- (124.3)
Repurchase of 6,450
preferred shares....... (0.6) -- -- -- (0.1) -- -- -- -- (0.7)
Conversion of 320,202
preferred shares into
1,705,410 common
shares................. (13.4) -- 2.1 11.3 -- -- -- -- -- --
Cash payments received
on notes receivable
from ESOP.............. -- -- -- -- -- -- 3.2 -- -- 3.2
Tax benefits of
dividends on common
stock held by ESOP..... -- -- -- -- 0.3 -- -- -- -- 0.3
Foreign currency
translation............ -- -- -- -- -- -- -- -- (3.0) (3.0)
------ ----- ----- ------ ------- ------ ------ ------ ---- -------
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
====== ===== ===== ====== ======= ====== ====== ====== ==== =======
See notes to consolidated financial statements.
37
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Norwest Corporation (the "corporation") is a regional bank holding company
organized in 1929 and registered under the Bank Holding Company Act of 1956, as
amended. The corporation is a diversified financial services organization which
operates through subsidiaries engaged in banking and 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, New Mexico, North Dakota, Ohio, South Dakota,
Texas, Wisconsin and Wyoming. The corporation also owns subsidiaries engaged in
various businesses related to banking, principally mortgage banking, equipment
leasing, agricultural finance, commercial finance, consumer finance, securities
brokerage and investment banking, insurance, computer and data processing
services, trust services and venture capital investments.
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 intercompany 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.
Cash paid for interest and income taxes for the years ended December 31 was:
1994 1993 1992
-------- ------- -------
IN MILLIONS
Interest............................................... $1,569.6 1,481.1 1,654.6
Income taxes........................................... 22.3 226.0 208.6
Loans transferred to other real estate owned totaled $69.8 million in 1994,
$69.6 million in 1993, and $112.7 million in 1992. In 1994, mortgage-backed
securities of $151.0 million, held for investment by First United Bank Group,
Inc. ("First United"), were transferred to available for sale to comply with
the corporation's investment and interest rate risk policies. See Note 2,
Business Combinations, for a discussion of the acquisition of First United.
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"). Investments
and mortgage-backed securities of $234.2 million and $14,001.2 million were
transferred to available for sale in 1993 and 1992, respectively. Student loans
totaling $1,330.3 million were transferred to available for sale in 1992.
During 1994, 1993 and 1992, the corporation issued 3,162,847, 2,127,428 and
899,972 shares of common stock, respectively, in connection with acquisitions
accounted for using the purchase method. On March 31, 1994, the corporation
issued 40,900 shares of ESOP Cumulative Convertible Preferred Stock in the
stated amount of $40.9 million at a premium of $1.2 million. A corresponding
charge of $42.1 million was recorded to unearned ESOP shares (see Note 10).
Preferred stock in the amount of $26.6 million was released to the ESOP during
1994.
38
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with the acquisition of First United, $30.2 million of
preferred stock of First United was converted into common stock of the
corporation.
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 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.
Effective January 1, 1994, the corporation adopted FAS 115. Accordingly,
investment and mortgage-backed securities available for sale are carried at
fair value. Net unrealized gains and losses, net of deferred 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 securities is determined at the date of
purchase and subsequent transfers, if any, between security classifications are
recorded at fair value. Prior to the adoption of FAS 115, investment and
mortgage-backed securities available for sale were carried at the lower of
aggregate cost or market value. Additionally, investment and mortgage-backed
securities were transferred to securities available for sale at their
respective carrying values.
Realized gains and losses on sales of securities are computed by the specific
identification method at the time of disposition and are recorded in non-
interest income.
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 to maturity.
Trading account securities are purchased with the intent to earn a profit by
selling the security. These securities are stated at fair value. Adjustments to
the fair value are reported in other non-interest income.
Loans and Leases
Loans are stated at their principal amount. Interest income is recognized on
an accrual basis except when a loan has been past due for 90 days, unless such
loan is in the process of collection and, in management's opinion, is fully
secured. 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.
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
39
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
At December 31, 1994 and 1993, the corporation had $2,031.4 million and
$1,349.2 million, respectively, of student loans available for sale because the
corporation does not intend to hold these loans until maturity. Student loans
available for sale are stated at the lower of aggregate cost or market value.
Student loans are transferred to available for sale at their carrying value.
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 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 generally
charged off when they become 120 days past due unless fully secured.
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.
Purchased Mortgage Servicing Rights
The corporation capitalizes the costs of purchased mortgage servicing rights.
These costs are deferred if it is anticipated that the servicing rights will be
sold concurrent with the sale of the underlying mortgages. If the servicing
rights are retained, such costs are amortized over the estimated remaining life
of the underlying loans. The corporation's amortization method approximates the
level yield method and takes into account appropriate prepayment assumptions.
The carrying value of purchased mortgage servicing rights is periodically
evaluated in relation to estimated future servicing net revenues.
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.
40
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. In 1993, the corporation changed the amortizable life of goodwill
to a maximum 15 years from amortizable lives ranging from 15-30 years. Goodwill
is amortized using the straight-line method. Other identifiable intangibles are
amortized either on an accelerated basis or straight-line, over various periods
not to 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 calls sold are marked to
market daily with the gain limited to the amount of the option fee.
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. 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. Realized gains
and losses on positions used as hedges in mortgage banking operations are
deferred
41
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and considered in the calculation of market value of the mortgages available
for sale. Positions 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 14, 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.
In 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS
109), effective January 1, 1993. The corporation adopted FAS 109 as of January
1, 1993, with no material impact on the consolidated financial statements of
the corporation. Prior to adoption of FAS 109, the corporation accounted for
income taxes under Statement of Financial Accounting Standards No. 96.
Foreign Currency Translation
The accounts of Norwest Financial, Inc.'s Canadian finance subsidiary 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.
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 12 percent
convertible notes, 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:
1994 1993 1992
----------- ----------- -----------
Primary..................................... 315,091,891 307,726,009 303,427,080
Fully diluted............................... 327,798,536 323,823,259 322,422,652
42
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Change In Accounting for Postretirement Medical Benefits
Effective January 1, 1992, the corporation adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (FAS 106). FAS 106 requires employers to accrue
the cost of retiree health care benefits and the cost of all other
postretirement benefits other than pensions during the employees' active
service. In years prior to 1992, this expense was recognized when benefits were
paid. The cumulative liability for these expenses for years prior to 1992 of
$76.0 million after tax, or $0.25 per common share, was recognized as a
cumulative effect of accounting change as of January 1, 1992.
Change In Accounting for Postemployment Benefits
Effective January 1, 1994, the corporation adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" (FAS 112). FAS 112 requires employers to accrue the cost of
postemployment benefits during the employees' active service, if the amount of
the benefits can be reasonably estimated and payment is probable. The adoption
of FAS 112 did not have a material effect on the corporation's financial
position or results of operations.
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.
On January 14, 1994, the corporation completed its acquisition of First
United, a multibank holding company headquartered in Albuquerque, New Mexico,
with total assets of $3.9 billion. The corporation issued 17,784,916 shares of
its common stock in connection with the acquisition. The acquisition was
accounted for using the pooling of interests method of accounting and,
accordingly, the corporation's financial statements have been restated for all
periods prior to the acquisition to include the accounts and operations of
First United.
Net income and net income per share amounts of the corporation and First
United prior to restatement for the years ended December 31, 1993 and 1992
were:
1993 1992
------------ -----------
IN MILLIONS, EXCEPT PER
COMMON SHARE AMOUNTS
The corporation
Net income.......................................... $653.6 364.1
Net income per common share
Primary........................................... 2.13 1.16
Fully diluted..................................... 2.10 1.16
First United
Net (loss) income*.................................. $ (40.5) 29.9
Net (loss) income per common share
Primary........................................... (3.40) 2.18
Fully diluted..................................... (3.40) 1.84
- --------
* First United's 1993 net income includes the additional provision for credit
losses of $16.5 million to conform with the corporation's credit loss
reserve practices and methods and $83.2 million in accruals and reserves for
merger-related expenses, including termination costs, systems and operations
costs, and other asset write-downs.
43
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The corporation acquired Alexandria Securities and Investment Company, a $59
million bank holding company located in Alexandria, Minnesota, on December 9,
1994, and issued 341,039 common shares. Also, on December 9, 1994, the
corporation acquired First National Bank of Kerrville, a $206 million bank
located in Kerrville, Texas, and issued 1,225,000 common shares. On December 2,
1994, the corporation acquired Texas National Bankshares, Inc., a $188 million
bank holding company located in Midland, Texas, for cash of $24.5 million. On
October 21, 1994, the corporation acquired Bank of Scottsdale, a $93 million
bank located in Scottsdale, Arizona, for cash of $13.6 million. On October 2,
1994, the corporation acquired Copper Bancshares, Inc., a $98 million bank
holding company located in Silver City, New Mexico, and issued 524,920 common
shares. On September 15, 1994, the corporation acquired LaPorte Bankcorp., a
$137 million bank holding company located in Hammond, Indiana, and issued
564,553 common shares. On July 1, 1994, the corporation acquired American Land
Title Company of Kansas City, Inc. and issued 166,666 common shares. On May 1,
1994, the corporation completed its acquisition of Double Eagle Financial
Corporation, which owns a title insurance agency, located in Phoenix, Arizona,
and issued 307,700 common shares. On April 28, 1994, the corporation completed
its acquisition of D.L. Bancshares, Inc., a $78 million bank holding company
located in Detroit Lakes, Minnesota, for cash of $11.9 million. On April 15,
1994, the corporation completed its acquisition of Bank of Montana System, with
assets of $807 million, located in Great Falls, Montana, and issued 4,174,105
common shares. On March 15, 1994, the corporation completed its acquisition of
Community Credit Co., a $173 million consumer finance company located in
Minneapolis, Minnesota, and issued 3,726,871 common shares. On February 2,
1994, the corporation completed its acquisition of First National Bank of
Arapahoe County, First National Bank of Lakewood and First National Bank of
Southeast Denver, with assets of $36 million, $61 million and $134 million,
respectively, located in the Denver, Colorado metro area, and issued 260,896,
337,582 and 803,439 common shares, respectively. Also on February 2, 1994, the
corporation completed its acquisition of Lindeberg Financial Corporation, a $55
million bank holding company, located in Forest Lake, Minnesota, and issued
413,599 common shares. On January 1, 1994, the corporation completed its
acquisition of St. Cloud National Bank & Trust Co., a $119 million bank, and on
January 6, 1994, acquired St. Cloud Metropolitan Agency, Inc., an insurance
agency, and issued 1,105,820 and 32,969 common shares, respectively.
The acquisitions of Bank of Montana System, Community Credit Co., First
National Bank of Arapahoe County, First National Bank of Lakewood, First
National Bank of Southeast Denver, Lindeberg Financial Corporation and St.
Cloud National Bank & Trust Co. were accounted for using the pooling of
interests method of accounting; however, the financial results of the
corporation for periods prior to these acquisitions have not been restated
because the effect of these acquisitions on the corporation's financial
statements was not material. The acquisitions of Alexandria Securities and
Investment Company, First National Bank of Kerrville, Texas National
Bankshares, Inc., Bank of Scottsdale, Copper Bancshares, Inc., LaPorte
Bancorp., American Land Title Company of Kansas City, Inc., D.L. Bancshares,
Inc., Double Eagle Financial Corporation and St. Cloud Metropolitan Agency,
Inc. were accounted for using the purchase method.
As of December 31, 1994, the corporation had 15 other pending acquisitions
with total assets of approximately $4.2 billion and it is anticipated that cash
of $965.9 million and approximately 18.2 million common shares will be issued
upon completion of these acquisitions. These pending acquisitions, subject to
approval by regulatory agencies, are expected to be completed during 1995 and
are not significant to the financial statements of the corporation, either
individually or in the aggregate.
On December 10, 1993, the corporation completed its acquisition of Winner
Banshares, Inc., a $99 million bank holding company headquartered in Winner,
South Dakota, and issued 530,737 common shares. On October 29, 1993, the
corporation completed its acquisition of FirstAmerican Bank, N.A., a $47.6
million bank, located in Colorado Springs, Colorado. On October 7, 1993, the
corporation completed its acquisition of Ralston Bancshares, Inc., a $101.1
million bank holding company headquartered in Ralston, Nebraska,
44
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and issued 548,981 common shares. On October 1, 1993, the corporation completed
its acquisition of M & D Holding Company, a $57.1 million bank holding company
headquartered in Spring Lake Park, Minnesota, and issued 536,084 common shares.
On September 10, 1993, Norwest Bank Denver, N.A., a banking subsidiary of the
corporation, completed its acquisition of $1.1 billion in assets of the
Columbia Savings division of First Nationwide Bank, a Federal Savings Bank. On
September 1, 1993, Norwest Bank Arizona, N.A., a subsidiary of the corporation,
completed its acquisition of the $2.1 billion banking business of Citibank
(Arizona), a subsidiary of Citicorp. On April 1, 1993, the corporation
completed its acquisition of Financial Concepts Bancorp, Inc., a $175.5 million
bank holding company headquartered in Green Bay, Wisconsin, and issued 847,416
common shares. On February 1, 1993, the corporation completed its acquisitions
of Merchants & Miners Bancshares, Inc., a $57 million bank holding company
headquartered in Hibbing, Minnesota, and BORIS Systems, Inc., a $6 million data
processing/transmission service, headquartered in East Lansing, Michigan, which
provides services to more than 100 boards of realtors located throughout the
United States, and issued 343,050 and 691,210 common shares, respectively. On
January 8, 1993, the corporation completed its acquisition of Rocky Mountain
Bankshares, Inc., a $105 million bank holding company with a bank in Aspen,
Colorado, and issued 557,084 common shares.
The acquisitions of Winner Banshares, Inc., Ralston Bancshares, Inc. and
Financial Concepts Bancorp, Inc. were accounted for using the pooling of
interests method of accounting; however, the financial results of the
corporation have not been restated because the effect of these acquisitions on
the corporation's financial statements was not material. The acquisitions of
FirstAmerican Bank, N.A., M & D Holding Company, Columbia Savings, Citibank
(Arizona), Merchants & Miners Bancshares, Inc., BORIS Systems, Inc. and Rocky
Mountain Bankshares, Inc. were accounted for using the purchase method.
On February 9, 1993, the corporation completed its acquisition of Lincoln
Financial Corporation (Lincoln), a $2.0 billion bank holding company
headquartered in Fort Wayne, Indiana. The corporation issued 8,529,242 shares
of its common stock in connection with the acquisition. The acquisition was
accounted for using the pooling of interests method of accounting and,
accordingly, the corporation's financial statements have been restated for all
periods prior to the acquisition to include the accounts and operations of
Lincoln.
Net income and net income per share amounts of the corporation and Lincoln
prior to restatement for the year ended December 31, 1992 were:
1992
-------------------
IN MILLIONS, EXCEPT
PER SHARE AMOUNTS
The corporation
Net income................................................ $ 446.7
Net income per share
Primary................................................. 1.48
Fully diluted........................................... 1.47
Lincoln
Net loss*................................................. $ (82.6)
Net loss per share........................................ (11.47)
- --------
*Reflects an increase in Lincoln's provision for credit losses of $60.0 million
to conform with the corporation's credit loss reserve practices and methods
and $33.5 million in Lincoln's provisions and expenditures for costs related
to restructuring activities.
On December 29, 1992, the corporation acquired Am-Can Investment, Inc., a $33
million bank holding company headquartered in Moorhead, Minnesota, for cash. On
October 2, 1992, the corporation completed its acquisition of United
Bancshares, Inc. a $174 million bank holding company headquartered in Lincoln,
Nebraska and issued 899,972 common shares. These acquisitions were accounted
for using the purchase
45
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
method. Effective January 19, 1992, Davenport Bank and Trust Company (Davenport
Bank), an Iowa banking corporation headquartered in Davenport, Iowa,
consolidated with Bettendorf Bank, National Association, a banking subsidiary
of the corporation. The corporation issued 19,331,426 shares of its common
stock to former Davenport Bank shareholders in connection with the
consolidation. The consolidation was accounted for using the pooling of
interests method of accounting and, accordingly, the corporation's financial
statements have been restated for all periods prior to the consolidation to
include the accounts and operations of Davenport Bank.
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 $584 million and $555 million for the years
ended December 31, 1994 and 1993, respectively.
4. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Information relating to the amortized cost and fair value of investment and
mortgage-backed securities for each of the three years ended December 31, 1994,
is provided in the table below.
AMORTIZED COST AND FAIR VALUES OF INVESTMENT AND MORTGAGE-BACKED SECURITIES
1994 1993
---------------------------------------- ----------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
IN MILLIONS
HELD FOR
INVESTMENT:
Investment
securities:
U.S. Treasury
and federal
agencies....... $ 27.4 -- -- 27.4 665.0 5.5 -- 670.5
State, municipal
and housing-tax
exempt......... 712.2 17.1 (16.5) 712.8 632.9 50.1 (1.0) 682.0
Other........... 495.5 39.6 (6.6) 528.5 244.8 0.3 -- 245.1
--------- ----- ------ -------- -------- ----- ----- --------
Total
investment
securities
held for
investment.... 1,235.1 56.7 (23.1) 1,268.7 1,542.7 55.9 (1.0) 1,597.6
--------- ----- ------ -------- -------- ----- ----- --------
Mortgage-backed
securities:
Federal
agencies....... -- -- -- -- 126.0 2.1 -- 128.1
Collateralized
mortgage
obligations.... -- -- -- -- 25.0 -- -- 25.0
--------- ----- ------ -------- -------- ----- ----- --------
Total mortgage-
backed
securities
held for
investment.... -- -- -- -- 151.0 2.1 -- 153.1
--------- ----- ------ -------- -------- ----- ----- --------
Total investment
and mortgage-
backed
securities held
for investment. 1,235.1 56.7 (23.1) 1,268.7 1,693.7 58.0 (1.0) 1,750.7
--------- ----- ------ -------- -------- ----- ----- --------
AVAILABLE FOR
SALE:
Investment
securities:
U.S. Treasury
and federal
agencies....... 932.4 6.3 (15.4) 923.3 1,520.5 77.2 (2.8) 1,594.9
State, municipal
and housing-tax
exempt......... 107.1 .3 (3.9) 103.5 96.2 3.7 (0.1) 99.8
Other........... 321.2 97.0 (17.4) 400.8 384.5 188.8 (7.1) 566.2
--------- ----- ------ -------- -------- ----- ----- --------
Total
investment
securities
available for
sale.......... 1,360.7 103.6 (36.7) 1,427.6 2,001.2 269.7 (10.0) 2,260.9
--------- ----- ------ -------- -------- ----- ----- --------
Mortgage-backed
securities:
Federal
agencies....... 12,635.2 19.1 (642.4) 12,011.9 8,889.1 227.5 (7.5) 9,109.1
Collateralized
mortgage
obligations.... 165.8 .5 (4.0) 162.3 132.5 2.7 (0.3) 134.9
--------- ----- ------ -------- -------- ----- ----- --------
Total mortgage-
backed
securities
available for
sale.......... 12,801.0 19.6 (646.4) 12,174.2 9,021.6 230.2 (7.8) 9,244.0
--------- ----- ------ -------- -------- ----- ----- --------
Total investment
and mortgage-
backed
securities
available for
sale........... 14,161.7 123.2 (683.1) 13,601.8 11,022.8 499.9 (17.8) 11,504.9
--------- ----- ------ -------- -------- ----- ----- --------
Total investment
securities..... $15,396.8 179.9 (706.2) 14,870.5 12,716.5 557.9 (18.8) 13,255.6
========= ===== ====== ======== ======== ===== ===== ========
1992
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
HELD FOR
INVESTMENT:
Investment
securities:
U.S. Treasury
and federal
agencies....... 884.3 7.7 (1.3) 890.7
State, municipal
and housing-tax
exempt......... 787.3 59.5 (4.0) 842.8
Other........... 193.4 0.4 -- 193.8
-------- ----- ----- --------
Total
investment
securities
held for
investment.... 1,865.0 67.6 (5.3) 1,927.3
-------- ----- ----- --------
Mortgage-backed
securities:
Federal
agencies....... 165.9 1.6 -- 167.5
Collateralized
mortgage
obligations.... -- -- -- --
-------- ----- ----- --------
Total mortgage-
backed
securities
held for
investment.... 165.9 1.6 -- 167.5
-------- ----- ----- --------
Total investment
and mortgage-
backed
securities held
for investment. 2,030.9 69.2 (5.3) 2,094.8
-------- ----- ----- --------
AVAILABLE FOR
SALE:
Investment
securities:
U.S. Treasury
and federal
agencies....... 1,241.0 85.0 (3.1) 1,322.9
State, municipal
and housing-tax
exempt......... 71.8 5.1 -- 76.9
Other........... 260.8 158.5 (3.4) 415.9
-------- ----- ----- --------
Total
investment
securities
available for
sale.......... 1,573.6 248.6 (6.5) 1,815.7
-------- ----- ----- --------
Mortgage-backed
securities:
Federal
agencies....... 9,096.6 217.5 (12.4) 9,301.7
Collateralized
mortgage
obligations.... 261.6 6.5 (4.2) 263.9
-------- ----- ----- --------
Total mortgage-
backed
securities
available for
sale.......... 9,358.2 224.0 (16.6) 9,565.6
-------- ----- ----- --------
Total investment
and mortgage-
backed
securities
available for
sale........... 10,931.8 472.6 (23.1) 11,381.3
-------- ----- ----- --------
Total investment
securities..... 12,962.7 541.8 (28.4) 13,476.1
======== ===== ===== ========
46
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying and market values of investment and mortgage-backed securities
by maturity at December 31 were:
1994 1993
------------------ -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- -------- -------- --------
IN MILLIONS
Held for investment:
Investment securities:
In one year or less..................... $ 62.0 62.3 686.4 690.7
After one year through five years....... 359.1 396.2 446.3 461.8
After five years through ten years...... 142.4 146.9 163.1 179.4
After ten years......................... 671.6 663.3 246.9 265.7
--------- -------- -------- --------
Total investment securities held for
investment........................... 1,235.1 1,268.7 1,542.7 1,597.6
--------- -------- -------- --------
Mortgage-backed securities:
After ten years......................... -- -- 151.0 153.1
--------- -------- -------- --------
Total investment and mortgage-backed
securities held for investment....... 1,235.1 1,268.7 1,693.7 1,750.7
--------- -------- -------- --------
Available for sale:
Investment securities:
In one year or less..................... 338.3 338.3 289.9 352.5
After one year through five years....... 629.0 629.0 1,211.7 1,364.2
After five years through ten years...... 296.6 296.6 480.7 525.0
After ten years......................... 163.7 163.7 18.9 19.2
--------- -------- -------- --------
Total investment securities available
for sale............................. 1,427.6 1,427.6 2,001.2 2,260.9
--------- -------- -------- --------
Mortgage-backed securities:
In one year or less..................... 30.1 30.1 247.6 270.3
After one year through five years....... 223.2 223.2 111.1 115.2
After five years through ten years...... 309.3 309.3 126.0 128.7
After ten years......................... 11,611.6 11,611.6 8,536.9 8,729.8
--------- -------- -------- --------
Total mortgage-backed securities
available for sale................... 12,174.2 12,174.2 9,021.6 9,244.0
--------- -------- -------- --------
Total investment and mortgage-backed
securities available for sale........ 13,601.8 13,601.8 11,022.8 11,504.9
--------- -------- -------- --------
Total investment securities........... $14,836.9 14,870.5 12,716.5 13,255.6
========= ======== ======== ========
47
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest income on investment and mortgage-backed securities for each of the
three years ended December 31 was:
1994 1993 1992
------ ----- -----
IN MILLIONS
Held for investment:
Investment securities:
U.S. Treasury and federal agencies.......................... $ 1.3 44.0 132.1
State, municipal and housing-tax exempt..................... 50.7 55.8 68.3
Other....................................................... 19.5 17.3 29.6
------ ----- -----
Total investment securities held for investment......... 71.5 117.1 230.0
------ ----- -----
Mortgage-backed securities:
Federal agencies.......................................... -- 8.2 562.7
Collateralized mortgage obligations....................... -- 1.1 21.5
------ ----- -----
Total mortgage-backed securities held for investment.... -- 9.3 584.2
------ ----- -----
Total investment and mortgage-backed securities held for
investment............................................. 71.5 126.4 814.2
Available for sale:
Investment securities:
U.S. Treasury and federal agencies.......................... 93.9 101.6 13.1
State, municipal and housing-tax exempt..................... 5.4 4.8 2.7
Other....................................................... 20.9 12.1 1.1
------ ----- -----
Total investment securities available for sale.......... 120.2 118.5 16.9
------ ----- -----
Mortgage-backed securities:
Federal agencies.......................................... 707.3 561.3 161.9
Collateralized mortgage obligations....................... 8.4 31.1 3.0
------ ----- -----
Total mortgage-backed securities available for sale..... 715.7 592.4 164.9
------ ----- -----
Total investment and mortgage-backed securities
available for sale..................................... 835.9 710.9 181.8
------ ----- -----
Total investment securities............................. $907.4 837.3 996.0
====== ===== =====
Investment and mortgage-backed securities (including securities available for
sale) carried at $5,333.9 million and $6,207.6 million were pledged to secure
public or trust deposits or for other purposes at December 31, 1994 and 1993,
respectively.
48
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total gross realized gains and gross realized losses from the sale of
securities for each of the three years ended December 31 were:
1994 1993 1992
------ ----- -----
IN MILLIONS
Held for investment:
Investment securities:
Gross realized gains............................... $ .9 0.1 6.7
Gross realized losses.............................. (1.1) -- (1.2)
------ ----- -----
Net gains (losses)................................. (0.2) 0.1 5.5
Mortgage-backed securities:
Gross realized gains............................... -- -- 13.8
Gross realized losses.............................. -- -- (8.6)
------ ----- -----
Net gains.......................................... -- -- 5.2
------ ----- -----
Net realized gains (losses) on investment and
mortgage-backed securities held for investment...... $ (0.2) 0.1 10.7
------ ----- -----
Available for sale:
Investment securities:
Gross realized gains............................... $ 28.3 24.4 2.7
Gross realized losses.............................. (75.9) (3.4) --
------ ----- -----
Net gains (losses)................................. (47.6) 21.0 2.7
Mortgage-backed securities:
Gross realized gains............................... 17.1 35.6 52.9
Gross realized losses.............................. (48.5) (7.9) (0.1)
------ ----- -----
Net gains (losses)................................. (31.4) 27.7 52.8
------ ----- -----
Net realized gains (losses) on investment and
mortgage-backed securities available for sale....... $(79.0) 48.7 55.5
------ ----- -----
Venture capital securities held for investment:
Gross realized gains............................... $ -- -- 31.7
Gross realized losses.............................. -- -- (4.5)
------ ----- -----
Net gains.......................................... -- -- 27.2
Venture capital securities available for sale:
Gross realized gains............................... 85.4 73.2 16.9
Gross realized losses.............................. (8.3) (13.7) (14.4)
------ ----- -----
Net gains.......................................... 77.1 59.5 2.5
------ ----- -----
Net venture capital gains............................ $ 77.1 59.5 29.7
====== ===== =====
During 1994 and 1993, certain investment securities with a total amortized
cost of $102.6 million and $29.5 million, respectively, were sold 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. The sales and calls of investment
securities during 1994 and 1993 resulted in net gains (losses) of $(0.2)
million and $0.1 million, respectively.
49
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LOANS AND LEASES
The carrying values of loans and leases at December 31 were:
1994 1993
--------- --------
IN MILLIONS
Commercial................................................. $ 8,390.4 7,624.1
Construction and land development.......................... 568.1 565.6
Real estate................................................ 12,548.8 11,738.8
Consumer................................................... 10,815.9 8,606.3
Lease financing............................................ 764.5 698.6
Foreign.................................................... 615.9 548.5
--------- --------
Total loans and leases................................. 33,703.6 29,781.9
Unearned discount.......................................... (1,127.6) (1,021.1)
--------- --------
Loans and leases, net of unearned discount............. $32,576.0 28,760.8
========= ========
Changes in the allowance for credit losses were:
1994 1993 1992
------ ------ ------
IN MILLIONS
Balance at beginning of year............................ $789.2 773.1 704.3
Allowances related to assets acquired, net............ 29.0 36.2 23.4
Provision for credit losses........................... 164.9 158.2 270.8
Credit losses......................................... (314.8) (310.3) (341.1)
Recoveries............................................ 121.6 132.0 115.7
------ ------ ------
Net credit losses................................... (193.2) (178.3) (225.4)
------ ------ ------
Balance at end of year.................................. $789.9 789.2 773.1
====== ====== ======
Non-accrual, restructured and 90 day past due loans and other real estate
owned at December 31 were:
1994 1993
------ -----
IN MILLIONS
Non-accrual loans................................................. $128.5 195.7
Restructured loans................................................ 1.8 10.3
------ -----
Total non-accrual and restructured loans...................... 130.3 206.0
Other real estate owned........................................... 29.6 63.0
------ -----
Total non-performing assets................................... 159.9 269.0
Loans and leases past due 90 days or more*........................ 58.4 50.8
------ -----
Total non-performing assets and 90-day past due loans and
leases....................................................... $218.3 319.8
====== =====
- --------
*Excludes non-accrual loans and leases.
The effect of non-accrual and restructured loans on interest income for each
of the three years ended December 31 was:
1994 1993 1992
----- ---- ----
IN MILLIONS
Interest income
As originally contracted................................... $15.4 19.4 26.5
As recognized.............................................. (3.1) (5.5) (8.1)
----- ---- ----
Reduction of interest income.............................. $12.3 13.9 18.4
===== ==== ====
50
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There are no material commitments to lend additional funds to customers whose
loans were classified as non-accrual or restructured at December 31, 1994.
Leveraged lease financing amounted to $136.9 million and $144.9 million at
December 31, 1994 and 1993, respectively. Deferred income taxes related to
leveraged leases amounted to $103.4 million and $99.7 million at the same
dates, respectively.
Loans and leases totaling $4,263.7 million and $4,082.3 million were pledged
to secure Federal Home Loan Bank (FHLB) advances at December 31, 1994 and 1993,
respectively.
The corporation and its subsidiaries have made loans to the executive
officers and directors (and their associates) of the corporation and its
significant subsidiaries in the ordinary course of business. Aggregate amounts
of these loans (excluding loans to the immediate families of persons who are
solely executive officers and directors of the corporation's significant
subsidiaries) were $58.9 million and $65.3 million at December 31, 1994 and
1993, respectively. Activity with respect to these loans during 1994 included
advances, repayments and net decreases (due to changes in executive officers
and directors) of $225.1 million, $228.4 million and $3.1 million,
respectively.
6. PREMISES AND EQUIPMENT
The carrying value of premises and equipment at December 31 was:
1994 1993
-------- -------
IN MILLIONS
Owned
Land......................................................... $ 106.8 99.0
Premises and improvements.................................... 719.1 665.4
Furniture, fixtures and equipment............................ 1,005.3 829.3
-------- -------
Total.................................................... 1,831.2 1,593.7
-------- -------
Capitalized leases
Premises..................................................... 20.1 20.2
Equipment.................................................... 16.5 14.3
-------- -------
Total.................................................... 36.6 34.5
-------- -------
Total premises and equipment................................. 1,867.8 1,628.2
Less accumulated depreciation and amortization............... (912.6) (786.1)
-------- -------
Premises and equipment, net.................................. $ 955.2 842.1
======== =======
7. SHORT-TERM BORROWINGS
Information related to short-term borrowings for the three years ended
December 31 is provided in the table on page 52.
At December 31, 1994, the corporation had available lines of credit totaling
$1,282.7 million, including $1,082.7 million at a subsidiary, Norwest
Financial, Inc. These financing arrangements require the maintenance of
compensating balances or payment of fees, which are not material.
At December 31, 1994, the corporation had commercial paper placement
agreements totaling $200.0 million (included in the $1,282.7 million reported
in the preceding paragraph).
51
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SHORT-TERM BORROWINGS
IN MILLIONS
1994 1993 1992
------------- ------------- -------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
At December 31,
Commercial paper.................. $2,544.9 3.63% $2,711.6 3.56% $2,947.5 3.65%
Federal funds purchased and
securities sold under agreements
to repurchase.................... 4,252.5 5.79 2,202.8 2.72 5,025.5 2.83
Other............................. 1,052.8 2.90 1,082.4 3.23 851.9 5.26
-------- -------- --------
Total......................... $7,850.2 4.70 $5,996.8 3.19 $8,824.9 3.34
======== ======== ========
For the year ended December 31,
Average daily balance
Commercial paper.................. $2,672.1 4.42% $2,675.0 3.37% $2,751.2 4.19%
Federal funds purchased and
securities sold under agreements
to repurchase.................... 2,966.7 4.34 3,509.0 3.01 3,805.8 3.63
Other............................. 989.7 4.38 1,127.0 3.83 483.8 5.08
-------- -------- --------
Total......................... $6,628.5 4.38 $7,311.0 3.27 $7,040.8 3.95
======== ======== ========
Maximum month-end balance
Commercial paper.................. $2,949.3 NA $3,084.6 NA $2,947.5 NA
Federal funds purchased and
securities sold under agreements
to repurchase.................... 4,252.5 NA 4,729.7 NA 5,138.0 NA
Other............................. 1,341.6 NA 1,590.2 NA 861.5 NA
- --------
NA--Not applicable.
8. CERTIFICATES OF DEPOSIT OVER $100,000
The corporation had certificates of deposit over $100,000 of $2,050.7 million
and $1,849.6 million at December 31, 1994 and 1993, respectively. Interest
expense on certificates of deposit over $100,000 was $69.4 million, $90.2
million and $99.0 million for the years ended December 31, 1994, 1993 and 1992,
respectively. There were no brokered certificates of deposit at December 31,
1994 and 1993.
52
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LONG-TERM DEBT
Long-term debt at December 31 consisted of:
1994 1993
-------- -------
IN MILLIONS
NORWEST CORPORATION (parent company only)
Medium-Term Notes, Series A, 4.47% to 5.74%, due 1995 to 1998. $ 60.3 62.6
Floating Rate Medium-Term Notes, Series B, due 1995........... 200.0 200.0
Medium-Term Notes, Series C, 4.03% to 5.14%, due 1995 to 1998. 44.6 44.6
Floating Rate Medium-Term Notes, Series C, due 1995 to 1998... 255.4 255.4
Medium-Term Notes, Series D, 7.125% to 8.15% due 1999 to 2001. 375.0 --
Floating Rate Medium-Term Notes, Series D, due 1996 to 1999... 600.0 --
Floating Rate Medium-Term Notes, Series E, due 1997........... 200.0 --
Senior Notes, 11.22% due 1995................................. 10.0 15.0
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 --
ESOP Series A Notes, 8.42% due 1996........................... 31.0 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........... 0.2 0.3
6.65% Subordinated Debentures, due 2003....................... 200.0 200.0
7 7/8% Notes due 1997......................................... -- 100.0
Other Notes................................................... 5.4 6.0
-------- -------
Total..................................................... 2,745.2 1,528.2
-------- -------
NORWEST FINANCIAL, INC. AND ITS SUBSIDIARIES
Senior Notes, 4.625% to 8.875%, due 1995 to 2004.............. 2,797.6 2,479.2
Senior Subordinated Notes, 4.85% to 9.63%, due 1995 to 1998... 295.0 262.5
-------- -------
Total..................................................... 3,092.6 2,741.7
-------- -------
OTHER CONSOLIDATED SUBSIDIARIES
FHLB Notes and Advances, 4.04% to 9.00%, due 1995 through
2024......................................................... 268.5 256.5
Floating Rate FHLB Advances due 1995 through 2000............. 2,443.8 2,190.1
Floating Rate Student Loan Marketing Association Advances, due
1995......................................................... 500.0 --
10.585% to 12.175% Notes guaranteed by Small Business
Administration due 1995...................................... -- 4.8
Senior Notes, 6.93% to 12.25%, due 1995 to 2003............... 76.0 44.9
Senior Subordinated Notes, 7.34% to 10.13%, due 1997 to 1998.. 5.8 --
Floating Rate Subordinated Notes, due 1995 to 1996............ -- 1.2
10% Subordinated Note, due 1994 to 1998....................... -- 0.5
Other notes and debentures due 1995 through 2002.............. 35.3 36.7
Mortgages payable............................................. 0.4 27.0
Capital lease obligations..................................... 18.7 19.3
-------- -------
Total..................................................... 3,348.5 2,581.0
-------- -------
Consolidated long-term debt............................... $9,186.3 6,850.9
======== =======
Notes and debentures of the corporation and Norwest Financial, Inc. and its
subsidiaries are unsecured.
During 1994, the corporation issued $1.2 billion of Medium-Term Notes. This
included $975 million of Medium-Term Notes, Series D, and $200 million of
Medium-Term Notes, Series E. The Medium-Term
53
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Notes, Series D, have maturities ranging from May 1996 to November 2001, and
consist of $375 million of fixed rate notes and $600 million of floating rate
notes. The fixed rate Medium-Term Notes, Series D, bear interest at rates
ranging from 7.125 percent to 8.150 percent and the floating rate Medium-Term
Notes, Series D, reset periodically at interest rates from one month LIBOR to
one month LIBOR plus five basis points or three month LIBOR plus five basis
points. The floating rate Medium-Term Notes, Series E, reset periodically at
interest rates from three month LIBOR plus five basis points to three month
LIBOR plus ten basis points and mature in November and December 1997. The
corporation has entered into interest rate swap agreements to exchange the
fixed interest rate on the fixed rate Series D, Medium Term Notes. The $375
million of Medium Term Notes, Series D, combined with the interest rate swap
agreements provide the corporation with $300 million of funds at an effective
rate of three month LIBOR less 36 basis points and $75 million of funds at an
effective rate of one month LIBOR less 92 basis points.
Interest on the floating rate Medium-Term Notes, Series B, resets
periodically based on LIBOR minus five basis points. The floating rate Medium
Term Notes, Series C, reset periodically at interest rates ranging from three
month LIBOR to three month LIBOR plus 25 basis points or three month U.S.
Treasury bills plus 25 basis points.
The corporation has entered into $55 million of interest rate swap agreements
on $60.3 million of Medium Term Notes, Series A, to exchange the fixed rate
interest for a floating rate. The Medium-Term Notes, Series A, combined with
the interest rate swap agreements provide the corporation with $55 million of
funds at an effective net interest rate of three-month LIBOR plus 29 basis
points. In addition, the corporation has entered into $20 million of interest
rate swap agreements to exchange the fixed rate interest on $44.6 million of
Medium-Term Notes, Series C, for a floating rate. The fixed rate Medium-Term
Notes, Series C, coupled with the interest rate swap agreements provide the
corporation with $20 million of funds at an effective net interest rate of
three-month LIBOR plus nine basis points.
The Medium-Term Notes represent senior, unsubordinated debt and rank equally
with all other unsecured and unsubordinated debt of the corporation.
The Series A ESOP Notes are due April 26, 1996 and the Series B ESOP Notes
are due April 26, 1999. The full principal amounts of the Series A ESOP Notes
are due at maturity. The Series B ESOP Notes require payments of $4.4 million
on April 25, 1997 and 1998, with the balance due at maturity. As a result of
the increase in the federal tax rate in 1993, the rates on the Series A ESOP
Notes and Series B ESOP Notes were adjusted retroactively from 8.5 percent and
8.6 percent, respectively, to 8.42 percent and 8.52 percent, respectively.
During 1994, the corporation issued a $150 million senior debt fixed rate
note. The note bears interest at a rate of 7.816% and matures December 13,
1996. The note represents senior unsubordinated debt of the corporation and
ranks equally with present and future unsecured and unsubordinated debt of the
corporation. Payment of principal may be accelerated only in the case of a
default in the payment of interest for a period of thirty days or 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 on any other note of the
corporation or in the lack of performance of any covenant of the corporation.
In addition, the corporation has entered into an interest rate swap agreement
to exchange the fixed interest rate for a floating rate. The senior debt
combined with the interest rate swap provides the corporation with funds at an
effective rate of three month LIBOR less 14 basis points.
The 9 1/4 percent 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 organization or cash at the bondholder's election if
the
54
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 corporation has also entered into interest rate swap agreements to
exchange the fixed interest rate on $50 million of the 9 1/4 percent
Subordinated Capital Notes for a floating rate through 1997. The 9 1/4 percent
Subordinated Capital Notes coupled with the interest rate swap agreements
provide the corporation with $50 million of funds at an effective net interest
rate of six-month LIBOR plus 44 basis points.
The 6 5/8 percent 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 percent 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
ranging from 101 basis points in 1995 to 34 basis points in 1997, and
thereafter without a premium.
The 6.65 percent 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.
The 7 7/8 percent Notes due 1997 were redeemed on January 20, 1994, at the
principal amount plus accrued interest.
During 1994, Norwest Financial, Inc. and subsidiaries issued a total of
$975.0 million of senior and senior subordinated notes bearing interest at
rates from 5.40 percent to 8.65 percent and due dates ranging from March 1996
to February 2004. Norwest Financial Services, Inc. assumed the debt of
Community Credit Co. upon acquisition. Senior notes of $63.2 million bear
interest at rates from 6.93 percent to 9.50 percent, and due dates ranging from
1996 to 2003. The Senior Subordinated Notes of $5.8 million bear interest at
rates from 7.34 percent to 10.13 percent and due dates ranging from 1997 to
1998.
The Floating Rate FHLB advances bear interest at rates ranging from LIBOR
less 17 basis points to LIBOR less 4 basis points, the one month LIBOR less 15
basis points to the one month LIBOR, and the three month LIBOR less 15 basis
points to the three month LIBOR less 10 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, 1994, the maturity dates
range from 1995 to 2000. The floating rate Student Loan Marketing Association
advances issued during 1994 bear interest at one month LIBOR minus 2 basis
points.
Mortgages payable consist of notes secured by deeds of trust on premises and
certain other real estate owned with a net book value of $0.45 million at
December 31, 1994. Interest rates on the mortgages payable range up to 9.25
percent with maturities through the year 1998.
55
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of long-term debt at December 31, 1994 were:
PARENT
COMPANY
CONSOLIDATED ONLY
------------ -------
IN MILLIONS
1995................................................. $1,835.7 309.8
1996................................................. 2,208.8 729.8
1997................................................. 1,243.5 305.1
1998................................................. 853.2 218.1
1999................................................. 989.0 480.0
Thereafter........................................... 2,056.1 702.4
-------- -------
Total............................................ $9,186.3 2,745.2
======== =======
10. STOCKHOLDERS' EQUITY
Preferred Stock. The corporation is authorized to issue 5,000,000 shares of
preferred stock without par value. A summary of the corporation's preferred
stock at December 31 is presented below.
ANNUAL AMOUNT
SHARES OUTSTANDING DIVIDEND OUTSTANDING
-------------------- RATE -------------
1994 1993 1994 1994 1993
--------- --------- -------- ------ -----
IN MILLIONS, EXCEPT SHARE AND PER SHARE
AMOUNTS
10.24% Cumulative, $100 stated
value............................ 1,127,125 1,131,250 10.24% $112.7 113.2
Cumulative Tracking, $200 stated
value............................ 980,000 -- 9.30% 196.0 --
Cumulative Convertible, Series B,
$200 stated value................ 1,143,675 1,143,750 7.00% 228.7 228.7
ESOP Cumulative Convertible,
$1,000 stated value.............. 14,265 -- 9.00% 14.3 --
First United Cumulative
Convertible Exchangeable, Series
A, $25 stated value.............. -- 1,200,000 -- -- 30.0
First United Adjustable Rate
Cumulative, Series B, $1 par
value............................ -- 188,095 -- -- 7.9
First United 10.00% Cumulative
Convertible Exchangeable, Series
C, $1 par value.................. -- 3,570 -- -- 0.2
Less: Cumulative Tracking shares
held by a subsidiary............. (125,000) -- -- (25.0) --
--------- --------- ------ -----
3,140,065 3,666,665 526.7 380.0
========= =========
Unearned ESOP shares.............. (14.7) --
------ -----
Total preferred stock......... $512.0 380.0
====== =====
On December 30, 1994, the corporation issued 980,000 shares of Cumulative
Tracking Preferred Stock, $200 stated value per share, of which 125,000 shares
were held by a subsidiary at December 31, 1994. 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 or three-month LIBOR rate 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
56
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock rank on a parity, both as to payment of dividends and the
distribution of assets upon liquidation, with the corporation's 10.24%
Cumulative Preferred Stock, Cumulative Convertible Preferred Stock, Series B,
and ESOP Cumulative Convertible 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, 1994, there
were two holders of record of the Cumulative Tracking Preferred Stock. The
corporation has entered into a $150 million interest rate swap agreement to
exchange a portion of the fixed dividend payment rate on the Cumulative
Tracking Preferred Stock to a floating rate.
On March 31, 1994, the corporation issued 40,900 shares of ESOP Cumulative
Convertible Preferred Stock, $1,000 stated value per share ("ESOP Preferred
Stock"). All shares of the ESOP Preferred Stock have been 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 9.00 percent. 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. During 1994, 26,635 shares of ESOP Preferred
Stock were converted into 1,094,593 shares of common stock of the corporation.
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 ESOP
Preferred Stock Certificate of Designations.
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.
As a result of the acquisition of First United (See Note 2), each share of
the Cumulative Convertible Exchangeable Preferred Stock, Series A, and the
10.00% Cumulative Convertible Exchangeable Preferred Stock, Series C, was
converted into 2.2 and 6.039 shares, respectively, of the corporation's common
stock and each outstanding share of the Adjustable Rate Cumulative Preferred
Stock, Series B, was redeemed for $42 per share plus accrued and unpaid
dividends.
The corporation has outstanding 1,127,125 shares of 10.24% Cumulative
Preferred Stock, $100 stated value per share, in the form of 4,508,500
depositary shares, each of which represents ownership of one quarter of a share
of such preferred stock. At December 31, 1994, there were 1,535 holders of
record of the depositary shares. Dividends are cumulative from the date of
issue and are payable quarterly at 10.24 percent per annum. Prior to January 1,
1996, if the corporation requests the holders of this preferred stock to vote
upon or consent to a merger or consolidation, and the corporation shall not
have received a favorable vote or consent requisite to the consummation of the
transaction within 60 days, the corporation may redeem, at its option, all
outstanding shares of 10.24% Cumulative Preferred Stock at the $100 stated
value plus accrued and unpaid dividends. On or after January 1, 1996, the
corporation, at its option, may redeem all or part of the outstanding shares at
the $100 stated value plus accrued and unpaid dividends. During 1994 and 1993,
the corporation repurchased 4,125 and 6,450 shares of 10.24% Cumulative
Preferred Stock, respectively.
The corporation has outstanding 1,143,675 shares of Cumulative Convertible
Preferred Stock, Series B, $200 stated value per share, in the form of
4,574,700 depositary shares, each of which represents ownership of one quarter
of a share of such preferred stock. At December 31, 1994, there were 91 holders
of record of
57
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the depositary shares. Dividends are cumulative from the date of issue and are
payable quarterly at a rate of 7.00 percent per annum. The convertible
preferred stock is convertible at the option of the holder at any time, unless
previously redeemed, into common stock of the corporation at a conversion price
of $18.23 per share of common stock, subject to adjustment in certain events.
On or after September 1, 1995, the corporation, at its option, may redeem all
or part of the outstanding shares at 104.2 percent of its stated value plus
accrued and unpaid dividends. The redemption price declines during each 12-
month subsequent period to 100.0 percent of the stated value plus accrued and
unpaid dividends if redeemed on or after September 1, 2001. During 1994, 75
shares of Cumulative Convertible Preferred Stock, Series B, were converted into
823 shares of common stock of the corporation. No Cumulative Convertible
Preferred Stock, Series B, was converted or repurchased during 1993.
Common Stock. On April 27, 1993, the stockholders approved an amendment to
the corporation's Restated Certificate of Incorporation increasing the
authorized shares of common stock to 500,000,000. On April 27, 1993 the Board
of Directors approved a two-for-one stock split effected in the form of a 100
percent stock dividend distributed on June 28, 1993 to stockholders of record
on June 4, 1993. The stock split resulted in an increase in issued common stock
of 146,549,734 shares and was accounted for by a transfer of $244.2 million to
common stock from surplus. All prior year common share and per share
disclosures have been restated to reflect the stock split.
In 1994, 1993 and 1992, holders of $25 thousand, $6.9 million and $5.0
million, respectively, of convertible subordinated debentures and the 12
percent convertible notes exchanged such debt for 5,000 shares, 695,016 shares
and 831,710 shares, respectively, of the corporation's common stock. At
December 31, 1994, there were nine holders of record of the convertible
subordinated debentures.
Common stockholders may purchase shares of common stock at market prices with
no sales charges through a dividend reinvestment plan. Stockholders may
purchase additional shares up to $30,000 per quarter with no sales charges
under the terms of the plan.
The corporation had reserved shares of authorized but unissued common stock
at December 31, as follows:
1994 1993
---------- ----------
Stock incentive plans.................................... 23,638,647 25,591,754
Convertible subordinated debentures and warrants*........ 8,045,500 50,500
Dividend reinvestment.................................... 632,777 1,089,842
Invest Norwest Program................................... 622,610 1,067,105
Savings-Investment Plans and Executive Incentive
Compensation Plan....................................... 3,121,951 5,108,548
Cumulative Convertible Preferred Stock, Series B......... 12,619,203 12,620,026
First United Convertible Preferred Stock, Series A and C. -- 4,874,390
Directors' Formula Stock Award and Stock Deferral Plans.. 371,691 386,244
Employees' deferral plans................................ 1,125,165 1,350,000
---------- ----------
Total.................................................. 50,177,544 52,138,409
========== ==========
- --------
*Includes warrants issued by the corporation to a subsidiary to purchase
8,000,000 shares of the corporation's common stock at $70.00 per share.
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
58
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 twelve 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, beginning January 1, 1995, 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 bond, 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 $30.4 million, $22.4 million and $18.9 million in 1994,
1993 and 1992, respectively.
The corporation's SIP contains Employee Stock Ownership Plan (ESOP)
provisions under which the SIP may borrow money to purchase corporation common
or preferred stock. In 1994, the corporation loaned money to the SIP which was
used to purchase shares of the corporation's ESOP Cumulative Convertible
Preferred Stock (the 1994 ESOP shares). The 1994 ESOP shares are accounted for
in accordance with AICPA Statement of Position 93-6. Accordingly, the 1994 ESOP
shares not yet released or committed to be released are reported as unearned
ESOP shares in the consolidated balance sheet. As shares are 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 1994 ESOP shares 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 1994 ESOP shares 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 1994
ESOP shares, are used to make loan principal and interest payments. With each
principal and interest payment, a portion of the 1994 ESOP shares are released
and, after conversion of the 1994 ESOP shares into common shares, are 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 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 loans from the corporation to the SIP are
repayable in monthly installments through April 26, 1999, with interest at
rates of 8.35 percent and 8.45 percent. Interest income on these loans was $1.2
million, $1.6 million and $1.8 million in 1994,
59
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1993 and 1992, 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, $3.8 million and $3.8 million in 1994, 1993 and 1992,
respectively. Total dividends paid to the SIP on ESOP shares were as follows:
1994 1993 1992
---- ---- ----
IN MILLIONS
1994 ESOP shares:
Common dividends............................................... $0.3 -- --
Preferred dividends............................................ 1.7 -- --
1989 ESOP shares:
Common dividends............................................... 6.8 5.7 4.9
---- --- ---
Total........................................................ $8.8 5.7 4.9
==== === ===
The ESOP shares as of December 31 were as follows:
1994 1993
--------- ---------
IN MILLIONS, EXCEPT
SHARES
1994 ESOP shares:
Allocated shares (common)................................. 1,074,106 --
Unreleased shares (preferred)............................. 14,265 --
1989 ESOP shares:
Allocated shares.......................................... 7,409,973 7,272,917
Unreleased shares......................................... 1,341,736 1,677,359
Fair value of unearned ESOP shares.......................... $14.3 NA
Norwest Financial Services, Inc. has a thrift and profit sharing plan for its
employees in which eligible employees may contribute on a before tax basis up
to ten percent of their salary, and the contributions will be matched 25
percent by Norwest Financial Services, Inc. up to six percent of the employee's
salary. 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 $12.3 million, $9.3 million and $7.9 million in 1994, 1993 and
1992, respectively.
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.
60
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The combined plans' funded status at December 31 is presented below.
1994 1993
------ -----
IN MILLIONS
Plan assets at fair value*....................................... $694.9 661.1
Actuarial present value of benefit obligations...................
Accumulated benefit obligation, including vested benefits of
$552.1 and $474.3, respectively............................... 598.0 522.0
Projected benefit obligation for service rendered to date...... 767.9 678.1
------ -----
Plan assets less than projected benefit obligation............... 73.0 17.0
Unrecognized net gain (loss) from past experience different from
that assumed and effects of changes in assumptions.............. (50.5) (15.7)
Unrecognized net asset being amortized over approximately 17
years........................................................... 14.0 16.4
Unrecognized prior service cost.................................. 3.7 (2.7)
------ -----
Accrued pension liability included in other liabilities.......... $ 40.2 15.0
====== =====
- --------
* Consists primarily of listed stocks and bonds and obligations of the U.S.
government and its agencies.
The components of net pension cost for the years ended December 31 are
presented below.
1994 1993 1992
----- ----- -----
IN MILLIONS
Service cost-benefits earned during the year............... $43.5 32.3 22.9
Interest cost on projected benefit obligation.............. 48.9 43.3 40.1
Actual return on plan assets............................... (6.0) (67.5) (39.4)
Net amortization and deferral*............................. (17.8) 49.9 (8.7)
----- ----- -----
Net pension cost........................................... $68.6 58.0 14.9
===== ===== =====
- --------
* 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 $35.9 million and $36.1 million as of December 31, 1994 and 1993,
respectively, and is not included in plan assets as presented above.
The weighted-average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were seven percent and six percent, respectively,
for 1994 and 1993. The expected long-term rate of return on assets was six
percent for 1994 and 1993.
61
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Postretirement Benefits. The corporation sponsors a medical plan 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
plan's funded status at December 31 is presented below.
1994 1993
------ -----
IN MILLIONS
Plan assets at fair value*...................................... $ 64.3 52.1
Accumulated postretirement benefit obligation:
Retirees...................................................... 81.6 88.6
Fully eligible active plan participants....................... 12.1 11.5
Other active plan participants................................ 84.6 66.8
------ -----
178.3 166.9
Unrecognized net gain (loss).................................... (16.4) (15.7)
------ -----
Accrued postretirement benefit liability included in other
liabilities.................................................... $ 97.6 99.1
====== =====
- --------
*Consists primarily of listed stocks and bonds, municipal securities, and
obligations of the U.S. government and its agencies and, as of December 31,
1994, life insurance policies.
The components of net periodic postretirement benefit cost for the year ended
December 31 is presented below.
1994 1993
----- ----
IN
MILLIONS
Service cost-benefits earned during the year....................... $ 9.0 7.5
Interest cost on accumulated postretirement benefit obligation..... 11.4 10.7
Actual return on plan assets....................................... 2.7 (3.4)
Net amortization and deferral*..................................... (1.7) 6.0
----- ----
Net periodic postretirement benefit cost........................... $21.4 20.8
===== ====
- --------
*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 12.0 percent annual increase in the cost of
covered health care benefits is assumed in the first two years. This rate is
assumed to decrease to eight percent after seven 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 $24.2 million at December 31, 1994 and the service and interest
components of the net periodic cost by $3.5 million for the year. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was seven percent in 1994 and 1993. The expected long-term
rate of return on plan assets after taxes was 3.6 percent in 1994 and 1993.
Stock Incentive Plans. The corporation grants stock incentives to key
employees. In April 1985, the corporation's stockholders approved the adoption
of the 1985 Long-Term Incentive Compensation Plan (1985 Plan). In April 1988,
1991 and 1993, the stockholders approved amendments which increased the number
of shares that may be distributed under the 1985 Plan. 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 1985 Plan.
62
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1994, 325,205 shares of restricted stock and options to acquire
15,407,439 shares of common stock were outstanding under the 1985 Plan.
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.
With the adoption of the 1985 Plan, no new grants may be made under the 1983
Stock Option and Restricted Stock Plan (1983 Plan). Additionally, all
outstanding options under the 1983 Plan expired on September 25, 1994.
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 market on the
dates of grant.
In connection with the acquisition of First National Bank of Kerrville
(Kerrville), the corporation assumed Kerrville's obligations under a stock
option plan. As a result of the merger, all options under the plan were
converted into options to acquire 181,300 shares of the corporation's common
stock, which options remain outstanding as of December 31, 1994.
In connection with the acquisition of First United Bank Group, Inc. (First
United), the corporation assumed First United's obligations under the First
United Bank Group Incentive Stock Option Plan. Exercise prices were based on
the fair market value of First United's common stock on the date of grant. As a
result of the acquisition, all outstanding options under the plan were vested
and converted into options to acquire the corporation's common stock. At
December 31, 1994, options to acquire 18,700 shares of the corporation's common
stock were outstanding under First United's stock option plan.
In connection with the 1993 acquisition of Financial Concepts Bancorp, Inc.
(Financial Concepts), the corporation assumed Financial Concepts's obligations
under a stock 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, 1994, 46,764 of such options remain outstanding.
In connection with the acquisition of Lincoln Financial Corporation
(Lincoln), the corporation assumed Lincoln's obligations under two stock option
plans and a Directors' Stock Compensation Plan. Under terms of the option
plans, stock 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, 1994, options to
acquire 45,129 shares of common stock were outstanding under one of Lincoln's
stock option plans.
63
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the United Banks of Colorado, Inc. (United) merger, 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. No new options may be
granted under these plans. 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, 1994, options to acquire 16,776 shares were
outstanding under United's stock option plans.
The table below presents a summary of stock option transactions under the
plans. At December 31, 1994, options for 8,484,333 shares were exercisable
under the plans.
STOCK OPTION TRANSACTIONS
OPTIONS OPTION PRICE
------------------------ -------------------------
AVAILABLE TOTAL IN
FOR GRANT OUTSTANDINGS PER SHARE MILLIONS
---------- ------------ ---------------- --------
December 31, 1991........... 8,033,009 12,844,554 $ 4.25-18.1563 $155.2
Granted*.................. (1,522,158) 1,522,158 16.9375-21.9688 29.9
Shares Swapped............ 1,271,826 -- -- --
Exercised................. -- (3,334,261) 4.25-19.4688 (34.5)
Cancelled................. 170,422 (200,938) 9.0909-19.4688 (3.3)
Restricted Stock Awards... (124,280) -- -- --
---------- ---------- ---------------- ------
December 31, 1992........... 7,828,819 10,831,513 4.25-21.9688 147.3
Stockholder Amendment..... 9,000,000 -- -- --
Granted*.................. (1,391,620) 1,391,620 20.8125-28.6875 36.8
Shares Swapped............ 835,264 -- -- --
Exercised................. -- (2,705,836) 4.4066-23.0625 (33.6)
Cancelled................. 236,518 (255,408) 6.6845-27.375 (2.6)
Restricted Stock Awards... (105,600) -- -- --
Acquisition of Financial
Concepts................. -- 99,712 8.4101-11.6818 0.8
Termination of Lincoln
Plans.................... (173,228) -- -- --
---------- ---------- ---------------- ------
December 31, 1993........... 16,230,153 9,361,601 4.25-28.6875 148.7
Granted*.................. (8,301,975) 8,301,975 22.125-28.00 211.0
Shares Swapped............ 802,038 -- -- --
Exercised................. -- (2,025,118) 4.4066-25.625 (27.2)
Cancelled................. 103,650 (103,650) 14.5313-28.00 (2.3)
Restricted Stock Awards... (68,500) -- -- --
Acquisition of Kerrville.. -- 181,300 4.4816-9.6237 1.0
Termination of First
United Plans............. (842,827) -- -- --
---------- ---------- ---------------- ------
December 31, 1994........... 7,922,539 15,716,108 $ 4.25-28.6875 $331.2
========== ========== ================ ======
- --------
*Includes 1,040,750, 1,076,552, and 1,263,568 AO grants at December 31, 1994,
1993 and 1992, respectively.
64
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES
Components of income tax expense were:
1994 1993 1992
------ ----- -----
IN MILLIONS
From operations
Current
Federal.................................................. $ 49.7 250.4 225.5
State.................................................... 6.2 32.6 21.1
Foreign.................................................. 11.6 3.7 0.1
------ ----- -----
Total current.......................................... 67.5 286.7 246.7
------ ----- -----
Deferred
Federal.................................................. 278.5 (32.5) (79.6)
State.................................................... 31.1 (1.0) 7.5
Foreign.................................................. 3.1 13.5 1.0
------ ----- -----
Total deferred......................................... 312.7 (20.0) (71.1)
------ ----- -----
Total from operations.................................. 380.2 266.7 175.6
------ ----- -----
From change in accounting for postretirement medical
benefits
Deferred
Federal.................................................. -- -- (39.2)
State.................................................... -- -- (6.0)
------ ----- -----
Total deferred......................................... -- -- (45.2)
------ ----- -----
Total.................................................. $380.2 266.7 130.4
====== ===== =====
Income tax expense (benefit) applicable to net gains on investment and
mortgage-backed securities for the years ended December 31, 1994, 1993 and 1992
was $(29.3) million, $18.3 million and $23.6 million, respectively.
Income before income taxes from operations outside the United States was
$33.4 million and $39.1 million for the years ended December 31, 1994 and 1993,
respectively. Such income was not material for the year ended December 31,
1992.
65
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net deferred tax asset included the following major temporary differences
at December 31:
1994 1993
------- ------
IN MILLIONS
Deferred tax liabilities
Depreciation................................................. $ 36.2 24.3
Lease financing.............................................. 155.8 169.8
Mark to market............................................... 286.3 --
Mortgage servicing........................................... 71.7 --
Other........................................................ 53.2 83.9
------- ------
Total deferred tax liabilities............................. 603.2 278.0
------- ------
Deferred tax assets
Provision for credit losses.................................. (225.6) (231.4)
Expenses deducted when paid.................................. (90.6) (114.0)
Mark to market............................................... -- (19.6)
FAS 115 adjustment........................................... (199.5) --
Mortgage servicing........................................... -- (16.1)
Postretirement benefits other than pensions.................. (34.0) (37.5)
Other........................................................ (99.5) (116.9)
------- ------
Total deferred tax assets.................................. (649.2) (535.5)
Valuation allowance............................................ -- --
------- ------
Deferred tax assets, net................................... (649.2) (535.5)
------- ------
Total net deferred tax assets.................................. $ (46.0) (257.5)
======= ======
Pursuant to FAS 109, the corporation has determined that it is not required
to establish a valuation reserve for the deferred tax asset since it is more
likely than not that the deferred tax asset of $649.2 million 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 asset will
be realized is based on federal taxable income of over $1.3 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 asset related to Statement of Financial Accounting Standards
No. 115 had no impact on 1994 income tax expense as the effect of the
unrealized losses, net of taxes, was charged directly to stockholder's equity.
A reconciliation of the federal income tax rate to effective income tax rates
follows:
1994 1993 1992
---- ---- ----
Federal income tax rate....................................... 35.0% 35.0 34.0
Adjusted for
State income taxes.......................................... 2.0 2.4 2.9
Tax-exempt income........................................... (2.4) (3.5) (6.7)
Federal tax benefit limitation.............................. -- (0.1) (6.0)
Charitable contributions of appreciated assets.............. (0.6) (2.5) (1.2)
Other, net.................................................. (1.8) (1.0) 1.9
---- ---- ----
Effective income tax rate..................................... 32.2% 30.3 24.9
==== ==== ====
66
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 1994, 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 $174.1
million, $156.4 million and $139.4 million in 1994, 1993 and 1992,
respectively.
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, 1994 were:
CAPITAL OPERATING
LEASES LEASES
------- ---------
IN MILLIONS
1995.......................................................... $ 2.4 $ 84.1
1996.......................................................... 2.3 71.9
1997.......................................................... 2.2 60.9
1998.......................................................... 2.2 52.5
1999.......................................................... 2.2 47.3
Thereafter.................................................... 34.7 468.2
----- ------
Total minimum rental payments................................. 46.0 $784.9
======
Less interest................................................. (27.3)
-----
Present value of net minimum rental payments.................. $18.7
=====
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 notional amount of those instruments.
The corporation uses the same credit policies in making commitments and
conditional obligations as it does for 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 14, 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 contract or notional amounts of these financial instruments
at December 31, is as follows:
1994 1993
-------- -------
IN MILLIONS
Commitments to extend credit................................... $6,862.3 6,498.2
Standby letters of credit*..................................... 905.6 907.7
Other letters of credit........................................ 422.6 404.9
- --------
*Total standby letters of credit are net of participations in standby letters
of credit sold to other institutions of $321.4 million in 1994 and $319.0
million in 1993.
67
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
counter-party. 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, 1994 supported $623.4 million of industrial revenue
bonds, $210.6 million of supplier payment guarantees, $151.0 million of
insurance premium financing, $134.4 million of performance bonds and $107.6
million of other obligations of unaffiliated parties with maturities up to 13
years, six years, seven years, nine years and eight years, respectively. Risks
associated with such standby letters of credit are included 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 to customers. As part of its overall risk management strategy,
the corporation does not believe it has any significant concentrations of
credit risk.
Norwest Mortgage, Inc., prior to 1985, sold mortgage loans 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 for these sales transactions were $198.0 million at
December 31, 1994 and $203.8 million at December 31, 1993. The liability under
these recourse 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 of the corporation and its
subsidiaries.
14. 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) as part of its overall
interest rate risk management strategy.
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
68
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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." The market risk of derivative 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
derivative included in its trading portfolio at December 31, 1994, and the
average fair value of derivatives held or issued for trading purposes during
the year ended December 31, 1994:
1994
NOTIONAL FAIR AVERAGE DAILY
VALUE VALUE FAIR VALUE
-------- ----- -------------
IN MILLIONS
At December 31, 1994
Swaps:
In a favorable position......................... $509.0 15.5 15.0
In an unfavorable position...................... 307.0 (17.0) (15.0)
Caps and Floors:
In a favorable position......................... 255.0 4.2 10.0
In an unfavorable position...................... 166.0 (1.6) (1.0)
Options:
Purchased....................................... -- -- --
Written......................................... 250.0 (4.6) (3.0)
Foreign exchange contracts:
In a favorable position......................... 289.0 6.7 7.0
In an unfavorable position...................... 282.0 (6.1) (7.0)
Foreign exchange contracts:
Purchased....................................... 1.0 -- --
Written......................................... 1.0 -- --
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 Asset and Liability Management section of
the Financial Review.
Interest income derived from trading account securities was $24.6 million,
$28.9 million and $22.9 million for the three years ended December 31, 1994,
1993 and 1992, respectively. Non-interest trading revenues (losses) during
1994, 1993 and 1992, were $(18.1) million, $41.7 million and $20.9 million,
respectively. The table on page 70 provides a summary of the corporation's
trading results in the principal markets in which the corporation participates.
69
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NORWEST CORPORATION AND SUBSIDIARIES
TRADING REVENUES
1994 1993 1992
----------------------- ----------------------- -----------------------
NON- NON- NON-
INTEREST INTEREST INTEREST INTEREST INTEREST INTEREST
INCOME INCOME TOTAL INCOME INCOME TOTAL INCOME INCOME TOTAL
-------- -------- ----- -------- -------- ----- -------- -------- -----
IN MILLIONS
Securities:
U.S. treasury and
agencies............. $10.5 -- 10.5 7.5 -- 7.5 19.8 -- 19.8
State and municipal... 1.3 -- 1.3 2.4 -- 2.4 1.8 -- 1.8
Mortgage-backed....... 1.2 -- 1.2 1.4 -- 1.4 1.1 -- 1.1
Other................. .9 -- .9 1.3 -- 1.3 0.1 -- 0.1
----- ----- ----- ---- ---- ---- ---- ----- -----
13.9 -- 13.9 12.6 -- 12.6 22.8 -- 22.8
Derivatives:
Swaps and other
interest rate
contracts............ 10.7 (39.9) (29.2) 16.3 14.6 30.9 0.1 14.7 14.8
Options............... -- 5.9 5.9 -- 3.1 3.1 -- -- --
Debt instruments...... -- -- -- -- (0.2) (0.2) -- (0.6) (0.6)
Futures............... -- 1.0 1.0 -- (2.6) (2.6) -- (10.1) (10.1)
Gains on securities..... -- 8.4 8.4 -- 21.4 21.4 -- 12.2 12.2
Foreign exchange
trading................ -- 6.5 6.5 -- 5.4 5.4 -- 4.7 4.7
----- ----- ----- ---- ---- ---- ---- ----- -----
Total................... $24.6 (18.1) 6.5 28.9 41.7 70.6 22.9 20.9 43.8
===== ===== ===== ==== ==== ==== ==== ===== =====
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) as part of an
overall interest rate risk management strategy. 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 contract. Amortizing swaps' notional amounts and lives 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.
A key assumption in the following information is that rates remain constant
at December 31, 1994 levels. To the extent that rates change, both the maturity
and variable interest rate information will change. The basis swaps are
contracts where the corporation receives an amount and pays an amount based on
different floating indices.
For the year ended December 31, 1994, the end-user derivative activities
increased interest income by $7.7 million and reduced interest expense by $4.6
million, for a total benefit to net interest income of $12.3 million. For the
same periods in 1993 and 1992, end-user derivative activities increased
interest income by $13.4 million and $1.2 million, respectively, and reduced
interest expense by $9.2 million and $48.9 million, respectively, for a total
benefit to net interest income of $22.6 million and $50.1 million,
respectively.
70
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the maturity and weighted average rates for end-
user derivatives by type at December 31, 1994.
MATURITY
------------------------------------
1995 1996 1997 1998 1999 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
DOLLARS IN MILLIONS
SWAPS:
Generic receive fixed--
Notional value................... $-- 475 50 100 200 200 1,025
Weighted average receive rate.... -- % 5.59 9.12 5.60 7.84 7.05 6.49
Weighted average pay rate........ -- % 6.14 6.00 6.38 5.85 5.81 6.04
Generic pay fixed--
Notional value................... $-- 30 -- -- -- 100 130
Weighted average receive rate.... -- % 5.81 -- -- -- 6.38 6.25
Weighted average pay rate........ -- % 6.27 -- -- -- 5.69 5.82
Basis--
Notional value................... $-- 200 -- 29 -- -- 229
Weighted average receive rate.... -- % 6.38 -- 4.63 -- -- 6.16
Weighted average pay rate........ -- % 6.16 -- 4.26 -- -- 5.92
INTEREST RATE CAPS AND FLOORS:*
Notional value................... $ 8 16 -- 327 400 -- 751
---- ---- ---- ---- ---- ---- -----
Total notional value........... $ 8 721 50 456 600 300 2,135
==== ==== ==== ==== ==== ==== =====
Total weighted average rates on
swaps:
Receive rate..................... -- % 5.82 9.12 5.39 7.84 6.83 6.41
==== ==== ==== ==== ==== ==== =====
Pay rate......................... -- % 6.15 6.00 5.91 5.85 5.77 6.00
==== ==== ==== ==== ==== ==== =====
- --------
*Average rates are not meaningful for interest rate caps and floors.
Note: Weighted average variable rates are the actual rates as of December
31, 1994.
Activity in the notional amounts of end-user derivatives for each of the
three years ended December 31, 1994, 1993 and 1992, is summarized as follows:
SWAPS
-------------------------------------- INTEREST
GENERIC AMORTIZING GENERIC RATE
RECEIVE RECEIVE PAY TOTAL CAPS/ TOTAL
FIXED FIXED FIXED BASIS SWAPS FLOORS FUTURES DERIVATIVES
------- ---------- ------- ----- ----- -------- ------- -----------
IN MILLIONS
Balance, December 31,
1991................... $ 860 -- 1,105 -- 1,965 2,148 3,150 7,263
Additions.............. -- 500 100 -- 600 450 1,500 2,550
Amortizations and
maturities............ 505 -- 1,000 -- 1,505 215 3,150 4,870
Terminations........... -- -- -- -- -- -- -- --
------ ----- ----- --- ----- ----- ----- -----
Balance, December 31,
1992................... $ 355 500 205 -- 1,060 2,383 1,500 4,943
Additions.............. 325 -- 200 -- 525 166 2,000 2,691
Amortizations and
maturities............ 305 -- 105 -- 410 1,900 1,500 3,810
Terminations........... -- -- -- -- -- -- -- --
------ ----- ----- --- ----- ----- ----- -----
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
====== ===== ===== === ===== ===== ===== =====
71
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unrecognized gains and losses for open end-user derivatives at December 31,
1994 and 1993 were as follows:
BALANCE SHEET CATEGORY
-------------------------------------------
INTEREST- OTHER LONG-
INVESTMENT BEARING SHORT-TERM TERM
SECURITIES LOANS DEPOSITS BORROWINGS DEBT TOTAL
---------- ----- --------- ---------- ----- -----
IN MILLIONS
1994:
Swaps
Pay variable unrealized
gains................... $ -- -- -- -- 1.0 1.0
Pay variable unrealized
(losses)................ -- -- (18.3) -- (18.2) (36.5)
----- --- ----- ---- ----- -----
Pay variable net....... -- -- (18.3) -- (17.2) (35.5)
----- --- ----- ---- ----- -----
Pay fixed unrealized
gains................... -- -- 15.3 -- -- 15.3
Basis unrealized
(losses)................ (3.3) -- -- -- -- (3.3)
----- --- ----- ---- ----- -----
Total unrealized gains... -- -- 15.3 -- 1.0 16.3
Total unrealized
(losses)................ (3.3) -- (18.3) -- (18.2) (39.8)
----- --- ----- ---- ----- -----
Total net.............. $(3.3) -- (3.0) -- (17.2) (23.5)
===== === ===== ==== ===== =====
Interest rate caps/floors
Unrealized gains......... $ 1.5 1.0 -- -- 0.9 3.4
Unrealized (losses)...... -- -- -- (0.1) -- (0.1)
----- --- ----- ---- ----- -----
Total net.............. $ 1.5 1.0 -- (0.1) 0.9 3.3
===== === ===== ==== ===== =====
Grand total unrealized
gains..................... $ 1.5 1.0 15.3 -- 1.9 19.7
Grand total unrealized
(losses).................. (3.3) -- (18.3) (0.1) (18.2) (39.9)
----- --- ----- ---- ----- -----
Grand total net............ $(1.8) 1.0 (3.0) (0.1) (16.3) (20.2)
===== === ===== ==== ===== =====
1993:
Swaps
Pay variable unrealized
gains................... $ -- 4.6 1.6 -- 6.7 12.9
Pay variable unrealized
(losses)................ -- -- -- -- (0.3) (0.3)
----- --- ----- ---- ----- -----
Pay variable net....... -- 4.6 1.6 -- 6.4 12.6
----- --- ----- ---- ----- -----
Pay fixed unrealized
gains................... -- -- -- 0.7 -- 0.7
Pay fixed unrealized
(losses)................ -- -- (3.3) -- -- (3.3)
----- --- ----- ---- ----- -----
Pay fixed net.......... -- -- (3.3) 0.7 -- (2.6)
----- --- ----- ---- ----- -----
Total unrealized gains... -- 4.6 1.6 0.7 6.7 13.6
Total unrealized
(losses)................ -- -- (3.3) -- (0.3) (3.6)
----- --- ----- ---- ----- -----
Total net.............. $ -- 4.6 (1.7) 0.7 6.4 10.0
===== === ===== ==== ===== =====
Interest rate caps/floors
Unrealized (losses)...... $(0.7) -- -- (0.6) (0.5) (1.8)
----- --- ----- ---- ----- -----
Total net.............. $(0.7) -- -- (0.6) (0.5) (1.8)
===== === ===== ==== ===== =====
Grand total unrealized
gains..................... $ -- 4.6 1.6 0.7 6.7 13.6
Grand total unrealized
(losses).................. (0.7) -- (3.3) (0.6) (0.8) (5.4)
----- --- ----- ---- ----- -----
Grand total net............ $(0.7) 4.6 (1.7) 0.1 5.9 8.2
===== === ===== ==== ===== =====
72
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The table on page 72 is a summary of gross gains and gross losses not yet
recognized in the income statements for end-user derivatives applicable to
certain hedged assets and liabilities at December 31, 1994 and 1993. As a
result of interest rate fluctuations, off-balance sheet derivatives have
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 on page 72, there has been offsetting
unrealized appreciation and depreciation in the assets and liabilities hedged.
Deferred gains and losses on closed end-user derivatives were not material at
December 31, 1994 and 1993.
The corporation has entered into mandatory and standby forward contracts to
reduce interest rate 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 price or yield. At December 31, 1994 and
1993, the corporation had forward contracts totaling $4.1 billion and $8.0
billion, respectively. The contracts mature within 240 days. Gains and losses
on forward contracts are included in the determination of market value of
mortgages held for sale. The net unrealized loss on these contracts at December
31, 1994 was $2.3 million, compared with a net unrealized gain of $28.3 million
at December 31, 1993.
15. SEGMENT REPORTING
The corporation's operations include three primary business segments:
banking, mortgage banking and consumer finance. The corporation, primarily
through its subsidiary banks, offers diversified banking services including
retail, commercial and corporate banking, equipment leasing, trust services,
securities brokerage and investment banking and venture capital investments.
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 where servicing rights have been retained. Consumer
finance activities, provided through the corporation's Norwest Financial
subsidiaries, include providing direct installment loans to individuals,
purchasing of sales finance contracts, private label and lease accounts
receivable financing and other related products and services.
Selected financial information by business segment for each of the three
years ended December 31 is included in the following summary:
ORGANIZATIONAL TOTAL
REVENUES* EARNINGS* ASSETS
--------- -------------- --------
IN MILLIONS
1994:
Banking..................................... $3,892.4 507.1 48,564.3
Mortgage banking............................ 921.3 70.8 4,608.1
Consumer finance............................ 1,218.3 222.5 6,143.5
-------- ----- --------
Total..................................... $6,032.0 800.4 59,315.9
======== ===== ========
1993:
Banking..................................... $3,594.6 356.7 41,956.9
Mortgage banking............................ 851.1 56.3 7,425.2
Consumer finance............................ 1,085.6 200.1 5,282.9
-------- ----- --------
Total..................................... $5,531.3 613.1 54,665.0
======== ===== ========
1992:**
Banking..................................... $3,557.3 257.6 39,879.1
Mortgage banking............................ 596.1 53.4 5,328.8
Consumer finance............................ 926.7 159.0 4,829.1
-------- ----- --------
Total..................................... $5,080.1 470.0 50,037.0
======== ===== ========
73
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------
*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.
**Organizational earnings is presented prior to the cumulative effect of a
change in accounting for postretirement medical benefits, which totaled
$76.0 million net of tax.
16. MORTGAGE BANKING ACTIVITIES
The detail of mortgage banking non-interest income for each of the three
years ended December 31 is presented below:
1994 1993 1992
------ ----- -----
IN MILLIONS
Origination fees............................................. $103.5 135.6 103.8
Servicing fees............................................... 190.6 56.1 39.9
Net gains on sales of servicing rights....................... 130.0 61.7 62.4
Net gains on sales of mortgages.............................. 74.5 140.5 19.8
Other mortgage fee income.................................... 82.4 78.4 49.4
------ ----- -----
Total mortgage banking non-interest income................. $581.0 472.3 275.3
====== ===== =====
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The outstanding balances of serviced loans were
$71,505.1 million, $45,695.1 million and $21,612.9 million at December 31,
1994, 1993 and 1992, respectively.
Changes in intangibles from purchased mortgage loan servicing rights for each
of the three years ended December 31 were:
1994 1993 1992
------ ----- -----
IN MILLIONS
Balance at beginning of year.............................. $185.2 64.0 35.8
Purchases............................................... 478.3 169.9 133.4
Sales................................................... (65.2) (2.5) (90.9)
Amortization............................................ (47.4) (27.7) (11.5)
Adjustments due to changes in prepayment assumptions.... (0.6) (18.5) (2.8)
------ ----- -----
Balance at end of year.................................... $550.3 185.2 64.0
====== ===== =====
17. FAIR VALUES 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.
Financial Instruments. The fair value estimates disclosed in the table below
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
74
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
not been estimated, include premises and equipment, goodwill and other
intangibles, deferred taxes and other liabilities. The estimated fair values of
the corporation's financial instruments as of December 31 are set forth in the
following table and explained below.
FAIR VALUES OF FINANCIAL INSTRUMENTS
1994 1993 1992
------------------- ------------------ ------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
--------- -------- -------- -------- -------- --------
IN MILLIONS
Financial assets:
Cash and cash
equivalents........... $ 4,024.3 4,024.3 3,608.0 3,608.0 3,428.0 3,428.0
Trading account
securities............ 172.3 172.3 279.1 279.1 132.0 132.0
Investment securities.. 1,235.1 1,268.7 1,542.7 1,597.6 1,865.0 1,927.3
Mortgage-backed
securities............ -- -- 151.0 153.1 165.9 167.5
Investment securities
available for sale.... 1,427.6 1,427.6 2,001.2 2,260.9 1,573.6 1,815.7
Mortgage-backed
securities available
for sale.............. 12,174.2 12,174.2 9,021.6 9,244.0 9,358.2 9,565.6
Student loans
available for sale.... 2,031.4 2,031.4 1,349.2 1,349.2 1,156.5 1,156.5
Mortgages held for
sale.................. 3,115.3 3,115.3 6,090.7 6,103.4 4,727.8 4,727.8
Loans and leases, net.. 31,786.1 31,872.8 27,971.6 28,236.7 25,009.4 25,255.3
Interest receivable.... 367.7 367.7 300.8 300.8 330.9 330.9
Excess servicing
rights receivable..... 98.9 139.4 54.4 86.7 9.0 20.7
--------- -------- -------- -------- -------- --------
Total financial
assets.............. 56,432.9 56,593.7 52,370.3 53,219.5 47,756.3 48,527.3
--------- -------- -------- -------- -------- --------
Financial liabilities:
Non-maturity deposits.. 24,475.6 24,475.6 24,066.8 24,066.8 20,116.9 20,116.9
Deposits with stated
maturities............ 11,948.4 11,696.9 11,909.7 12,074.5 11,492.5 11,687.9
Short-term borrowings.. 7,850.2 7,850.2 5,996.8 5,996.8 8,824.9 8,824.9
Long-term debt......... 9,186.3 8,825.5 6,850.9 6,928.7 4,553.2 4,645.2
Interest payable....... 259.0 259.0 238.4 238.4 263.8 263.8
--------- -------- -------- -------- -------- --------
Total financial
liabilities......... 53,719.5 53,107.2 49,062.6 49,305.2 45,251.3 45,538.7
--------- -------- -------- -------- -------- --------
Off-balance sheet
financial instruments:
Forward delivery
commitments........... (2.3) (2.3) 28.3 28.3 (35.7) (35.7)
Interest rate swaps.... (1.5) (25.0) 11.2 14.8 0.7 (7.0)
Futures contracts...... -- -- 0.5 -- -- --
Interest rate
caps/floors........... 5.8 12.5 2.4 17.2 23.4 36.3
Option contracts to
sell.................. (4.6) (4.6) 4.2 8.1 -- --
Foreign exchange
contracts............. 0.6 0.6 (0.4) (0.4) -- --
--------- -------- -------- -------- -------- --------
Total off-balance
sheet financial
instruments......... (2.0) (18.8) 46.2 68.0 (11.6) (6.4)
--------- -------- -------- -------- -------- --------
Net financial
instruments......... $ 2,711.4 3,467.7 3,353.9 3,982.3 2,493.4 2,982.2
========= ======== ======== ======== ======== ========
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.
Trading Account Securities, Investment Securities, Mortgage-Backed
Securities, Investments 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.
75
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans and Leases and Student Loans Available 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 student loans
available 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 book 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 counter-party 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,
Options, Interest Rate Caps and Floors and Foreign Exchange Contracts. The fair
value of forward delivery commitments, interest rate caps and floors, swaps,
options, futures contracts and foreign exchange contracts 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.
CERTAIN NON-FINANCIAL INSTRUMENTS
Supplemental fair value information for certain non-financial instruments as
of December 31 are set forth in the table on page 77 and explained below.
76
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The supplemental fair value information, combined with the total fair value
of net financial instruments from the table on page 75, 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.
1994 1993 1992
--------- -------- --------
IN MILLIONS, EXCEPT PER
SHARE AMOUNTS
Non-financial instrument assets and liabilities:
Premises and equipment, net................... $ 955.2 842.1 742.2
Other assets.................................. 1,927.8 1,452.6 1,538.5
Accrued expenses and other liabilities........ (1,750.0) (1,841.5) (1,413.9)
Other values:
Non-maturity deposits......................... 2,684.1 1,265.1 1,150.4
Consumer finance network...................... 3,207.1 3,128.5 2,374.0
Credit card................................... 259.9 245.3 84.6
Banking subsidiaries' consumer loans.......... 166.3 269.3 224.4
Mortgage servicing............................ 867.0 431.4 187.2
Mortgage loan origination/wholesale network... 621.4 836.4 707.6
Trust department.............................. 709.8 631.8 570.0
--------- -------- --------
Net fair value of certain non-financial
instruments.................................... 9,648.6 7,261.0 6,165.0
Net fair value of financial instruments......... 3,467.7 3,982.3 2,982.2
--------- -------- --------
Stockholders' equity at the net fair value of
financial instruments and certain non-
financial instruments*.......................
Amount...................................... $13,116.3 11,243.3 9,147.2
========= ======== ========
Per common share at December 31............. $ 42.43 36.59 30.33
========= ======== ========
- --------
* 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 book 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 $21,791.5
million, $22,801.7 million, and $18,966.5 million at December 31, 1994, 1993
and 1992, 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. During 1994, the corporation
considered a greater percentage of the deposit rates to be fixed than in prior
years.
Consumer Finance Network. The supplemental fair value table includes the
estimated fair value associated with the consumer finance network which is
estimated to be $3,207.1 million, $3,128.5 million and $2,374.0 million at
December 31, 1994, 1993 and 1992, respectively. Such estimates are 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.
77
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 is estimated to
exceed book value by $259.9 million, $245.3 million and $84.6 million at
December 31, 1994, 1993 and 1992, respectively. This represents the fair value
related to such future balances of both securitized and on-balance sheet credit
card receivables 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 75, 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 to be $166.3 million, $269.3 million and $224.4 million
at December 31, 1994, 1993 and 1992, respectively. This fair value 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. Mortgage servicing represents estimated current value in
the servicing portfolio. The corporation estimates that the fair value of its
mortgage servicing exceeds book value by $867.0 million, $431.4 million and
$187.2 million at December 31, 1994, 1993 and 1992, respectively.
Mortgage Loan Origination/Wholesale Network. The supplemental fair value
table includes the fair value associated with the corporation's origination
network for mortgage loans, which is estimated to be $621.4 million, $836.4
million and $707.6 million at December 31, 1994, 1993 and 1992, respectively.
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 to be $709.8 million, $631.8 million and $570.0
million at December 31, 1994, 1993 and 1992, respectively. Such estimates are
based on current trust revenues using an industry multiple.
78
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Norwest Corporation (parent company only)
follows:
BALANCE SHEET
1994 1993
-------- -------
IN MILLIONS
At December 31,
ASSETS
Interest-bearing deposits with subsidiary banks................ $ 69.1 155.4
Advances to non-bank subsidiaries.............................. 2,452.4 2,313.8
Capital notes and term loans of subsidiaries
Banks........................................................ 470.1 353.0
Non-banks.................................................... 643.0 371.5
-------- -------
Total capital notes and term loans of subsidiaries......... 1,113.1 724.5
-------- -------
Investments in subsidiaries
Banks........................................................ 2,964.0 3,096.6
Non-banks.................................................... 1,144.3 803.4
-------- -------
Total investments in subsidiaries.......................... 4,108.3 3,900.0
Investment and mortgage-backed securities...................... 154.6 91.4
Investment securities available for sale....................... 237.4 211.7
Other assets................................................... 309.4 173.0
-------- -------
Total assets............................................... $8,444.3 7,569.8
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.......................................... $1,548.2 2,094.1
Accrued expenses and other liabilities......................... 277.9 186.6
Long-term debt with non-affiliates............................. 2,745.2 1,528.2
Stockholders' equity........................................... 3,873.0 3,760.9
-------- -------
Total liabilities and stockholders' equity................. $8,444.3 7,569.8
======== =======
79
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF INCOME
YEAR ENDED DECEMBER
31,
--------------------
1994 1993 1992
------- ----- -----
IN MILLIONS
INCOME
Dividends from subsidiaries
Banks.................................................. $ 680.6 402.0 318.3
Non-banks.............................................. 170.1 215.7 168.8
------- ----- -----
Total dividends from subsidiaries.................... 850.7 617.7 487.1
Interest from subsidiaries............................... 142.2 91.2 109.1
Service fees from subsidiaries........................... 66.2 58.0 50.0
Other income............................................. 45.3 38.2 29.0
------- ----- -----
Total income......................................... 1,104.4 805.1 675.2
------- ----- -----
EXPENSES
Interest to subsidiaries................................. 0.7 1.5 1.0
Other interest........................................... 202.6 140.0 134.0
Other expenses........................................... 128.3 113.0 140.8
------- ----- -----
Total expenses....................................... 331.6 254.5 275.8
------- ----- -----
Income before income taxes, equity in undistributed
earnings of subsidiaries, and cumulative effect of a
change in accounting for postretirement medical
benefits................................................ 772.8 550.6 399.4
------- ----- -----
Income tax benefit....................................... 34.2 24.4 43.3
------- ----- -----
Income before equity in undistributed earnings of
subsidiaries and cumulative effect of a change in
accounting for postretirement medical benefits.......... 807.0 575.0 442.7
Equity in undistributed earnings of subsidiaries......... (6.6) 38.1 27.3
------- ----- -----
Income before cumulative effect of a change in accounting
for postretirement medical benefits..................... 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, net of tax............................ -- -- (76.0)
------- ----- -----
Net income............................................... $ 800.4 613.1 394.0
======= ===== =====
Federal law prevents the corporation 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 profits for that year
combined with its retained net profits for the preceding two calendar years.
Under this formula, at December 31, 1994 the corporation's national banks could
have declared $361.4 million of aggregate dividends, in addition to amounts
previously paid, without the approval of the Comptroller of the Currency,
subject to minimum regulatory capital requirements. In addition, the
corporation's non-bank subsidiaries could have declared dividends totaling
$1,144.3 million.
80
NORWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- ------
IN MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 800.4 613.1 394.0
Adjustments to reconcile net income to net cash
flows from operating activities:
Cumulative effect on years ended prior to December
31, 1992 of a change in accounting for
postretirement medical benefits, net of tax....... -- -- 76.0
Equity in undistributed earnings of subsidiaries... 6.6 (38.1) (27.3)
Depreciation and amortization...................... 5.4 12.2 12.9
Release of preferred shares to ESOP................ 26.6 -- --
Other assets, net.................................. (157.7) (3.7) (36.4)
Accrued expenses and other liabilities, net........ 97.0 32.1 (5.9)
-------- -------- ------
Net cash flows from operating activities........... 778.3 615.6 413.3
-------- -------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to non-bank subsidiaries, net............. (138.6) (762.5) 580.8
Investment securities, net......................... (63.2) (63.5) 46.5
Investment securities available for sale, net...... 6.7 14.5 (105.9)
Principal collected on capital notes and term loans
of subsidiaries................................... 140.4 23.3 75.6
Capital notes and term loans made to subsidiaries.. (517.4) (218.2) (143.2)
Investments in subsidiaries, net................... (455.6) (354.4) (242.1)
-------- -------- ------
Net cash flows from (used for) investing
activities........................................ (1,027.7) (1,360.8) 211.7
-------- -------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net......................... (545.9) 84.3 (158.8)
Taxes receivable from affiliates, net.............. -- 4.7 (4.7)
Proceeds from issuance of long-term debt with non-
affiliates........................................ 1,325.0 1,263.2 --
Repayment of long-term debt with non-affiliates.... (107.6) (312.4) (137.5)
Issuances of common stock.......................... 49.8 55.9 35.8
Repurchases of common stock........................ (482.1) (124.3) (86.0)
Issuance of stock warrant to subsidiary............ 1.6 -- --
Issuance of preferred stock........................ 195.7 -- --
Repurchases of preferred stock..................... (8.4) (0.7) (2.9)
Net decrease in ESOP loans......................... 3.0 3.2 3.0
Dividends paid..................................... (268.0) (219.7) (185.7)
-------- -------- ------
Net cash flows from (used for) financing
activities........................................ 163.1 754.2 (536.8)
-------- -------- ------
Net increase (decrease) in cash and cash
equivalents....................................... (86.3) 9.0 88.2
Cash and cash equivalents
Beginning of year................................ 155.4 146.4 58.2
-------- -------- ------
End of year...................................... $ 69.1 155.4 146.4
======== ======== ======
81
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, 1994 and 1993 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, 1994. 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, 1994 and 1993, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, Norwest
Corporation adopted the provisions of the Financial Accounting Standards
Board's Statements of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" and No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" in 1994 and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" in 1992.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 18, 1995
82
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
President 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 18, 1995
83
NORWEST CORPORATION AND SUBSIDIARIES
SIX-YEAR CONSOLIDATED FINANCIAL SUMMARY
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
--------- ------- ---------- ---------- ----------- ----------
IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS AND RATIOS
STATEMENTS OF INCOME
Interest income......... $4,393.7 3,946.3 3,806.4 4,025.9 3,885.8 3,624.5
Interest expense........ 1,590.1 1,442.9 1,610.6 2,150.3 2,320.1 2,210.1
--------- ------- ---------- ---------- ----------- ----------
Net interest income.... 2,803.6 2,503.4 2,195.8 1,875.6 1,565.7 1,414.4
Provision for credit
losses................. 164.9 158.2 270.8 406.4 433.0 233.5
--------- ------- ---------- ---------- ----------- ----------
Net interest income
after provision for
credit losses......... 2,638.7 2,345.2 1,925.0 1,469.2 1,132.7 1,180.9
Non-interest income..... 1,638.3 1,585.0 1,273.7 1,064.0 896.3 728.5
Non-interest expenses... 3,096.4 3,050.4 2,553.1 2,041.5 1,744.5 1,525.9
--------- ------- ---------- ---------- ----------- ----------
Income before income
taxes and cumulative
effect of a change in
accounting for
postretirement medical
benefits............... 1,180.6 879.8 645.6 491.7 284.5 383.5
Income tax expense...... 380.2 266.7 175.6 73.4 115.1 99.0
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.............. $ 800.4 613.1 394.0 418.3 169.4 284.5
========= ======= ========== ========== =========== ==========
PER COMMON SHARE
Net Income(a)
Primary................ $ 2.45 1.89 1.19 1.33 0.59 1.00
Fully diluted.......... 2.41 1.86 1.19 1.32 0.59 1.00
Dividends declared...... 0.765 0.640 0.540 0.470 0.423 0.380
Stockholders' equity.... 10.79 11.00 9.88 9.29 8.19 7.98
Stock price range....... 28 1/4-21 29-20 5/8 22 1/8-16 5/8 18 7/16-9 3/8 11 13/16-6 3/4 12 1/16-7 15/16
SELECTED CONSOLIDATED
BALANCE SHEET DATA AT
DECEMBER 31,
Assets.................. $ 59,316 54,665 50,037 45,974 43,523 38,322
Investment and mortgage-
backed securities...... 1,235 1,694 2,031 13,958 10,256 8,570
Investment and mortgage-
backed securities
available for sale..... 13,602 11,023 10,932 -- -- --
Loans, leases, and
student loans and
mortgages held for
sale(b)................ 37,723 36,201 31,667 26,328 26,728 24,981
Deposits................ 36,424 35,977 31,609 31,331 30,542 26,259
Long-term debt.......... 9,186 6,851 4,553 3,686 3,066 2,720
Stockholders' equity.... 3,846 3,761 3,372 3,193 2,434 2,288
RATIOS(C)
Per $100 of average
assets
Net interest income
(tax-equivalent
basis)................ $ 5.14 4.98 4.81 4.43 4.17 4.16
Provision for credit
losses................ 0.30 0.31 0.58 0.94 1.11 0.66
--------- ------- ---------- ---------- ----------- ----------
Net interest income
after provision for
credit losses......... 4.84 4.67 4.23 3.49 3.06 3.50
Non-interest income.... 2.97 3.11 2.74 2.45 2.30 2.05
Non-interest expenses.. 5.62 5.99 5.50 4.70 4.48 4.29
--------- ------- ---------- ---------- ----------- ----------
Income before income
taxes and cumulative
effect of a change in
accounting for
postretirement medical
benefits.............. 2.19 1.79 1.47 1.24 0.88 1.26
Income tax expense..... 0.69 0.52 0.38 0.17 0.30 0.28
Less tax equivalent
adjustment............ 0.05 0.07 0.08 0.11 0.15 0.18
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)........... $ 1.45 1.20 0.85 0.96 0.43 0.80
========= ======= ========== ========== =========== ==========
Leverage(d)............. 14.3x 14.2 13.2 15.3 16.8 15.9
Return on realized
common equity(a)(e).... 21.4% 18.2 11.7 15.3 7.3 12.9
Return on realized total
equity(a)(e)........... 20.3% 17.1 11.2 14.7 7.3 12.7
Stockholders' equity to
average assets......... 7.0% 7.1 7.6 6.5 6.0 6.3
Dividend payout ratio... 31.2% 33.9 45.4 35.3 71.7 38.0
Tier 1 at December
31,(f)................. 9.89% 9.71 9.74 10.00 7.25
Tier 1 and Tier 2 at
December 31,(f)........ 12.23% 12.39 12.42 13.78 11.76
Leverage ratio(f)....... 6.94% 6.46 6.62 6.63 5.54
- -------
(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 22.1% and return on total equity was
20.8% in 1994.
(f) Information not available for 1989.
84
NORWEST CORPORATION AND SUBSIDIARIES
INCOME STATEMENT DATA
1994 OVER 1993 1993 OVER 1992
------------------------ -------------------------
VOLUME YIELD/RATE TOTAL VOLUME YIELD/RATE TOTAL
------ ---------- ----- ------ ---------- ------
IN MILLIONS
CHANGES IN TAX-EQUIVALENT
NET INTEREST INCOME*
INTEREST INCOME
Loans and leases........... $367.3 54.7 422.0 341.4 (149.0) 192.4
Investment securities...... (55.6) 7.0 (48.6) (122.2) 3.4 (118.8)
Mortgage-backed securities. (9.3) -- (9.3) (569.9) (5.0) (574.9)
Investment securities
available for sale........ 28.1 (25.9) 2.2 108.0 (4.7) 103.3
Mortgage-backed securities
available for sale........ 121.1 2.2 123.3 530.5 (103.0) 427.5
------ ----- ----- ------ ------ ------
Total
investment/mortgage-
backed securities....... 84.3 (16.7) 67.6 (53.6) (109.3) (162.9)
Money market and trading
account securities........ (9.0) 6.0 (3.0) (11.5) 8.8 (2.7)
Student loans available for
sale...................... 20.0 6.1 26.1 64.6 (3.5) 61.1
Mortgages held for sale.... (77.8) 8.2 (69.6) 99.3 (51.9) 47.4
------ ----- ----- ------ ------ ------
Total.................... 384.8 58.3 443.1 440.2 (304.9) 135.3
====== ===== ===== ====== ====== ======
INTEREST EXPENSE
Interest bearing deposits.. 57.7 (46.6) 11.1 34.4 (197.7) (163.3)
Short-term borrowings...... (22.4) 74.6 52.2 10.2 (50.0) (39.8)
Long-term debt............. 98.3 (14.4) 83.9 138.7 (103.3) 35.4
------ ----- ----- ------ ------ ------
Total.................... 133.6 13.6 147.2 183.3 (351.0) (167.7)
------ ----- ----- ------ ------ ------
Net interest income........ $251.2 44.7 295.9 256.9 46.1 303.0
====== ===== ===== ====== ====== ======
ANALYSIS OF SELECTED NON- 1994 % CHANGE 1993 % CHANGE 1992 1991 1990
INTEREST EXPENSES -------- -------- -------- -------- -------- ----- -----
SALARIES AND BENEFITS
Salaries................. $1,260.9 4.1% $1,210.8 22.2% $ 991.0 828.5 705.9
Benefits................. 312.8 18.7 263.5 42.9 184.4 154.8 132.4
-------- -------- -------- ----- -----
Total.................. $1,573.7 6.7% $1,474.3 25.4% $1,175.4 983.3 838.3
======== ======== ======== ===== =====
BUSINESS DEVELOPMENT
Advertising.............. $ 98.6 35.1% $ 73.0 39.0% $ 52.6 39.4 31.4
Other business
development............. 91.9 17.4 78.3 20.5 64.9 54.0 49.7
-------- -------- -------- ----- -----
Total.................. $ 190.5 25.9% $ 151.3 28.8% $ 117.5 93.4 81.1
======== ======== ======== ===== =====
OTHER NON-INTEREST
EXPENSES
Professional fees........ $ 60.2 -- % $ 60.2 11.9% $ 53.8 41.5 39.0
Other employment......... 45.6 17.8 38.7 19.4 32.4 24.0 31.3
Insurance claims......... 42.7 1.2 42.2 64.5 25.7 22.1 23.7
Charitable contributions. 24.6 (66.1) 72.5 187.1 25.3 6.4 9.9
Other real estate owned,
net..................... (11.8) (457.6) 3.3 (53.8) 7.1 31.6 48.7
Other.................... 245.4 (36.3) 385.5 6.9 360.6 168.7 140.8
-------- -------- -------- ----- -----
Total.................. $ 406.7 (32.5)% $ 602.4 19.3% $ 504.9 294.3 293.4
======== ======== ======== ===== =====
- --------
*Changes in the average balance/rate are allocated entirely to the yield/rate
changes.
85
NORWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES*
1994 1993 1992
------------------------- -------------------------- -----------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/
BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE EXPENSE
------- -------- ------- ------- -------- ------- ------- --------
IN MILLIONS, EXCEPT RATIOS
ASSETS
Money market
investments............ $ 472 $ 21.9 4.66% $ 624 $ 19.8 3.18% $ 779 $ 28.9
Trading account
securities............. 250 25.2 10.11 254 30.3 11.90 344 23.9
Investment securities
U.S. Treasury and
federal agencies...... 26 1.3 4.84 881 44.0 5.00 2,132 132.1
State, municipal and
housing-tax exempt.... 680 71.6 10.53 739 79.7 10.79 917 98.1
Other investment
securities............ 412 19.5 4.74 226 17.3 7.65 434 29.6
Mortgage-backed
securities
Federal agencies....... -- -- -- 159 8.2 5.16 7,183 562.7
Collateralized
mortgage obligations.. -- -- -- 22 1.1 4.90 228 21.5
Investment securities
available for sale..... 2,137 122.6 5.98 1,662 120.4 7.25 228 17.1
Mortgage-backed
securities available
for sale............... 10,407 715.7 6.73 8,827 592.4 6.71 2,093 164.9
------- -------- ------- -------- ------- --------
Total investment
securities............ 13,662 930.7 6.74 12,516 863.1 6.90 13,215 1,026.0
Student loans available
for sale............... 1,563 111.4 7.13 1,266 85.3 6.74 345 24.2
Mortgages held for sale. 3,757 257.2 6.85 4,932 326.8 6.63 3,639 279.4
Loans and leases (net of
unearned discount)
Commercial............. 9,301 749.9 8.06 8,433 648.3 7.69 8,105 670.8
Real estate............ 11,445 997.2 8.71 10,720 934.7 8.72 8,478 834.3
Consumer............... 9,498 1,329.2 13.99 7,415 1,071.3 14.45 6,749 956.8
------- -------- ------- -------- ------- --------
Total loans and
leases.............. 30,244 3,076.3 10.17 26,568 2,654.3 9.99 23,332 2,461.9
Allowance for credit
losses................ (801) (791) (721)
------- ------- -------
Net loans and leases. 29,443 25,777 22,611
------- -------- ------- -------- ------- --------
Total earning assets
(before the
allowance for credit
losses)............. 49,948 4,422.7 8.83 46,160 3,979.6 8.62 41,654 3,844.3
-------- -------- --------
Cash and due from banks. 2,974 2,871 2,566
Other assets............ 2,952 2,647 2,904
------- ------- -------
Total assets......... $55,073 $50,887 $46,403
======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Noninterest-bearing
deposits............... $ 8,704 $ 7,726 $ 6,225
Interest-bearing
deposits
Savings and NOW
accounts.............. 4,617 85.0 1.84 4,244 85.3 2.01 3,872 107.5
Money market accounts.. 10,487 247.4 2.36 9,106 201.1 2.21 8,159 205.9
Savings certificates... 9,794 446.9 4.56 9,582 473.1 4.94 10,352 603.9
Certificates of
deposit and other
time.................. 1,544 69.9 4.53 1,650 77.7 4.71 1,754 94.7
Foreign time........... 328 14.2 4.34 489 15.1 3.09 112 3.6
------- -------- ------- -------- ------- --------
Total interest-
bearing deposits.... 26,770 863.4 3.23 25,071 852.3 3.40 24,249 1,015.6
Short-term borrowings... 6,628 290.3 4.38 7,316 238.1 3.25 7,058 277.9
Long-term debt.......... 7,508 436.4 5.82 5,871 352.6 6.01 4,086 317.3
------- -------- ------- -------- ------- --------
Interest-bearing
liabilities......... 40,906 1,590.1 3.89 38,258 1,443.0 3.77 35,393 1,610.8
Capitalized interest
expense................ -- (0.1) (0.2)
-------- -------- --------
Net interest expense. 1,590.1 1,442.9 1,610.6
Other liabilities....... 1,620 1,315 1,276
Stockholders' equity.... 3,843 3,588 3,509
------- ------- -------
Total liabilities and
stockholders'
equity.............. $55,073 $50,887 $46,403
======= -------- ======= -------- ======= --------
Net interest income
(tax-equivalent basis). $2,832.6 $2,536.7 $2,233.7
======== ======== ========
Yield spread............ 4.94 4.85
Net interest income to
earning assets......... 5.66 5.50
Interest-bearing
liabilities to earning
assets................. 81.90 82.88
- --------
*Interest income/expense and yields/rates are calculated on a tax-equivalent
basis utilizing a federal incremental tax rate of 35% in 1994 and 1993 and
34% in each preceding period presented. Non-accrual loans and the related
negative income effect has been included in the calculation of average
rates.
NM--Not meaningful
86
1991 1990 1989 AVERAGE BALANCE
- ------- ------------------------- ------------------------- -------------------------- ------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE 5 YEAR % CHANGE
YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ GROWTH 1994 OVER
RATES BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE EXPENSE RATES RATE % 1993
- ------- ------- -------- ------- ------- -------- ------- ------- -------- ------- ------ ---------
3.71% 1,143 76.7 6.72% $ 1,640 $ 138.3 8.43% $ 1,373 $ 126.6 9.22% (19.2)% (24.4)%
6.95 157 11.6 7.39 119 10.2 8.57 78 7.1 9.10 26.2 (1.6)
6.20 2,199 178.6 8.13 2,211 191.6 8.66 2,594 224.1 8.64 (60.2) (97.0)
10.70 1,028 116.0 11.29 1,142 129.6 11.35 1,270 141.4 11.14 (11.7) (8.0)
6.81 451 36.3 8.01 670 53.3 7.95 585 41.9 7.16 (6.8) 82.3
7.83 7,993 715.3 8.95 4,592 444.7 9.68 2,357 230.7 9.79 (100.0) (100.0)
9.39 431 35.9 8.32 741 65.3 8.82 1,161 105.8 9.11 (100.0) (100.0)
7.53 -- -- -- -- -- -- -- -- -- NM 28.6
7.88 -- -- -- -- -- -- -- -- -- NM 17.9
------ -------- ------- -------- ------- --------
7.76 12,102 1,082.1 8.94 9,356 884.5 9.45 7,967 743.9 9.34 11.4 9.2
6.99 -- -- -- -- -- -- -- -- -- NM 23.4
7.68 2,100 192.1 9.15 1,420 137.8 9.70 662 63.4 9.58 41.5 (23.8)
8.28 8,922 877.4 9.83 9,261 1,016.3 10.97 9,366 1,093.7 11.68 (0.1) 10.3
9.84 7,762 856.3 11.03 6,868 787.9 11.47 6,520 754.1 11.57 11.9 6.8
14.18 6,855 977.5 14.26 6,568 970.0 14.77 6,130 898.5 14.66 9.2 28.1
------ -------- ------- -------- ------- --------
10.55 23,539 2,711.2 11.52 22,697 2,774.2 12.22 22,016 2,746.3 12.47 6.6 13.8
(660) (472) (412) 14.2 1.3
------ ------- -------
22,879 22,225 21,604 6.4 14.2
------ -------- ------- -------- ------- --------
9.23 39,041 4,073.7 10.43 35,232 3,945.0 11.20 32,096 3,687.3 11.49 9.2 8.2
-------- -------- --------
2,437 2,270 2,148 6.7 3.6
2,619 1,920 1,698 11.7 11.5
------ ------- -------
43,437 $38,950 $35,530 9.2 8.2
====== ======= =======
$5,377 $ 4,832 $ 4,565 13.8 12.7
2.78 3,508 150.6 4.30 3,106 152.7 4.92 3,011 148.0 4.91 8.9 8.8
2.52 7,565 370.0 4.89 6,136 377.7 6.15 4,995 322.2 6.45 16.0 15.2
5.83 10,641 764.5 7.18 8,852 706.7 7.98 8,100 659.9 8.15 3.9 2.2
5.40 2,713 186.2 6.86 3,277 270.0 8.24 3,440 299.5 8.71 (14.8) (6.4)
3.23 200 11.2 5.60 240 19.6 8.17 311 28.9 9.29 1.1 (32.9)
------ -------- ------- -------- ------- --------
4.19 24,627 1,482.5 6.02 21,611 1,526.7 7.06 19,857 1,458.5 7.35 6.2 6.8
3.94 5,890 352.4 5.98 6,428 522.9 8.13 5,354 493.2 9.21 4.4 (9.4)
7.77 3,492 315.4 9.03 2,753 270.5 9.82 2,545 258.5 10.15 24.2 27.9
------ -------- ------- -------- ------- --------
4.55 34,009 2,150.3 6.32 30,792 2,320.1 7.54 27,756 2,210.2 7.96 8.1 6.9
-- -- (0.1)
-------- -------- --------
2,150.3 2,320.1 2,210.1
1,206 1,002 972 10.8 23.2
2,845 2,324 2,237 11.4 7.1
------ ------- -------
43,437 $38,950 $35,530 9.2 8.2
====== -------- ======= -------- ======= --------
$1,923.4 $1,624.9 $1,477.2
======== ======== ========
4.68 4.11 3.66 3.53
5.36 4.93 4.61 4.60
84.97 87.11 87.40 86.48
87
NORWEST CORPORATION AND SUBSIDIARIES
LOAN INFORMATION
1994 1993 1992 1991 1990 1989
------- ------ ------ ------ ------ ------
IN MILLIONS
LOANS AND LEASES AT DECEMBER
31,
Commercial, financial and
industrial.................... $ 7,434 6,686 6,577 6,440 7,190 7,246
Agricultural................... 956 938 830 814 816 754
Construction and land
development................... 568 566 454 518 759 881
Real estate
Secured by 1-4 family
residential properties....... 8,959 8,321 7,582 5,067 5,254 3,936
Secured by other properties... 3,590 3,418 3,186 3,277 3,458 3,330
Consumer....................... 7,923 6,560 5,766 6,400 5,976 5,794
Credit card and check credit... 2,893 2,046 1,274 1,127 879 1,349
Lease financing................ 765 699 627 600 521 474
Foreign
Consumer installment.......... 444 425 425 -- -- --
Real estate secured by 1-4
family residential
properties................... 42 30 15 -- -- --
Other......................... 130 93 62 61 50 60
------- ------ ------ ------ ------ ------
Total loans and leases...... 33,704 29,782 26,798 24,304 24,903 23,824
Unearned discount........... (1,128) (1,021) (1,015) (984) (936) (905)
------- ------ ------ ------ ------ ------
Total loans and leases net
of unearned discount..... $32,576 28,761 25,783 23,320 23,967 22,919
======= ====== ====== ====== ====== ======
ALLOWANCE FOR CREDIT LOSSES
Balances at beginning of year.. $ 789.2 773.1 704.3 577.0 408.6 396.2
Allowances related to assets
acquired...................... 29.0 36.2 23.4 42.5 57.5 10.0
Provision for credit losses.... 164.9 158.2 270.8 406.4 433.0 233.4
Credit losses
Commercial, financial and
industrial................... 31.0 58.9 90.9 146.4 127.5 98.0
Agricultural.................. 4.5 2.6 4.2 3.9 2.3 4.5
Construction and land
development.................. 2.8 11.9 15.8 21.4 36.3 24.2
Real estate................... 44.2 53.2 68.4 99.6 69.6 39.7
Consumer...................... 124.2 110.6 113.8 122.7 99.3 79.0
Credit card and check credit.. 79.5 51.9 42.0 44.9 54.1 44.6
Lease financing............... 2.3 2.2 2.6 3.8 2.6 2.0
Foreign
Consumer installment........ 17.4 18.5 2.9 -- -- --
Other....................... 8.9 0.5 0.5 1.8 0.7 7.3
------- ------ ------ ------ ------ ------
Total credit losses......... 314.8 310.3 341.1 444.5 392.4 299.3
------- ------ ------ ------ ------ ------
Recoveries
Commercial, financial and
industrial................... 34.0 39.4 41.4 47.3 26.2 25.0
Agricultural.................. 2.5 4.0 4.9 4.0 5.1 5.8
Construction and land
development.................. 7.2 7.2 2.4 6.9 1.1 0.7
Real estate................... 26.9 36.6 24.9 23.6 8.5 6.0
Consumer...................... 34.1 31.2 29.2 26.2 20.2 18.5
Credit card and check credit.. 11.9 8.7 7.6 6.8 4.6 3.4
Lease financing............... 0.7 0.3 0.6 0.3 0.4 0.5
Foreign
Consumer installment........ 3.5 3.5 -- -- -- --
Other....................... 0.8 1.1 4.7 7.8 4.2 8.4
------- ------ ------ ------ ------ ------
Total recoveries............ 121.6 132.0 115.7 122.9 70.3 68.3
------- ------ ------ ------ ------ ------
Net credit losses.............. 193.2 178.3 225.4 321.6 322.1 231.0
------- ------ ------ ------ ------ ------
Balance at end of year......... $ 789.9 789.2 773.1 704.3 577.0 408.6
======= ====== ====== ====== ====== ======
ALLOCATION OF ALLOWANCE FOR
CREDIT LOSSES
Commercial..................... $ 151.9 137.4 154.5 185.9 170.3 123.9
Consumer....................... 209.0 195.2 155.4 140.6 109.1 98.0
Real estate.................... 163.5 203.4 220.6 152.8 151.6 84.7
Foreign........................ 20.0 21.2 22.0 5.0 7.0 6.0
Unallocated.................... 245.5 232.0 220.6 220.0 139.0 96.0
------- ------ ------ ------ ------ ------
Total....................... $ 789.9 789.2 773.1 704.3 577.0 408.6
======= ====== ====== ====== ====== ======
CREDIT QUALITY RATIOS
Net credit losses as a percent
of average loans and leases... 0.64% 0.67 0.97 1.37 1.42 1.05
Allowance for credit losses to
Total loans and leases at
year-end..................... 2.42% 2.74 3.00 3.02 2.41 1.78
Net credit losses............. 4.09x 4.43 3.43 2.19 1.79 1.77
Provision for credit losses to
average loans and leases...... 0.55% 0.60 1.16 1.73 1.91 1.06
Earnings coverage of net credit
losses........................ 6.96x 5.82 3.53 2.79 2.23 2.67
88
NORWEST CORPORATION AND SUBSIDIARIES
OTHER BALANCE SHEET DATA
MATURITY OF TOTAL INVESTMENT
SECURITIES*
CARRYING VALUE
-------------------------------------------------------------------------
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS AFTER 10 YEARS TOTAL
-------------- ------------- ----------- -------------- -------------- TOTAL
AMOUNT/ AMOUNT/ AMOUNT/ AMOUNT/ MARKET
AMOUNT/ YIELD YIELD YIELD YIELD YIELD VALUE
-------------- ------------- ----------- -------------- -------------- ---------
IN MILLIONS
At December 31, 1994
HELD FOR INVESTMENT
U.S. Treasury and
Federal Agencies....... $ -- -- % $ -- -- % $-- -- % $ 27.4 4.63% $ 27.4 4.63% $ 27.4
State, municipal and
housing-tax exempt**... 62.0 6.82 174.8 7.22 142.4 7.69 333.0 7.21 712.2 7.28 712.8
Other................... -- -- 184.3 1.02 -- -- 311.2 6.00 495.5 4.15 528.5
------- -------- ------ --------- --------- ---------
Total securities held
for investment......... 62.0 6.82 359.1 4.04 142.4 7.69 671.6 6.55 1,235.1 5.96 1,268.7
------- -------- ------ --------- --------- ---------
AVAILABLE FOR SALE
Investment Securities:
U.S. Treasury and
federal agencies....... 257.7 6.35 426.6 6.60 224.6 8.50 14.4 8.66 923.3 7.02 923.3
State, municipal and
housing-tax exempt**... 14.3 9.27 44.0 9.57 44.3 5.61 0.9 5.68 103.5 7.77 103.5
Other................... 66.3 7.78 158.4 6.46 27.7 9.50 148.4 7.89 400.8 7.44 400.8
------- -------- ------ --------- --------- ---------
Total investment
securities available
for sale.............. 338.3 6.54 629.0 6.79 296.6 8.14 163.7 7.94 1,427.6 7.18 1,427.6
------- -------- ------ --------- --------- ---------
Mortgage-backed
Securities:
Federal agencies........ 23.9 9.15 211.6 6.43 303.3 7.65 11,473.1 7.38 12,011.9 7.38 12,011.9
Collateralized mortgage
obligations............ 6.2 8.06 11.6 7.75 6.0 5.50 138.5 7.57 162.3 7.53 162.3
------- -------- ------ --------- --------- ---------
Total mortgage-backed
securities available
for sale.............. 30.1 9.01 223.2 6.50 309.3 7.61 11,611.6 7.38 12,174.2 7.38 12,174.2
------- -------- ------ --------- --------- ---------
Total securities
available for sale..... 368.4 6.90 852.2 6.71 605.9 7.87 11,775.3 7.39 13,601.8 7.36 13,601.8
------- -------- ------ --------- --------- ---------
Total investment
securities............. $ 430.4 6.89 1,211.3 5.91 748.3 7.83 12,446.9 7.35 14,836.9 7.25 14,870.5
======= ======== ====== ========= ========= =========
WITHIN 1 YEAR 1-5 YEARS AFTER 5 YEARS TOTAL
MATURITY OF LOANS*** ------------- --------- ------------- -------
Commercial....................... $4,693 3,184 513 $ 8,390
Construction and land
development..................... 369 168 31 568
Real estate...................... 985 1,851 754 3,590
Foreign.......................... 105 16 9 130
------ ----- ----- -------
Total............................ $6,152 5,219 1,307 $12,678
====== ===== ===== =======
Predetermined interest rates..... $1,696 3,170 787 $ 5,653
Floating interest rates.......... 4,456 2,049 520 7,025
------ ----- ----- -------
Total............................ $6,152 5,219 1,307 $12,678
====== ===== ===== =======
MATURITY OF TIME
DEPOSITS OF $100,000 OR WITHIN 3 MONTHS 3-6 MONTHS 6-12 MONTHS OVER 12 MONTHS TOTAL
MORE --------------- ---------- ----------- -------------- ------
Certificates of deposit
and other time......... $ 556 256 267 449 $1,528
Foreign time............ 482 42 0 0 524
------ --- --- --- ------
Total................... $1,038 298 267 449 $2,052
====== === === === ======
1994 1993 1992 1991 1990
DEPOSITS AT DECEMBER 31, ------- ------ ------ ------ ------
Noninterest-bearing deposits...............
Interest-bearing deposits.................. $ 9,283 9,054 7,382 6,551 6,170
Savings and NOW accounts.................. 4,790 4,421 4,310 3,613 3,627
Money market accounts..................... 10,403 10,592 8,422 8,036 7,051
Savings certificates...................... 9,773 10,043 9,683 10,528 9,401
Certificates of deposit and other
time****................................. 1,528 1,678 1,655 2,448 4,006
Foreign time****.......................... 647 189 157 155 287
------- ------ ------ ------ ------
Total deposits............................. $36,424 35,977 31,609 31,331 30,542
======= ====== ====== ====== ======
- --------
*Based on contractual maturities.
**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, 1994, the amount of the increases in the yields for
these securities and for total securities held for maturity is 3.07% and
1.87%, respectively, and for total securities available for sale is 2.56%
and 0.02%, respectively.
***Excludes leases of $765 million and consumer and residential mortgage loans
of $20,261 million.
****There were $123 million of foreign time deposits less than $100,000 in
1994, and no time deposits of less than $100,000 in 1993.
89
NORWEST CORPORATION AND SUBSIDIARIES
QUARTERLY CONDENSED CONSOLIDATED FINANCIAL INFORMATION
1994 QUARTERS 1993 QUARTERS
------------------------------------------------ -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
-------- ---------- ---------- ---------- ------- ------ ---------- ------
IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS AND RATIOS
Interest income........ $1,196.4 1,130.7 1,073.8 992.8 1,022.0 985.2 971.3 967.8
Interest expense....... 461.8 408.9 376.5 342.9 369.2 359.5 357.0 357.2
-------- ---------- ---------- ---------- ------- ------ ---------- ------
Net interest income.... 734.6 721.8 697.3 649.9 652.8 625.7 614.3 610.6
Provision for credit
losses................ 63.3 41.6 23.7 36.3 57.4 23.3 39.4 38.1
Non-interest income.... 437.9 379.4 386.9 434.1 436.8 377.4 421.7 349.1
Non-interest expenses.. 807.8 760.5 759.0 769.1 869.1 741.9 755.7 683.7
-------- ---------- ---------- ---------- ------- ------ ---------- ------
Income before income
taxes................. 301.4 299.1 301.5 278.6 163.1 237.9 240.9 237.9
Income tax expense..... 96.5 96.1 99.5 88.1 52.0 63.1 72.0 79.6
-------- ---------- ---------- ---------- ------- ------ ---------- ------
Net income............. $ 204.9 203.0 202.0 190.5 111.1 174.8 168.9 158.3
======== ========== ========== ========== ======= ====== ========== ======
PER COMMON SHARE
Net income
Primary............... $ 0.63 0.62 0.61 0.59 0.34 0.54 0.52 0.49
Fully diluted......... 0.62 0.61 0.60 0.58 0.34 0.53 0.51 0.48
Dividends declared..... 0.210 0.185 0.185 0.185 0.165 0.165 0.165 0.145
Stockholders' equity... 10.79 11.13 11.07 11.14 11.00 10.85 10.51 10.21
Stock price range...... 25-21 27 1/2-24 3/4 28 1/4-23 1/8 27 3/8-22 1/4 29-22 1/2 28-25 5/8 28 3/8-22 7/8 26-20 5/8
TAX-EQUIVALENT YIELDS
AND RATES
Money market
investments........... 6.79% 3.05 5.01 4.28 3.52 2.90 2.89 3.12
Trading account
securities............ 9.63 9.84 11.66 9.36 10.42 13.61 17.09 5.99
Investment and
mortgage-backed
securities............ 7.79 8.05 8.13 9.26 7.68 7.36 7.31 7.35
Investment and
mortgage-backed
securities available
for sale.............. 7.07 6.74 6.43 6.12 6.43 6.61 6.85 7.29
Total investment
securities........... 7.12 6.85 6.57 6.38 6.61 6.73 6.93 7.31
Mortgages held for
sale.................. 7.89 7.32 6.67 5.89 6.14 6.49 6.87 7.39
Student loans available
for sale.............. 7.96 7.22 6.73 6.45 6.34 6.62 7.27 6.73
Loans and leases....... 10.50 10.33 10.05 9.77 9.85 9.91 10.01 10.22
Total earning assets.. 9.27 8.97 8.67 8.37 8.36 8.52 8.72 8.92
Interest-bearing
deposits.............. 3.52 3.18 3.09 3.11 3.27 3.34 3.47 3.54
Short-term borrowings.. 5.25 4.61 4.03 3.35 3.25 3.18 3.21 3.37
Long-term debt......... 6.13 5.85 5.62 5.60 5.62 5.84 6.26 6.45
Interest-bearing
liabilities.......... 4.34 3.92 3.69 3.57 3.66 3.71 3.83 3.91
Yield spread........... 4.93 5.05 4.98 4.80 4.70 4.81 4.89 5.01
Net interest income to
earning assets........ 5.73 5.76 5.65 5.49 5.38 5.45 5.54 5.63
RATIOS*
Return on assets....... 1.43% 1.45 1.48 1.45 0.81 1.35 1.37 1.33
Leverage............... 15.34x 14.24 14.26 13.52 14.59 14.18 13.89 14.05
Return on realized
common equity......... 21.5% 21.1 21.7 21.5 12.3 20.4 20.4 20.0
(Continued on page 91)
- --------
*Based on average balances and net income for the periods.
90
NORWEST CORPORATION AND SUBSIDIARIES
QUARTERLY CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED FROM PAGE 90)
1994 QUARTERS 1993 QUARTERS
------------------------------- ------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------- ------ ------ ------ ------ ------ ------ ------
IN MILLIONS
AVERAGE ASSETS
Money market
investments............ $ 351 471 562 500 948 460 482 603
Trading account
securities............. 166 198 267 371 307 243 250 216
Investment and mortgage-
backed securities...... 1,169 1,191 1,130 981 1,852 2,057 2,109 2,088
Investment and mortgage-
backed securities
available for sale..... 13,011 13,206 12,518 11,415 10,509 10,355 10,433 10,667
------- ------ ------ ------ ------ ------ ------ ------
Total investment
securities............ 14,180 14,397 13,648 12,396 12,361 12,412 12,542 12,755
Mortgages held for sale. 3,157 3,399 3,873 4,622 6,081 5,545 4,421 3,648
Student loans available
for sale............... 1,753 1,425 1,557 1,517 1,351 1,199 1,276 1,237
Loans and leases, net of
unearned discount...... 31,720 30,502 29,820 28,901 28,147 26,668 25,951 25,475
------- ------ ------ ------ ------ ------ ------ ------
Total average earning
assets................ 51,327 50,392 49,727 48,307 49,195 46,527 44,922 43,934
Allowance for credit
losses................. (791) (798) (805) (808) (792) (797) (788) (785)
Cash and due from banks. 3,150 2,811 2,949 2,985 3,217 2,892 2,716 2,654
Other assets............ 3,244 2,958 2,860 2,740 2,749 2,737 2,517 2,578
------- ------ ------ ------ ------ ------ ------ ------
Total average assets... $56,930 55,363 54,731 53,224 54,369 51,359 49,367 48,381
======= ====== ====== ====== ====== ====== ====== ======
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY
Noninterest-bearing
deposits............... $ 9,064 8,455 8,515 8,783 9,041 7,854 7,203 6,778
Interest-bearing
deposits............... 26,545 26,747 27,019 26,770 27,137 24,999 24,143 23,972
Short-term borrowings... 7,145 7,073 6,827 5,445 6,325 7,444 7,604 7,907
Long-term debt.......... 8,615 7,665 7,096 6,633 6,681 6,099 5,597 5,089
Other liabilities....... 1,850 1,536 1,437 1,655 1,458 1,340 1,265 1,192
Stockholders' equity.... 3,711 3,887 3,837 3,938 3,727 3,623 3,555 3,443
------- ------ ------ ------ ------ ------ ------ ------
Total average
liabilities and
stockholders' equity.. $56,930 55,363 54,731 53,224 54,369 51,359 49,367 48,381
======= ====== ====== ====== ====== ====== ====== ======
The financial information on pages 90 and 91 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.
91