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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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-2979
NORWEST CORPORATION
A DELAWARE CORPORATION - I.R.S. NO. 41-0449260
NORWEST CENTER
SIXTH AND MARQUETTE
MINNEAPOLIS, MINNESOTA 55479
TELEPHONE (612) 667-1234
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock ($1 2/3 par value) New York Stock Exchange
Chicago Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Chicago Stock Exchange
6 3/4% Convertible Subordinated New York Stock Exchange
Debentures Due 2003
No securities are registered pursuant to Section 12(g) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No __
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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 30, 1998, 758,022,040 shares of common stock were outstanding having
an aggregate market value, based upon a closing price of $38.75 per share, of
$29,373.4 million. At that date, the aggregate market value of the voting stock
held by non-affiliates was in excess of $26,508.9 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 28, 1998, are incorporated
by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Norwest Corporation (the corporation) is a diversified financial services
company organized under the laws of Delaware in 1929 and registered under the
Bank Holding Company Act of 1956, as amended (the BHC Act). As a diversified
financial services organization, the corporation owns subsidiaries engaged in
banking and in a variety of related businesses. Subsidiaries of the corporation
provide retail, commercial, and corporate banking services to customers through
banks located in Arizona, Colorado, Illinois, Indiana, Iowa, Minnesota, Montana,
Nebraska, Nevada, New Mexico, North Dakota, Ohio, South Dakota, Texas, Wisconsin
and Wyoming. Additional financial services are provided to customers by
subsidiaries engaged in various businesses, principally mortgage banking,
consumer finance, equipment leasing, agricultural finance, commercial finance,
securities brokerage and investment banking, insurance agency services, computer
and data processing services, trust services, mortgage-backed securities
servicing and venture capital investment.
At December 31, 1997, the corporation and its subsidiaries employed 57,036
persons, and had consolidated total assets of $88.5 billion, total deposits of
$55.5 billion, and total stockholders' equity of $7.0 billion. Based on total
assets at December 31, 1997, the corporation was the 11th largest bank holding
company in the United States.
The corporation provides to its subsidiaries various services, including
strategic planning, asset and liability management, investment administration
and portfolio planning, tax planning, new product and business development,
advertising, administration and internal auditing, employee benefits and payroll
management. In addition, the corporation provides funds to its subsidiaries.
The corporation derives substantially all its income from investments in and
advances to its subsidiaries and service fees received from its subsidiaries.
The Financial Review, which begins on page 17 in the Appendix, discusses
developments in the corporation's businesses during 1997 and provides financial
and statistical data relative to the business and operations of the corporation.
A brief description of the primary business lines of the corporation follows.
Refer to Note 16 of the corporation's consolidated financial statements for
financial information about the corporation's business segments.
BANKING
As of February 1, 1998, the corporation's 37 subsidiary banks, located in 16
states with 930 locations, offer diversified financial services including
retail, commercial and corporate banking, equipment leasing, trust services and
mortgage-backed securities servicing; and their affiliates offer insurance,
securities brokerage, investment banking and venture capital investment.
Investment services are provided to customers by Norwest Investment Services,
Inc., a registered broker/dealer and a registered investment adviser, which
operates in 18 states with 366 offices, primarily in banking locations. Norwest
Insurance, Inc. and its subsidiaries operate insurance agencies in ten states
with 44 offices offering commercial and personal coverages to customers.
Norwest Insurance, Inc. is the 14th largest agency in the United States and the
largest agency owned by a bank holding company. A subsidiary of the
corporation operates one of the nation's top five crop insurance managing
general agencies. There are also three insurance companies that are owned by
bank affiliates and three other insurance companies that are owned directly or
indirectly by the corporation that reinsure credit-related insurance products
for the corporation's affiliates.
Norwest Bank Minnesota, N.A. is the largest bank in the group with total assets
of $20.4 billion at December 31, 1997. Ten other banks in the group exceeded
$2.0 billion in total assets: Norwest Bank Colorado, N.A. ($8.5 billion),
Norwest Bank Texas, N.A. ($8.3 billion); Norwest Bank Iowa, N.A. ($5.5 billion),
Norwest Bank Arizona, N.A. ($4.2 billion), Norwest Bank South Dakota, N.A. ($4.1
billion), Norwest Bank Nevada, N.A. ($3.4 billion), Norwest Bank Wyoming, N.A.
($2.9 billion), Norwest Bank Indiana, N.A. ($2.4 billion), Norwest Bank New
Mexico, N.A. ($2.4 billion) and Norwest Bank Nebraska, N.A. ($2.2 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 1997, Norwest Venture Capital made new investments of $172 million.
Norwest Venture Capital's investments typically range from $1,500,000 to
$15,000,000; however, larger sums may be invested in a single company, sometimes
through syndication with other venture capitalists. Most Norwest Venture
Capital emerging growth company clients are engaged in technology-related
businesses, such as computer software, telecommunications, medical products,
health care delivery and industrial automation. Remaining clients are engaged
in non-technology businesses, such as specialty retailing and consumer-related
businesses. Financing of management buy-outs is done for a variety of
businesses.
MORTGAGE BANKING
Norwest Mortgage is the largest mortgage banking enterprise in the United States
in terms of both originations and servicing. Subsidiaries of the corporation
originate and purchase residential first mortgage loans for sale to various
investors and provide servicing of mortgage loans for others. Income is
primarily earned from origination and other loan production fees, loan servicing
fees, interest on mortgages held for sale, and the sale of mortgages and
servicing rights. Through a network of 727 stores, Norwest Mortgage offers a
wide range of FHA, VA and conventional loan programs to customers in all 50
states. Approximately 28.5 percent of the mortgages are FHA and VA mortgages
guaranteed by the federal government and sold as GNMA securities. In 1997
Norwest Mortgage funded $55.3 billion of mortgages, with the average loan being
approximately $124,000. This compares with $51.5 billion of fundings in 1996
and $33.9 billion in 1995. The five states with the highest originations in
1997 were: California $10.1 billion; Minnesota $3.0 billion; Texas $2.7
billion; Illinois $2.6 billion; and New Jersey $2.5 billion. The originations
in these five states comprise approximately 37.9 percent of total originations
in 1997. As of December 31, 1997, the mortgage servicing portfolio totaled
$205.8 billion with a weighted average coupon of 7.75 percent, as compared with
$179.7 billion and 7.77 percent, respectively, at December 31, 1996. The five
highest states in servicing as of December 31, 1997 were: California $39.8
billion; Minnesota $11.8 billion; Texas $10.3 billion; New York $9.6 billion;
and New Jersey $8.9 billion. Loans from these five states comprise
approximately 39.0 percent of the total servicing portfolio at year-end 1997.
CONSUMER FINANCE
Norwest Financial consists of Norwest Financial Services, Inc. and its
subsidiaries and Island Finance, a group of eight companies operating in the
Caribbean and Central America. Norwest Financial provides consumer and
automobile finance products and services through 1,447 stores in 48 states,
Guam, Saipan, all ten Canadian provinces, the Caribbean and Latin America.
Consumer finance activities include providing direct installment loans to
individuals, purchasing open- or closed-end sales finance contracts, providing
private label and other lease and accounts receivables services and providing
other related products and services. Such products are generally repayable in
monthly installments for periods of 180 months or less. Automobile finance
activities generally include making loans to individuals secured by automobiles
and purchasing closed-end sales finance contracts from automobile dealers.
Automobile finance products are generally repayable in monthly installments for
periods of 60 months or less.
At December 31, 1997, consumer finance receivables accounted for 95 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 $696.8 million;
Illinois $291.7 million; Ohio $253.9 million; Florida $237.6 million; and Texas
$224.5 million. Consumer finance receivables in Puerto Rico and Canada totaled
$1.4 billion and $617.8 million, respectively, at December 31, 1997. The
consumer finance receivables in Puerto Rico, Canada, and the five states listed
above comprise approximately 44.0 percent of total consumer finance receivables
at year-end 1997. The average installment loan made during 1997 was
approximately $3,000, while sales finance contracts purchased during the year
averaged approximately $1,600. Comparable amounts in 1996 were $2,700 and
$1,100, respectively.
Norwest Financial's insurance subsidiaries are primarily engaged in the business
of providing, directly or through reinsurance arrangements, credit life and
credit disability insurance as a part of Norwest Financial's consumer finance
business. Property, involuntary unemployment and non-filing insurance also are
sold as part of Norwest
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Financial's consumer finance business, either directly or through a reinsurance
arrangement with one of its insurance subsidiaries or on an agency basis.
Norwest Financial Information Services Group, Inc. (NFISG) operates an on-line,
real-time information processing and communications system which connects, over
leased telecommunication facilities, equipment located in branch offices to the
computer center in Norwest Financial's home office. Branch employees use the
computer to process loans and payments, to write checks and to perform
bookkeeping functions. In addition, as of December 31, 1997, NFISG had
contracts to supply information services to 26 non-affiliated finance companies.
On that date, approximately 3,000 offices were being served and 6.3 million
accounts were being maintained on the system.
ACQUISITIONS
The corporation expands its businesses in part by acquiring banking institutions
and other companies engaged in activities closely related to banking. See Note
2 of the corporation's consolidated financial statements beginning on page 38 in
the Appendix regarding acquisitions by the corporation since 1995.
The acquisition of banking institutions and other companies by the corporation
is generally subject to the prior approval of the Board of Governors of the
Federal Reserve System (the Federal Reserve Board) and may be subject to the
prior approval of other federal and state regulatory authorities. Under the
interstate banking provisions of the Reigle-Neal Interstate Banking and
Branching Act of 1994 (the Reigle-Neal Act), which became effective September
29, 1995, the corporation is permitted to acquire banks in any state subject to
the prior approval of the Federal Reserve Board, certain limited conditions that
a state may impose and deposit concentration limits of 10 percent nationwide and
30 percent in any one state, unless the acquisition is the initial entry of a
banking institution into that state. Effective June 1, 1997, under the
interstate branching provisions of the Reigle-Neal Act, banking subsidiaries of
the corporation were permitted to acquire directly a banking institution located
in a state other than the state in which the acquiring bank is located
(interstate bank merger) through merger, consolidation or purchase of assets and
assumption of liabilities, unless the state in which either of the banks is
located has enacted a law opting out of the interstate branching provisions of
the Reigle-Neal Act. The state of Texas has opted out of the Reigle-Neal Act
and the state of Montana has opted out until at least the year 2000. Interstate
bank mergers are subject to the prior approval of the applicable federal and
state regulatory authorities, and may be subject to certain limited conditions
that a state may impose and the deposit concentration limits outlined above.
In determining whether to approve a proposed bank acquisition or merger, bank
regulatory authorities consider a number of factors including the effect of the
proposed acquisition on competition, the public benefits expected to be derived
from the consummation of the proposed transaction, the projected capital ratios
and levels on a post-acquisition basis, and the acquiring institution's record
of addressing the credit needs of the communities it serves, including the needs
of low and moderate income neighborhoods, consistent with the safe and sound
operation of the bank, under the Community Reinvestment Act of 1977, as amended.
COMPETITION
Legislative and regulatory changes coupled with technological advances have
significantly increased competition in the financial services industry. The
corporation's banking and financial services subsidiaries compete with other
financial services providers, such as commercial banks and financial
institutions, including savings and loan associations, credit unions, finance
companies, mortgage banking companies and mutual funds. In addition, the
corporation's subsidiaries compete with non-banking institutions such as
brokerage houses and insurance companies, as well as financial services
subsidiaries of commercial and manufacturing companies. Many of these
competitors are not subject to the same regulatory restrictions as banks and
bank holding companies.
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GOVERNMENT POLICIES, SUPERVISION AND REGULATION
GENERAL
As a bank holding company, the corporation is subject to the supervision and
examination by the Federal Reserve Board under the BHC Act. The corporation's
national banking subsidiaries are regulated by the Office of the Comptroller of
the Currency (OCC) while its state-chartered banking subsidiaries are regulated
primarily by the Federal Deposit Insurance Corporation (FDIC) or the Federal
Reserve Board and applicable state banking agencies. The deposits of the
corporation's banking subsidiaries are primarily insured by the Bank Insurance
Fund (BIF), subjecting such subsidiaries to FDIC regulation. In addition to the
impact of regulation, commercial banks are affected significantly by the actions
of the Federal Reserve Board affecting the money supply and credit availability.
The corporation has other financial services subsidiaries that are subject to
regulation by the Federal Reserve Board and other applicable federal and state
agencies. For example, the corporation's brokerage subsidiary is subject to
regulation by the Securities and Exchange Commission, the National Association
of Securities Dealers, Inc. and state securities regulators. The corporation's
insurance subsidiaries are subject to regulation by applicable state insurance
regulatory agencies. Other non-bank subsidiaries of the corporation are subject
to the laws and regulations of both the federal government and the various
states in which they conduct business.
DIVIDEND RESTRICTIONS
Various federal and state statutes and regulations limit the amount of dividends
the banking and other subsidiaries may pay to the corporation without regulatory
approval. Refer to Note 19 of the corporation's consolidated financial
statements beginning on page 67 in the Appendix for additional information.
HOLDING COMPANY STRUCTURE
The corporation is a legal entity separate and distinct from its banking and
non-banking subsidiaries. Accordingly, the right of the corporation, and thus
the right of the corporation's creditors, to participate in any distribution of
the assets or earnings of any subsidiary, other than in its capacity as a
creditor of the subsidiary, is subject to the prior payment of claims of
creditors of such subsidiary. The principal sources of the corporation's
revenues are dividends and fees from its subsidiaries.
The corporation's banking subsidiaries are subject to restrictions under federal
law which limit the transfer of funds by the subsidiary banks to the corporation
and its non-bank subsidiaries, whether in the form of loans, extensions of
credit, investments or asset purchases. Such transfers by any subsidiary bank
to the corporation or any non-bank subsidiary are limited in amount to 10
percent of the bank's capital and surplus and, with respect to the corporation
and all non-bank subsidiaries, to an aggregate of 20 percent of the bank's
capital and surplus. Further, such loans and extensions of credit are required
to be secured in specified amounts.
The Federal Reserve Board has a policy to the effect that a bank holding company
is expected to act as a source of financial and managerial strength to each of
its subsidiary banks and to commit resources to support each subsidiary bank.
This support may be required at times when the corporation may not have the
resources to provide support. Any capital loans by the corporation to any of
the subsidiary banks are subordinate in right of payment to deposits and to
certain other indebtedness of the subsidiary bank. In addition, the Crime
Control Act of 1990 provides that in the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
A depository institution insured by the FDIC can be held liable for any loss
incurred, or reasonably expected to be incurred, by the FDIC after August 9,
1989, in connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance.
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Federal law (12 U.S.C. Section 55) permits the OCC to order the pro rata
assessment of shareholders of a national bank whose capital stock has become
impaired, by losses or otherwise, to relieve a deficiency in such national
bank's capital stock. This statute also provides for the enforcement of any
such pro rata assessment of shareholders of such national bank to cover such
impairment of capital stock by sale, to the extent necessary, of the capital
stock of any assessed shareholder failing to pay the assessment. Similarly, the
laws of certain states provide for such assessment and sale with respect to
banks chartered by such states. The corporation, as the sole stockholder of
most of its subsidiary banks, is subject to such provisions.
CAPITAL REQUIREMENTS
The Federal Reserve Board, the OCC and the FDIC have adopted substantially
similar risk-based and leverage capital guidelines for banking organizations.
Such guidelines are intended to ensure that banking organizations have adequate
capital given the risk levels of their assets and off-balance sheet commitments.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as stand-by letters of credit) is eight
percent. At least half of the total capital is to be comprised of common stock,
minority interests in subsidiaries and noncumulative perpetual preferred stock
(Tier 1 capital). The remainder (Tier 2 capital) may consist of hybrid capital
instruments, perpetual stock, mandatory convertible debt securities, a limited
amount of subordinated debt, other preferred stock and a limited amount of the
allowance for credit losses. Additionally, the risk-based capital guidelines
specify that all intangibles, including core deposit intangibles, as well as
mortgage servicing rights (MSRs) and purchased credit card relationships
(PCCRs), be deducted from Tier 1 capital. The guidelines, however, grandfather
identifiable intangible assets (other than MSRs and PCCRs) acquired on or before
February 19, 1992, and permit the inclusion of readily marketable MSRs and PCCRs
in Tier 1 capital to the extent that (i) MSRs and PCCRs do not exceed 50 percent
of Tier 1 capital and (ii) PCCRs do not exceed 25 percent of Tier 1 capital.
For such purposes, MSRs and PCCRs each are included in Tier 1 capital only up to
the lesser of (a) 90 percent of their fair market value (which must be
determined quarterly) and (b) 100 percent of the remaining unamortized book
value of such assets. The Federal Financial Institutions Examination Council,
which includes all federal banking regulators, is currently evaluating a
proposal which would permit inclusion of MSRs and PCCRs up to 100 percent of
Tier 1 capital, and the corporation has received permission from the Federal
Reserve System to determine its capital ratios under these proposed limitations.
In addition, the Federal Reserve Board has specified minimum "leverage ratio"
(the ratio of Tier 1 capital to quarterly average total assets) guidelines for
bank holding companies and state member banks. These guidelines provide for a
minimum leverage ratio of three percent for bank holding companies and state
member banks that meet certain specified criteria, including that they have the
highest regulatory rating. All other bank holding companies and state member
banks are required to maintain a leverage ratio of three percent plus an
additional cushion of one to two percent. The guidelines also provide that
banking organizations experiencing internal growth or making acquisitions are
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier 1 leverage ratio" in evaluating proposals
for expansion or new activities. The tangible Tier 1 leverage ratio is the
ratio of a banking organization's Tier 1 capital, less all intangibles, to total
assets, less all intangibles. Each of the corporation's banking subsidiaries is
also subject to capital requirements adopted by applicable regulatory agencies
which are substantially similar to the foregoing. At December 31, 1997, the
corporation's Tier 1 and total capital (the sum of Tier 1 and Tier 2 capital) to
risk-adjusted assets ratios were 9.09 percent and 11.01 percent, respectively,
and the corporation's leverage ratio was 6.63 percent. Neither the corporation
nor any subsidiary bank has been advised by the appropriate federal regulatory
agency of any specific leverage ratio applicable to it.
As a result of federal law enacted in 1991 that required each federal banking
agency to revise its risk-based capital standards to ensure that those standards
take adequate account of interest rate risk, concentration of credit risk and
the risks of nontraditional activities, each of the federal banking agencies has
revised the risk-based capital guidelines described above to take into account
the concentration of credit risk and risk of nontraditional activities. The
Federal Reserve Board, the FDIC and the OCC adopted a rule that amended the
capital standards to require
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banks to include changes in interest rates as a factor to be considered in
evaluating the economic value of its capital. The agencies issued for comment a
joint policy statement that described the process to be used to measure and
assess the exposure of a bank's net economic value to changes in interest rates.
In June 1996, these agencies elected not to pursue a standardized supervisory
measure and explicit capital charge for interest rate risk. In supervising
interest rate risk, the agencies intend to emphasize reliance on internal
measures of risk, promotion of sound risk management practices and other means
to identify those institutions that appear to be taking excessive risk. The
corporation does not believe these revisions to the capital guidelines will
materially impact its operations.
Effective January 1, 1998, federal bank regulatory agencies require banking
organizations that engage in significant trading activity to calculate a capital
charge for market risk. Significant trading activity is defined to include
trading activity of at least ten percent of total assets or $1 billion,
whichever is smaller, calculated on a consolidated basis for bank holding
companies. Trading activity is defined as the sum of a banking organization's
trading assets and trading liabilities as reported in the most recent financial
statements filed with the organization's primary federal bank regulator.
Federal bank regulators may apply the market risk measure to other banks and
bank holding companies if the agency deems necessary or appropriate for safe and
sound banking practices. Each agency may exclude organizations that it
supervises that otherwise meet the criteria under certain circumstances. The
market risk charge will be included in the calculation of applicable risk-based
capital ratios. The corporation has not historically engaged in significant
trading activity, as defined.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
revisions to several other federal banking statutes. Among other things, FDICIA
requires the federal banking regulators to take "prompt corrective action" in
respect of depository institutions insured by the FDIC that do not meet minimum
capital requirements. FDICIA establishes five capital tiers: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized".
Under applicable regulations, an FDIC-insured depository institution is defined
to be well capitalized if it maintains a leverage ratio of at least five
percent, a risk-adjusted Tier 1 capital ratio of at least six percent and a
risk-adjusted total capital ratio of at least 10 percent, and is not subject to
a directive, order or written agreement to meet and maintain specific capital
levels. An insured depository institution is defined to be adequately
capitalized if it meets all of its minimum capital requirements as described
above. An insured depository institution will be considered undercapitalized if
it fails to meet any minimum required measure, significantly undercapitalized if
it has a risk-adjusted total capital ratio of less than six percent, risk-
adjusted Tier 1 capital ratio of less than three percent or a leverage ratio of
less than three percent, and critically undercapitalized if it fails to maintain
a level of tangible equity equal to at least two percent of total assets. An
insured depository institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating. As of December 31, 1997, all of the
corporation's banking subsidiaries were classified as 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.
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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. On July 10, 1995, the federal banking agencies
published the final rules implementing three of the safety and soundness
standards required by FDICIA, including operational and managerial standards,
asset quality and earnings standards, and compensation standards. The impact of
such standards on the corporation has not been material.
FDICIA also contains a variety of other provisions that may affect the
operations of the corporation, including new reporting requirements, revised
regulatory standards for real estate lending, "truth in savings" provisions and
the requirement that a depository institution give 90 days' notice to customers
and regulatory authorities before closing any branch.
Under other regulations promulgated under FDICIA, a bank cannot accept brokered
deposits (that is, deposits obtained through a person engaged in the business of
placing deposits with insured depository institutions or with interest rates
significantly higher 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, 1997, all of the corporation's banking subsidiaries
were not subject to these restrictions.
FDIC INSURANCE
The FDIC insures the deposits of the corporation's depository institution
subsidiaries up to prescribed per depositor limits through the BIF, and the
amount of FDIC assessments paid by each BIF member institution is based on its
relative risk of default as measured by regulatory capital ratios and other
factors. Specifically, the assessment rate is based on the institution's
capitalization risk category and supervisory subgroup category. An
institution's capitalization risk category is based on the FDIC's determination
of whether the institution is well capitalized, adequately capitalized or less
than adequately capitalized. An institution's supervisory subgroup is based on
the FDIC's assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will be required.
Subgroup A institutions are financially sound institutions with few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weakness
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness.
The BIF assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits, with Subgroup A institutions assessed at a rate of zero and
Subgroup C institutions assessed at a rate of 27 cents. The FDIC may increase
or decrease the assessment rate schedule on a semiannual basis. An increase in
the rate assessed one or more of the corporation's banking subsidiaries could
have a material effect on the corporation's earnings, depending upon the amount
of the increase. The FDIC is authorized to terminate a depository institution's
deposit insurance upon a finding by the FDIC that the institution's financial
condition is unsafe or unsound or that the institution has engaged in unsafe or
unsound practices or violated any applicable rule, regulation, order or
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condition enacted or imposed by the institution's regulatory agency. The
termination of deposit insurance with respect to one or more of the
corporation's subsidiary depository institutions could have a material adverse
effect on the corporation depending on the collective size of the particular
institutions involved.
Effective January 1, 1997, all FDIC-insured depository institutions are also
required to pay an assessment to provide funds for payment of interest on
Financing Corporation (FICO) bonds. Until December 31, 1999 or when the last
savings and loan association ceases to exist, whichever occurs first,
institutions will pay approximately 1.3 cents per $100 of BIF-assessable
deposits.
DEPOSITOR PREFERENCE
Under the Federal Deposit Insurance Act, claims of holders of domestic deposits
and certain claims of administrative expenses and employee compensation against
an FDIC-insured depository institution have priority over other general
unsecured claims against the institution in the "liquidation or other
resolution" of the institution by a receiver.
ITEM 2. PROPERTIES
The corporation's Banking Group subsidiaries operate out of 930 banking
locations, of which 593 are owned directly and 337 are leased from outside
parties. Norwest Mortgage leases its headquarters in Des Moines, Iowa,
servicing centers in Minneapolis, Minnesota; Phoenix, Arizona; Charlotte, North
Carolina; and Springfield, Illinois, operations centers in Frederick, Maryland
and St. Louis, Missouri and all mortgage production offices nationwide. In
addition, Norwest Mortgage owns servicing centers located in Springfield, Ohio
and Riverside, California. Norwest Financial owns its headquarters in Des
Moines, Iowa, and leases all consumer finance branch locations. The corporation
and Norwest Bank Minnesota, N.A. lease their offices in Minneapolis, Minnesota.
The accompanying Notes 6 and 13 to the corporation's consolidated financial
statements on pages 43 and 55 in the Appendix contain additional information
with respect to premises and equipment and commitments under non-cancelable
leases for premises and equipment.
ITEM 3. LEGAL PROCEEDINGS
The corporation and certain subsidiaries are defendants in various matters of
litigation generally incidental to their businesses. Although it is difficult
to predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability will not materially affect
the consolidated financial position and results of operations of the corporation
and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal trading markets for the corporation's common equity are presented
on the cover page of this Form 10-K. The high and low sales prices for the
corporation's common stock for each quarter during the past two years and
information regarding cash dividends is set forth on pages 46 through 48, 72,
and 78 in the Appendix. The number of holders of record of the common stock and
securities convertible into common stock of the corporation at January 30, 1998
were:
Title of Class Number of Holders
-------------- -----------------
6 3/4 % Convertible
Subordinated Debentures Due 2003............... 4
Common Stock, par value $1 2/3 per share....... 47,995
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data begins on page 72 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The discussion and analysis presented beginning on page 17 of the Appendix
includes applicable disclosures pertaining to quantitative and qualitative
disclosures about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the corporation and its subsidiaries
begin on page 30 in the Appendix. The report of independent certified public
accountants on the corporation's consolidated financial statements is presented
on page 70 in the Appendix.
Selected quarterly financial data is presented on pages 78 and 79 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS - See Item 8 above.
(2) FINANCIAL STATEMENT SCHEDULES
All schedules to the consolidated financial statements normally
required by Form 10-K are omitted since they are either not applicable
or the required information is shown in the financial statements or
the notes thereto.
(3) MANAGEMENT CONTRACTS OR COMPENSATORY PLAN ARRANGEMENTS - See exhibits
marked with an asterisk in Item 14(c) below.
(b) REPORTS ON FORM 8-K
The corporation filed a Current Report on Form 8-K, dated October 10,
1997, placing on file a description of its common stock reflecting the
corporation's two-for-one stock split distributed in the form of a 100
percent stock dividend, and adjustments to the preferred share
purchase rights as a result of the stock dividend. The corporation
also filed amendments to its by-laws, effective September 23, 1997, to
allow for the issuance and transfer of uncertificated shares of the
corporation's stock.
The corporation filed a Current Report on Form 8-K, dated October 13,
1997, reporting consolidated operating results of the corporation for
the quarter ended September 30, 1997.
11
(c) EXHIBITS
3(a). Restated Certificate of Incorporation, incorporated by reference to
Exhibit 3(b) to the corporation's Current Report on Form 8-K dated
June 28, 1993. Certificate of Amendment of Certificate of
Incorporation of the corporation authorizing 4,000,000 shares of
Preference Stock, incorporated by reference to Exhibit 3 to the
corporation's Current Report on Form 8-K dated July 3, 1995.
Certificate of Amendment of Certificate of Incorporation of the
corporation increasing the authorized number of common shares to one
billion shares, incorporated by reference to Exhibit 3 to the
corporation's Current Report on Form 8-K dated June 3, 1997.
3(b). Certificate of Designations of powers, preferences and rights
relating to the corporation's ESOP Cumulative Convertible Preferred
Stock incorporated by reference to Exhibit 4 to the corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
3(c). Certificate of Designations of powers, preferences and rights
relating to the corporation's Cumulative Tracking Preferred Stock
incorporated by reference to Exhibit 3 to the corporation's Current
Report on Form 8-K dated January 9, 1995.
3(d). Certificate of Designations of powers, preferences and rights
relating to the corporation's 1995 ESOP Cumulative Convertible
Preferred Stock incorporated by reference to Exhibit 4 to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
3(e). Certificate Eliminating the Certificate of Designations with respect
to the Cumulative Convertible Preferred Stock, Series B, incorporated
by reference to Exhibit 3(a) to the corporation's Current Report on
Form 8-K dated November 1, 1995.
3(f). Certificate Eliminating the Certificate of Designations with respect
to the 10.24% Cumulative Preferred Stock incorporated by reference to
Exhibit 3 to the corporation's Current Report on Form 8-K dated
February 20, 1996.
3(g). Certificate of Designations of powers, preferences and rights
relating to the corporation's 1996 ESOP Cumulative Convertible
Preferred Stock incorporated by reference to Exhibit 3 to the
corporation's Current Report on Form 8-K dated February 26, 1996.
3(h). Certificate of Designations of powers, preferences and rights
relating to the corporation's 1997 ESOP Cumulative Convertible
Preferred Stock incorporated by reference to Exhibit 3 to the
corporation's Current Report on Form 8-K dated April 14, 1997.
3(i). By-Laws, incorporated by reference to Exhibit 3 to the corporation's
Current Report on Form 8-K dated October 10, 1997.
4(a). See 3(a) through 3(i) of this Item.
4(b). Rights Agreement, dated as of November 22, 1988, between the
corporation and Citibank, N.A. incorporated by reference to Exhibit 1
to the corporation's Form 8-A, dated December 6, 1988, and
Certificate of Adjustment pursuant to Section 12 of the Rights
Agreement incorporated by reference to Exhibit 5 to the corporation's
Form 8-A/A dated October 14, 1997.
4(c). Copies of instruments with respect to long-term debt will be
furnished to the Commission upon request.
12
*10(a). Long-Term Incentive Compensation Plan (including Form of Non-
Qualified Stock Option Agreement and Form of Restricted Stock
Agreement) /(1)/
*10(b). Employees' Stock Deferral Plan /(1)/
*10(c). Employees' Deferred Compensation Plan /(1)/
*10(d). Elective Deferred Compensation Plan for Mortgage Banking Executives
incorporated by reference to Exhibit 10(c) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
*10(e). Performance Deferral Award Plan for Mortgage Banking Executives
incorporated by reference to Exhibit 10(b) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
*10(f). Executive Incentive Compensation Plan incorporated by reference to
Exhibit 19(a) to the corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1988. Amendment to Executive Incentive
Compensation Plan incorporated by reference to Exhibit 19(b) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989.
*10(g). Performance-Based Compensation Policy for Covered Executive Officers
incorporated by reference to Exhibit 10(a) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
*10(h). Supplemental Savings Investment Plan /(1)/
*10(i). Supplemental Pension Plan
*10(j). Supplemental Long Term Disability Plan incorporated by reference to
Exhibit 10(f) to the corporation's Annual Report on Form 10-K for the
year ended December 31, 1990. Amendment to Supplemental Long Term
Disability Plan incorporated by reference to Exhibit 10(g) to the
corporation's Annual Report on Form 10-K for the year ended December
31, 1992.
*10(k). Executive Financial Counseling Plan incorporated by reference to
Exhibit 10(f) to the corporation's Annual Report on Form 10-K for the
year ended December 31, 1987.
*10(l). Deferred Compensation Plan for Non-Employee Directors incorporated by
reference to Exhibit 10(i) to the corporation's Annual Report on Form
10-K for the year ended December 31, 1995.
*10(m). Directors' Stock Deferral Plan /(1)/
*10(n). Directors' Formula Stock Award Plan /(1)/
*10(o). Retirement Plan for Non-Employee Directors incorporated by reference
to Exhibit 10(j) to the corporation's Annual Report on Form 10-K for
the year ended December 31, 1996.
*10(p). 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.
13
*10(q). Agreement between the corporation and Richard M. Kovacevich dated
March 18, 1991, incorporated by reference to Exhibit 19(e) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1991. Amendment effective January 1, 1995, to the March 18,
1991 agreement between the corporation and Richard M. Kovacevich,
incorporated by reference to Exhibit 10(c) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
*10(r). Form of agreement between the corporation and 13 executive officers,
including two directors, incorporated by reference to Exhibit 19(f)
to the corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1991. Amendment effective January 1, 1995, to the
March 11, 1991 agreement between the corporation and Richard M.
Kovacevich incorporated by reference to Exhibit 10(b) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
11. Computation of Earnings Per Share.
12(a). Computation of Ratio of Earnings to Fixed Charges.
12(b). Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
21. Subsidiaries of the Corporation.
23. Consent of Experts.
24. Powers of Attorney.
___________________
* Management contract or compensatory plan or arrangement.
(1) As restated to reflect the two-for-one stock split in the form of a 100
percent stock dividend distributed on October 10, 1997.
Stockholders may obtain a copy of any Exhibit, in Item 14(c), 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 23rd day of
February, 1998.
Norwest Corporation
(Registrant)
By /s/ RICHARD M. KOVACEVICH
-------------------------
Richard M. Kovacevich
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 23rd day of February, 1998, by the following
persons on behalf of the registrant and in the capacities indicated.
By /s/ JOHN T. THORNTON
--------------------
John T. Thornton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By /s/ MICHAEL A. GRAF
-------------------
Michael A. Graf
Senior Vice President and Controller
(Principal Accounting Officer)
The Directors of Norwest Corporation listed below have duly executed powers of
attorney empowering Richard S. Levitt to sign this document on their behalf.
Leslie S. Biller Reatha Clark King
J. A. Blanchard III Richard M. Kovacevich
David A. Christensen Richard D. McCormick
Gerald J. Ford Cynthia H. Milligan
Pierson M. Grieve Benjamin F. Montoya
Charles M. Harper Ian M. Rolland
William A. Hodder Michael W. Wright
By /s/ RICHARD S. LEVITT
---------------------
Richard S. Levitt
Director and Attorney-in-Fact
February 23, 1998
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, 1997
Contents
--------
Page
----
Financial Review........................................ 17
Financial Statements.................................... 30
Independent Auditors' Report............................ 70
Management's Report..................................... 71
Six-Year Consolidated Financial Summary................. 72
Consolidated Average Balance Sheets
and Related Yields and Rates............................ 73
Quarterly Condensed Consolidated Financial Information.. 78
16
FINANCIAL REVIEW
This financial review should be read with the consolidated financial statements
and accompanying notes presented on pages 30 through 69 and other information
presented on pages 72 through 79.
EARNINGS PERFORMANCE
Norwest Corporation (the corporation) reported record net income of $1,351.0
million in 1997, an increase of 17.1 percent over earnings of $1,153.9 million
in 1996, which were up 20.7 percent over the $956.0 million earned in 1995. Net
income per diluted common share was $1.75 in 1997, compared with $1.54 in 1996
and $1.36 in 1995, an increase of 13.6 percent and 13.2 percent, respectively.
Net income per common share amounts for periods prior to 1997 have been restated
to reflect the two-for-one split of the corporation's common stock, effected in
the form of a 100 percent stock dividend, distributed on October 10, 1997.
Return on realized common equity was 22.1 percent and return on assets was 1.63
percent for 1997, compared with 21.9 percent and 1.51 percent, respectively, in
1996, and 22.3 percent and 1.44 percent, respectively, in 1995.
The 1996 results include a special pre-tax charge of $19.0 million on deposits
insured by the Savings Association Insurance Fund (SAIF). This charge, based on
legislation enacted by Congress to recapitalize SAIF, related to deposits of
thrift institutions acquired by the corporation during 1996. Excluding the $19.0
million pre-tax charge, net operating earnings in 1996 were $1,165.7 million, or
$1.55 per diluted common share. On an operating basis, return on realized common
equity was 22.1 percent and return on assets was 1.52 percent for the year ended
December 31, 1996.
The corporation previously included in its normal operating results a pre-tax
charge of $23.5 million for savings and loan association deposits insured under
SAIF which were acquired prior to 1996. Such charge was recorded in the third
quarter of 1995 when the SAIF recapitalization legislation was first introduced
in Congress.
Norwest Corporation and Subsidiaries
CONSOLIDATED INCOME SUMMARY
5 Year
Growth
In millions 1997 Change 1996 Change 1995 1994 1993 Rate
-------- ------ -------- ------ -------- -------- -------- -------
Interest income (tax-equivalent basis)....... $6,741.9 6.2% $6,350.5 10.4% $5,750.8 $4,422.7 $3,979.6 11.9%
Interest expense............................. 2,664.0 1.8 2,617.0 6.9 2,448.0 1,590.1 1,442.9 10.6
-------- -------- -------- -------- --------
Net interest income......................... 4,077.9 9.2 3,733.5 13.0 3,302.8 2,832.6 2,536.7 12.8
Provision for credit losses.................. 524.7 32.9 394.7 26.3 312.4 164.9 158.2 14.1
-------- -------- -------- -------- --------
Net interest income after provision
for credit losses......................... 3,553.2 6.4 3,338.8 11.7 2,990.4 2,667.7 2,378.5 12.6
Non-interest income.......................... 2,962.3 15.5 2,564.6 38.8 1,848.2 1,638.3 1,585.0 18.4
Non-interest expenses........................ 4,421.3 8.1 4,089.7 20.9 3,382.3 3,096.4 3,050.4 11.6
-------- -------- -------- -------- --------
Income before income taxes.................. 2,094.2 15.5 1,813.7 24.5 1,456.3 1,209.6 913.1 25.1
Income tax expense........................... 698.7 11.3 627.6 34.4 466.8 380.2 266.7 31.8
Tax-equivalent adjustment.................... 44.5 38.2 32.2 (3.9) 33.5 29.0 33.3 3.3
-------- -------- -------- -------- --------
Net income................................... $1,351.0 17.1% $1,153.9 20.7% $ 956.0 $ 800.4 $ 613.1 23.5%
======== ======== ======== ======== ========
ORGANIZATIONAL EARNINGS
Banking The Banking Group reported record earnings of $957.2 million in 1997,
23.3 percent over 1996 operating earnings of $776.4 million, which increased
28.9 percent over 1995 earnings of $602.2 million. The Banking Group earnings
increases in 1997 and 1996 reflect a 6.1 percent and 7.3 percent growth in tax-
equivalent net interest income, respectively, primarily due to increases in
average earning assets and in net interest margin. The Banking Group's provision
for credit losses was $176.2 million in 1997, compared with $146.7 million and
$143.0 million in 1996 and 1995, respectively. The 1997 and 1996 increases in
the provision for loan losses were due to higher net charge-offs. Non-interest
income in the Banking Group increased 20.4 percent from 1996 due primarily to
increases in fee-based revenue including trust, insurance, and other fees and
service charges, and gains on sales of securities. The Banking Group non-
interest income for 1996 increased 35.8 percent from 1995 due primarily to
increases in venture capital gains and gains on sale of credit card receivables.
Non-interest expenses for the Banking Group in 1997 were $2,889.4 million, or a
10.3 increase from 1996. This increase is due to increased operating expenses
related to acquisitions. Excluding the previously discussed SAIF
17
recapitalization charge, the Banking Group non-interest expenses increased 14.7
percent in 1996 from 1995 reflecting writedowns of goodwill and intangibles and
additional operating expenses related to acquired companies, partially offset by
reduced pension expense and FDIC insurance premiums.
The venture capital subsidiaries reported $190.9 million of net gains in 1997,
compared with net gains of $256.4 million in 1996 and net gains of $102.1
million in 1995. Certain appreciated securities which comprised $8.1 million of
the 1997 net venture gains were contributed to the Norwest Foundation. The
contribution amount of such securities, which included the cost basis, was $8.4
million in 1997. Sales of venture capital securities generally relate to the
timing of such holdings becoming publicly traded and subsequent market
conditions, causing venture capital gains to be unpredictable in nature. Net
unrealized appreciation in the venture capital investment portfolio was $166.2
million at December 31, 1997 and $237.7 million at December 31, 1996.
Mortgage Banking Mortgage Banking earned a record $151.0 million in 1997, a 20.8
percent increase over the $125.0 million earned in 1996, which was 19.2 percent
over the $104.9 million earned in 1995. The increases were principally due to
increases in mortgage loan fundings and the servicing portfolio. Fundings were a
record $55.3 billion in 1997, compared with $51.5 billion in 1996 and $33.9
billion in 1995. Increases in volume were attributable in part to the
acquisition of certain assets of The Prudential Home Mortgage Company, Inc. in
May 1996, including $47 billion of its mortgage servicing portfolio. The
percentage of fundings attributed to mortgage loan refinancings was
approximately 23.0 percent in 1997, compared with 22.0 percent in 1996 and 19.6
percent in 1995. The servicing portfolio increased to $205.8 billion at December
31, 1997, compared with $179.7 billion at December 31, 1996. The weighted
average coupon was 7.75 percent at December 31, 1997, compared with 7.77 percent
a year earlier. Total capitalized servicing amounted to $2.8 billion or 135
basis points of the mortgage servicing portfolio at December 31, 1997.
Amortization of capitalized mortgage servicing rights was $444.3 million in
1997, compared with $300.6 million in 1996 and $139.6 million in 1995. Higher
levels of amortization in 1997 and 1996 reflect increased balances of
capitalized servicing associated with a larger servicing portfolio and increased
assumed prepayments due to a lower interest rate environment. No mortgage
servicing impairment provisions were recorded in 1997 or 1996, while $64.2
million was recorded in 1995. Combined gains on sales of mortgages and servicing
rights were $89.8 million in 1997, compared with $70.5 million in 1996 and $57.1
million in 1995.
Norwest Financial Norwest Financial (including Norwest Financial Services, Inc.
and Island Finance) reported earnings of $242.8 million in 1997, which includes
$27.3 million in non-recurring pre-tax acquisition charges related to the
acquisition of Fidelity Acceptance Corporation, an automobile finance company
with $1.1 billion in receivables and 150 locations in 31 states and Guam. The
non-recurring charges include $16.0 million pre-tax to conform Fidelity's credit
policies with those of the corporation. Excluding the special acquisition
charges, Norwest Financial's operating earnings were $260.6 million, down
slightly from the $264.3 million earned in 1996 due to higher levels of
provisions related to higher levels of loan charge-offs. Norwest Financial's
earnings for 1996 increased 6.2 percent over the $248.9 million earned in 1995
primarily due to a 16.8 percent increase in tax-equivalent net interest income
related to a 14.9 percent increase in average finance receivables. Tax-
equivalent net interest income rose 9.4 percent in 1997, as average finance
receivables increased 10.0 percent. The 1997 and 1996 increases in tax-
equivalent net interest income and average receivables reflect internal growth
as well as the Fidelity Acceptance acquisition in August 1997, and the May 1995
acquisition of ITT Financial Corporation's Island Finance business, with $1
billion in receivables in Puerto Rico, the Virgin Islands and elsewhere in the
Caribbean. Net interest margin decreased 17 basis points in 1997, reflecting a
narrowing of the yield spread on earning assets. Net interest margin increased
22 basis points in 1996 over 1995 due to an improvement in funding costs. The
overall increases in net interest income were partially offset by higher
provisions for credit losses. Norwest Financial provided $330.7 million for
credit losses in 1997, compared with $247.1 million in 1996 and $170.8 million
in 1995. Norwest Financial's non-interest expenses increased 9.4 and 15.5
percent in 1997 and 1996, respectively, primarily due to higher operating costs
of acquired companies.
18
Norwest Corporation and Subsidiaries
Organizational Earnings*
In millions 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Years Ended December 31,
- -----------------------
Banking........................................................... $ 957.2 776.4 602.2 507.1 356.7
Mortgage Banking.................................................. 151.0 125.0 104.9 70.8 56.3
Norwest Financial+................................................ 242.8 264.3 248.9 222.5 200.1
-------- -------- -------- -------- --------
Consolidated operating earnings before SAIF recapitalization...... 1,351.0 1,165.7 956.0 800.4 613.1
SAIF recapitalization, net of income taxes........................ - (11.8) - - -
-------- -------- -------- -------- --------
Net income........................................................ $1,351.0 1,153.9 956.0 800.4 613.1
======== ======== ======== ======== ========
*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.
+Norwest Financial had net operating earnings of $260.6 million in 1997 before a
non-recurring acquisition charge of $17.8 million, net of income taxes.
CONSOLIDATED INCOME STATEMENT ANALYSIS
Net Interest Income Net interest income on a tax-equivalent basis is the
difference between interest earned on assets and interest paid on liabilities,
with adjustments made to present yields on tax-exempt assets as if such income
were fully taxable. Changes in the mix and volume of earning assets and
interest-bearing liabilities, their related yields and overall interest rates
have a major impact on earnings. In 1997, tax-equivalent net interest income
provided 57.9 percent of the corporation's tax-equivalent net revenues, compared
with 59.3 percent in 1996 and 64.1 percent in 1995.
Total tax-equivalent net interest income was $4,077.9 million in 1997, a 9.2
percent increase over the $3,733.5 million reported in 1996. Growth in tax-
equivalent net interest income over 1996 was primarily due to a 7.0 percent
increase in average earning assets and an 11 basis point increase in net
interest margin. The increase in average earning assets was primarily due to a
5.7 percent increase in average loans and leases and a 13.8 percent increase in
average investment securities. The 1996 increase in tax-equivalent net interest
income of 13.0 percent over the $3,302.8 million reported in 1995 was due to a
12.7 percent increase in average earning assets and a five basis point increase
in net interest margin. Non-accrual and restructured loans reduced net interest
income by $16.2 million in 1997, $17.8 million in 1996 and $11.7 million in
1995. Detailed analyses of net interest income appear on pages 73, 74 and 75 and
a discussion of the corporation's asset and liability management process begins
on page 25.
Net interest margin, the ratio of tax-equivalent net interest income divided by
average earning assets, was 5.74 percent in 1997, 5.63 percent in 1996 and 5.58
percent in 1995. The increases in 1997 and 1996 were primarily due to
improvements in funding costs, partially offset by a lower yield on average
earning assets. Average loans and leases comprised 57.0 percent of average
earning assets in 1997, compared with 57.7 percent in 1996 and 60.0 percent in
1995.
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
$524.7 million in 1997, $394.7 million in 1996 and $312.4 million in 1995. The
provision for credit losses was 1.29 percent of average loans and leases in
1997, compared with 1.02 percent in 1996 and 0.88 percent in 1995. The 1997
provision for credit losses includes $16.0 million, or 0.04 percent, of one-time
provision related to the acquisition of Fidelity Acceptance Corporation.
Excluding the special acquisition charge, the provision for credit losses was
higher in 1997 compared with 1996 as well as in 1996 compared with 1995 due to
higher net charge-offs and loan growth.
Net charge-offs were $499.7 million in 1997, $382.4 million in 1996 and $304.2
million in 1995. The net charge-off ratio, the ratio of net charge-offs as a
percent of average loans and leases, was 1.23 percent in 1997, compared with
0.99 percent in 1996 and 0.86 percent in 1995. The increases in net charge-offs
in 1997 and 1996 were due principally to higher levels of charge-offs in regions
which have had acquisitions and higher consumer credit charge-offs. Excluding
net charge-offs relating to Fidelity Acceptance, the corporation's total net
charge-offs as a percent of average loans and leases was 1.15 percent.
The net charge-off ratio for Norwest Financial was 3.72 percent in 1997,
compared with 3.24 percent in 1996 and 2.52 percent in 1995. Norwest Card
Services' net charge-off ratio was 5.23 percent in 1997 compared with 4.23
percent in 1996 and 4.77 percent in 1995 (excluding credit card portfolios
classified as held for sale in 1995). The higher consumer loan net
19
credit losses reflect, in part, growth in the overall portfolio, including the
acquisition of Fidelity Acceptance in 1997. Fidelity Acceptance, as a subprime
automobile lender, originates loans and purchases sales finance contracts
secured by automobiles which generally have higher charge-off rates.
Non-interest Income Non-interest income is a significant source of the
corporation's revenue, representing 42.1 percent of tax-equivalent net revenues
in 1997, compared with 40.7 percent in 1996 and 35.9 percent in 1995.
Consolidated non-interest income was $2,962.3 million in 1997, an increase of
15.5 percent over $2,564.6 million recorded in 1996. Non-interest income
includes net investment securities gains of $37.9 million in 1997 and losses of
$46.8 million in 1996. Proceeds from sales of securities in 1996 provided
opportunities for the corporation to reinvest at more attractive yields.
Contributing to the 1997 increase in non-interest income was growth in fee-based
revenues, including trust, mortgage banking, insurance and other fees and
service charges.
The increases in trust fees and service charges reflect overall increases in
business activity, including acquisitions, and marketing efforts. Mortgage
banking revenues increased $54.0 million from 1996 due to increased levels of
origination and other closing fees resulting from higher mortgage loan funding
levels. Servicing fees, essentially unchanged from 1996, are expected to
increase as the servicing portfolio grows through retention of servicing and
through acquisitions. Mortgage banking revenue derived from sales of servicing
and future sales of servicing rights are largely dependent upon portfolio
characteristics and prevailing market conditions. The increase in insurance fees
is attributed to a higher volume of commissions on sales of crop and credit life
insurance.
The corporation's trading revenue totaled $78.6 million in 1997, compared with
$35.3 million in 1996 and $39.9 million in 1995. Trading activities are
conducted within the risk limits established by the Asset and Liability
Management Committee to satisfy the investment and risk management needs of
customers and those of the corporation. The table in Note 14 to the consolidated
financial statements on page 57 provides a summary of the corporation's trading
revenues in the principal markets in which the corporation participates.
Consolidated non-interest income increased 38.8 percent in 1996 from $1,848.2
million in 1995, primarily due to higher trust fees, service charges on deposit
accounts, insurance, mortgage banking revenues, net venture capital gains and
gains on the disposition of credit card receivables held for sale. The increases
in various fee-based services related to growth in consumer-related lending
activities and other marketing initiatives.
Non-interest Expenses Consolidated non-interest expenses increased 8.1 percent
in 1997 to $4,421.3 million. The change in non-interest expenses reflects
increased operating expenses associated with acquisitions and certain one-time
acquisition charges related to completed 1997 transactions.
Personnel expenses increased $263.8 million in 1997, primarily attributable to
salaries expense. Changes in personnel expenses by business segment for 1997
included an increase of 14.8 percent for the Banking Group, an increase of 6.0
percent for Mortgage Banking, and an increase of 16.2 percent for Norwest
Financial. Normalized for acquisitions, personnel expenses increased 7.6 percent
for the Banking Group and 10.7 percent for Norwest Financial and remained
essentially unchanged for Mortgage Banking.
Of the 1997 increases of $9.9 million in communication expenses, $13.7 million
in equipment rentals, depreciation and maintenance, and $10.0 million in net
occupancy expenses, the Banking Group contributed $9.8 million, $13.8 million
and $10.2 million, respectively, and Norwest Financial contributed $7.3 million,
$6.2 million and $5.9 million, respectively; Mortgage Banking incurred lower
expenses of $7.2 million, $6.3 million and $6.1 million, respectively, in each
expense category. Increases in the Banking Group and Norwest Financial are
attributable in part to acquisition activity; Mortgage Banking decreases are
primarily related to the consolidation of certain operations acquired from
Prudential Home Mortgage.
Consolidated non-interest expenses increased 20.9 percent in 1996 to $4,089.7
million from 1995, reflecting increased operating expenses associated with
acquisitions and certain one-time acquisition charges related to completed 1996
transactions, the non-recurring charge related to recapitalization of SAIF and
writedowns of goodwill and other intangibles of $151.0 million before taxes,
partially offset by reduced pension benefits expense of $53.2 million due to
changes in pension assumptions.
Changes in personnel expenses by business segment for 1996 include an increase
of 14.0 percent for the Banking Group, an increase of 37.5 percent for Mortgage
Banking, and an increase of 15.9 percent for Norwest Financial. Normalized for
acquisitions, personnel expenses increased 8.0 percent for the Banking Group,
23.6 percent for Mortgage Banking and 10.2 percent for Norwest Financial.
20
Of the 1996 increases of $60.2 million in communication expenses, $55.0 million
in equipment rentals, depreciation and maintenance, and $61.9 million in net
occupancy expenses, the Banking Group contributed $33.3 million, $36.9 million
and $40.8 million, respectively, and Mortgage Banking contributed $20.7 million,
$15.8 million and $16.1 million, respectively. In addition to the Prudential
Home Mortgage acquisition, increases in Mortgage Banking reflect higher levels
of origination and servicing volume.
Income Taxes The corporation's income tax planning is based upon the goal of
maximizing long-term, after-tax profitability. The effective income tax rate was
34.1 percent in 1997, compared with 35.2 percent in 1996 and 32.8 percent in
1995. For more information on income taxes, see Note 12 to the consolidated
financial statements on page 54.
CONSOLIDATED BALANCE SHEET ANALYSIS
Earning Assets At December 31, 1997, earning assets were $75.0 billion,
compared with $68.2 billion at December 31, 1996. This increase was primarily
due to a $1.8 billion increase in total investment securities, a $3.1 billion
increase in loans and leases and a $2.5 billion increase in mortgages held for
sale.
Average earning assets were $71.5 billion in 1997, an increase of 7.0 percent
over 1996. This increase is primarily due to a 5.7 percent increase in average
loans and leases and a 13.8 percent increase in average total investment
securities.
Leverage, the ratio of average assets to average total stockholders' equity, was
12.7 times during 1997, compared with 13.5 times during 1996. The change from
1996 is due to a 15.6 percent increase in average stockholders' equity,
partially offset by an 8.0 percent increase in average assets.
In Note 18 to the consolidated financial statements beginning on page 65, the
corporation has disclosed the estimated fair values of all on- and off-balance
sheet financial instruments and certain non-financial instruments in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments." At December 31, 1997, the excess of fair
value of net financial instruments over the carrying value of such instruments
was $993.5 million, compared with $489.5 million at December 31, 1996.
Credit Risk Management Credit risk management includes pricing loans to cover
anticipated future credit losses, funding and servicing costs and to allow for a
profit margin. Loans and leases by type appear in Note 5 to the consolidated
financial statements on page 42. The corporation manages exposure to credit risk
through loan portfolio diversification by customer, product, industry and
geography in order to minimize concentrations in any single sector. The
corporation's credit risk management policies and activities as well as the
geographical diversification of the corporation's Banking Group (including
Norwest Card Services), Mortgage Banking, and Norwest Financial help mitigate
the credit risk in their respective portfolios. The corporation's Banking Group
operates in 16 states, largely in the Midwest, Southwest, and Western/Rocky
Mountain regions of the country. Distribution of average loans by region in 1997
was approximately 50.1 percent in the Midwest, 28.0 percent in the Western/Rocky
Mountain region and 21.9 percent in the Southwest region. Norwest Mortgage,
Norwest Financial and Norwest Card Services operate on a nationwide basis.
Mortgage Banking includes the largest retail mortgage origination network and
the largest servicing portfolio in the United States. The five states with the
highest originations in 1997 are: California, $10.1 billion; Minnesota, $3.0
billion; Texas, $2.7 billion; Illinois, $2.6 billion; and New Jersey, $2.5
billion. The originations in these five states comprise approximately 37.9
percent of total originations in 1997. The five states representing the highest
level of servicing include: California, $39.8 billion; Minnesota, $11.8 billion;
Texas, $10.3 billion; New York, $9.6 billion; and New Jersey, $8.9 billion.
These five states comprise approximately 39.0 percent of the total servicing
portfolio at December 31, 1997.
Norwest Financial engages in consumer finance activities in 48 states, all 10
Canadian provinces, the Caribbean, Central America, Saipan and Guam. The five
states with the largest consumer finance receivables are: California, $696.8
million; Illinois, $291.7 million; Ohio, $253.9 million; Florida, $237.6
million; and Texas, $224.5 million. Consumer finance receivables in Puerto Rico
and Canada totaled $1.4 billion and $617.8 million, respectively, at December
31, 1997. The consumer finance receivables in the five states listed above,
Puerto Rico and Canada comprise approximately 44.0 percent of total consumer
finance receivables at December 31, 1997.
With respect to credit card receivables, approximately 63.4 percent of the
portfolio is within the corporation's 16-state banking region. Minnesota
represents approximately 12.7 percent of the total outstanding credit card
portfolio. No other state accounts for more than 10 percent of the portfolio.
21
In general, the U.S. economy continues to experience moderate growth, although
consumer-related loan delinquencies and charge-offs have increased moderately
over recent years. Consumer past due delinquencies at December 31 were as
follows:
1997 1996 1995
---- ---- ----
Banking Group 30 days past due....................... 2.02% 2.05 1.75
Norwest Financial 60 days past due................... 3.58 3.89 3.41
Credit Card 30 days past due......................... 3.92 4.09 3.88
See Provision for Credit Losses on page 19 for a further discussion of consumer-
related net charge-offs. The average consumer installment loan made during 1997
at Norwest Financial was approximately $3,000 while sales finance contracts
purchased averaged approximately $1,600. This compares with $2,700 and $1,100,
respectively, in 1996. The average credit card receivable balance at Norwest
Card Services was $1,428 in 1997, compared with $1,465 in 1996.
The corporation is not aware of any loans classified for regulatory purposes at
December 31, 1997, 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, 1997.
Allowance for Credit Losses At December 31, 1997, the allowance for credit
losses was $1,233.9 million, or 2.90 percent of loans and leases outstanding,
compared with $1,040.8 million, or 2.64 percent, at December 31, 1996. The ratio
of the allowance for credit losses to the total non-performing assets and 90-day
past due loans and leases was 322.7 percent at December 31, 1997, compared with
335.0 percent at December 31, 1996.
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 76 presents the allocation of the
allowance for credit losses to major categories of loans.
Non-performing Assets and Past Due Loans and Leases The table on page 23
presents data on the corporation's non-performing assets and 90-day past due
loans and leases. Generally, the accrual of interest on a loan or lease in the
Banking Group is suspended when the credit becomes 90 days past due unless fully
secured and in the process of collection. A restructured loan is generally a
loan that is accruing interest, but on which concessions in terms have been made
as a result of deterioration in the borrower's financial condition. Under the
corporation's credit policies and practices, all non-accrual and restructured
commercial, agricultural, construction, and commercial real estate loans are
included in impaired loans. Loan impairment is measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the observable market price of the loan or
the fair value of the collateral if the loan is collateral-dependent.
Non-performing assets, including non-accrual, restructured and other real estate
owned, and 90-day past due loans and leases totaled $382.3 million, or 0.4
percent of total assets, at December 31, 1997, compared with $310.7 million, or
0.4 percent of total assets, at December 31, 1996. Total 90-day past due loans
and leases rose $43.1 million from the end of 1996. Non-performing loans
increased by $36.4 million from December 31, 1996 because of acquisitions.
22
Norwest Corporation and Subsidiaries
Non-performing Assets and 90-day Past Due Loans and Leases
In millions, except per share amounts 1997 1996 1995 1994 1993 1992
------ ----- ----- ----- ----- -----
At December 31,
- ---------------
NON-ACCRUAL LOANS AND LEASES............................................ $178.1 156.5 166.9 128.5 195.7 257.6
RESTRUCTURED LOANS AND LEASES........................................... 0.1 0.2 2.0 1.8 10.3 5.4
------ ----- ----- ----- ----- -----
Total non-accrual and restructured loans and leases*................... 178.2 156.7 168.9 130.3 206.0 263.0
OTHER REAL ESTATE OWNED................................................. 50.3 43.3 37.1 29.6 63.0 113.7
------ ----- ----- ----- ----- -----
Total non-performing assets............................................ 228.5 200.0 206.0 159.9 269.0 376.7
LOANS AND LEASES PAST DUE 90-DAYS OR MORE**............................. 153.8 110.7 91.9 58.4 50.8 51.9
------ ----- ----- ----- ----- -----
Total non-performing assets and 90-day past due loans and leases....... $382.3 310.7 297.9 218.3 319.8 428.6
====== ===== ===== ===== ===== =====
Interest income as originally contracted on non-accrual and restructured
loans and leases....................................................... $ 20.6 25.1 15.3 15.4 19.4 26.5
Interest income recognized on non-accrual and restructured
loans and leases....................................................... (4.4) (7.3) (3.6) (3.1) (5.5) (8.1)
------ ----- ----- ----- ----- -----
Reduction of interest income due to non-accrual and restructured
loans and leases....................................................... $ 16.2 17.8 11.7 12.3 13.9 18.4
====== ===== ===== ===== ===== =====
Reduction in basic earnings per share due to non-accrual
and restructured loans and leases...................................... $ .01 .02 .01 .01 .01 .02
* Total impaired loans included in total non-accrual and restructured loans and
leases amounted to $89.5 million, $94.2 million, $102.1 million and $98.6
million at December 31, 1997, 1996, 1995 and 1994, respectively.
** Excludes non-accrual and restructured loans and leases.
Mortgage Servicing Rights and Other Assets At December 31, 1997, mortgage
servicing rights totaled $2.8 billion, an increase of $0.1 billion from year-end
1996. The increase in mortgage servicing rights is due to higher levels of
originations. Other assets increased slightly due to the timing of receivables
associated with sales of securities and increases in mortgage-related
receivables.
Effective January 1, 1997, the corporation adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125 sets
forth the criteria for determining whether a transfer of financial assets should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
FAS 125 requires that after a transfer of financial assets, a company must
recognize the financial and servicing assets controlled and liabilities
incurred, and derecognize financial assets and liabilities in which control is
surrendered or debt is extinguished. FAS 125 also eliminates the distinction
between normal and excess servicing to the extent that such fees do not exceed
the rate specified in the servicing contract. Application of FAS 125 for certain
repurchase agreements, dollar-rolls, securities lending and similar transactions
is effective for 1998. The adoption of FAS 125 has not had a material effect on
the corporation's consolidated financial statements.
23
FUNDING SOURCES
Interest-bearing Liabilities At December 31, 1997, interest-bearing liabilities
totaled $61.5 billion, an increase of $5.0 billion over December 31, 1996. The
increase was principally due to a $3.4 billion increase in interest-bearing
deposits and a $2.0 billion increase in short-term borrowings.
Average interest-bearing liabilities were $58.2 billion in 1997, compared with
$56.0 billion in 1996, primarily due to an 11.2 percent increase in average
interest-bearing deposits, partially offset by an 8.8 percent decrease in long-
term debt. Increases in interest-bearing deposits are principally from
acquisitions.
Core Deposits In the corporation's banking subsidiaries, demand deposits,
regular savings and NOW accounts, money market checking and savings accounts and
consumer savings certificates provide a stable source of low-cost funding. These
funds accounted for approximately 60 percent of the corporation's total funding
sources during 1997 and approximately 58 percent in 1996. 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 76 percent of total funding sources during 1997, compared with 73
percent in 1996.
Purchased Deposits In addition to core deposits, purchased deposits are another
source of funding for the corporation's banking subsidiaries. Purchased deposits
include certificates of deposit with denominations of more than $100,000 and
foreign time deposits. Purchased deposits represented approximately 5 percent
and 4 percent of the corporation's total funding sources in 1997 and 1996,
respectively. There were no brokered certificates of deposit at December 31,
1997 and 1996.
Short-term Borrowings Short-term borrowings include federal funds purchased,
securities sold under agreements to repurchase, master note agreements,
privately negotiated financing agreements and commercial paper issued by the
corporation and Norwest Financial. Commercial paper is used by the corporation
to fund the short-term needs of its subsidiaries, consisting primarily of
funding of the inventory of mortgages held for sale which are typically held for
30 to 60 days. Norwest Financial used funds generated through its own commercial
paper sales program to fund approximately 29 percent of its average earning
assets in 1997, compared with 30 percent in 1996.
The commercial paper/short-term debt of the corporation and Norwest Financial,
Inc. are currently rated TBW-1 by Thomson BankWatch, P-1 by Moody's, A1+ by
Standard & Poor's, Duff-1+ by Duff & Phelps and F-1+ by Fitch IBCA, Inc. On
average, total short-term borrowings represented approximately 10.4 percent of
the corporation's total funding sources during 1997 and approximately 11.6
percent during 1996.
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 15.8 percent of the corporation's consolidated average funding
sources during 1997, compared with approximately 18.5 percent in 1996. The
corporation utilizes long-term debt primarily to meet the long-term funding
requirements of its subsidiaries, and had outstandings of $5,804.9 million as of
December 31, 1997, compared with $6,384.0 million as of December 31, 1996. In
addition, 22 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, 1997, these Banking Group subsidiaries had
advances outstanding totaling $1,702.0 million, a decrease of $825.2 million
from December 31, 1996. Long-term debt also plays a significant role at Norwest
Financial, Inc., which uses this source of financing to fund approximately 50
percent of its average earning assets. At December 31, 1997, Norwest Financial,
Inc.'s long-term debt outstanding was $5,221.4 million. Note 9 to the
consolidated financial statements on page 45 presents the corporation's
outstanding consolidated long-term debt as of December 31, 1997 and 1996.
Fitch IBCA, Inc. has assigned its highest individual rating of A to the
corporation. Both the corporation and Norwest Financial, Inc. maintain an issuer
rating of A from Thomson BankWatch. The corporation's senior debt is currently
rated AA+ by Thomson BankWatch, Fitch IBCA, 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 IBCA, Inc., AA by Duff &
Phelps, AA- by Standard & Poor's and Aa3 by Moody's.
24
INTEREST RATE SENSITIVITY AND
LIQUIDITY MANAGEMENT
Asset and Liability Management The goal of the asset and liability management
process is to manage the structure of the balance sheet to provide the maximum
level of net interest income while maintaining acceptable levels of interest
sensitivity risk (as defined below) and liquidity. The focal point of this
process is the corporate Asset and Liability Management Committee (ALCO). This
committee forms and monitors policies governing investments, funding sources,
off-balance sheet commitments, overall interest sensitivity risk and liquidity.
These policies form the framework for management of the asset and liability
process at the corporate and affiliate levels. The corporation's interest
sensitivity position is managed as a function of balance sheet trends, asset
opportunities and interest rate expectations, and the corporation is normally
well within policy risk limits at any given time.
Definition of Interest Sensitivity Risk Interest sensitivity risk is the risk
that future changes in interest rates will reduce net interest income or the net
market value of the corporation's balance sheet. Two basic ways of defining
interest rate risk in the financial services industry are commonly referred to
as the accounting perspective and the economic perspective. The corporation
draws upon aspects of each perspective to provide a more complete view of
interest rate risk than would be provided by either perspective alone.
The accounting perspective focuses on the risk to reported net income over a
particular time frame. Differences in the timing of interest rate repricing
(repricing or "gap" risk) and changing market rate relationships (basis risk)
determine the exposure of net income to changes in interest rates.
The economic perspective focuses on the risk to the market value of the
corporation's balance sheet, the net of which is referred to as the market value
of balance sheet equity. The sensitivity of the market value of balance sheet
equity to changes in interest rates is an indicator of the level of interest
rate risk inherent in an institution's current position and an indicator of
longer horizon earnings trends. Assessing interest rate risk from the economic
perspective focuses on the risk to net worth arising from all repricing
mismatches (gaps) across the full maturity spectrum.
Measurement of Interest Rate Risk Measurement of interest rate risk from the
accounting perspective has traditionally taken the form of the gap report, which
represents the difference between assets and liabilities that reprice in given
time periods. While providing a rough measure of rate risk, the gap report
provides only a static (i.e., point-in-time) measurement, and it does not
capture basis risk or risks that vary either asymmetrically or non-
proportionately with rate movements.
The corporation uses a simulation model as its primary method of measuring
earnings risk. The simulation model, because of its dynamic nature, can capture
the effects of future balance sheet trends, different patterns of rate
movements, and changing relationships between rates (basis risk). In addition,
it can capture the effects of embedded option risk by taking into account the
effects of interest rate caps and floors, and varying the level of prepayment
rates on assets as a function of interest rates. The simulation model is used to
determine the one and three year gap levels which correspond to the limits
within which the corporation has placed earnings at risk to interest rate
movements.
Measurement of interest rate risk from the economic perspective is accomplished
with a market valuation model. The market value of each asset and liability is
calculated by computing the present value of all cash flows generated. In each
case the cash flows are discounted by a market interest rate chosen to reflect
as closely as possible the characteristics of the given asset or liability.
Management of Interest Rate Risk As indicated above, the primary measure of
interest rate risk is the simulation of net income under different future rate
environments. The model was used to measure the impact on after-tax net income,
relative to a base case scenario, of rates increasing or decreasing gradually
100 basis points over the next 12 months. The yield curve is assumed to flatten
slightly as rates increase and to steepen as rates decrease. Embedded options
are captured by including the effects of caps and floors, and by varying
prepayment rates on assets as a function of interest rates. The effects of
financial derivatives which are used to hedge balance sheet items are also
included. Rate sensitivity of non-maturity core deposits is based on their
measured historical sensitivity to market interest rates.
The resulting model simulations show that a 100 basis point increase in rates
will result in a negative variance in net income of $18 million relative to the
base case over the next 12 months; while a decrease of 100 basis points will
result in a positive variance of $6 million. Under neither rate scenario would
net income be affected by impairment of capitalized mortgage servicing rights.
25
CHANGES IN INTEREST SENSITIVITY The table below presents the corporation's
interest sensitivity gaps for December 1997. The cumulative gap within one year
was $(4,807) million, or (5.6) percent of assets. This compares with a one year
gap of $(1,197) million, or (1.5) percent of assets, in December 1996. The
cumulative gap within three years was $(1,411) million, or (1.6) percent of
assets, in December 1997, compared to $1,025 million, or 1.3 percent of assets,
in December 1996. The movement of the gaps in the negative direction was due to
the addition of fixed rate investments and amortizing interest rate swaps in the
first half of the year, as well as growth in loans in the consumer finance
subsidiary. These changes were partly offset by growth in non-interest bearing
deposits and core retail deposits, which are considered a largely non-sensitive
source of funding. The effect of the current interest sensitivity position is to
make the corporation's earnings slightly vulnerable to rising rates, but in a
position to benefit from falling short-term rates.
Norwest Corporation and Subsidiaries
INTEREST RATE SENSITIVITY
In millions, except ratios
Repricing or Maturing
--------------------------------------------------------
Within 6 Months 1 Year 3 Years After
6 Months - 1 Year - 3 Years - 5 Years 5 Years
---------- --------- --------- --------- ---------
Average Balances For December 1997
- ----------------------------------
Loans and leases............................... $16,772 3,343 6,538 3,424 12,216
Investment securities.......................... 2,062 1,834 3,541 2,735 8,539
Loans held for sale............................ 3,257 -- -- -- --
Mortgages held for sale........................ 7,691 -- -- -- --
Other earning assets........................... 2,389 -- -- -- --
Other assets................................... -- 750 -- -- 10,987
---------- ---------- ---------- --------- --------
Total assets.................................. $32,171 5,927 10,079 6,159 31,742
========== ========== ========== ========= ========
Noninterest-bearing deposits................... $ 4,638 74 306 206 10,521
Interest-bearing deposits...................... 16,187 4,214 4,899 1,170 12,292
Short-term borrowings.......................... 8,608 -- -- -- --
Long-term debt................................. 2,405 799 3,129 2,262 4,008
Other liabilities and equity................... 2 -- 188 -- 10,170
---------- ---------- ---------- --------- --------
Total liabilities and equity.................. $31,840 5,087 8,522 3,638 36,991
========== ========== ========== ========= ========
Swaps and options.............................. $(6,632) 654 1,839 1,396 2,743
Gap*........................................... (6,301) 1,494 3,396 3,917 (2,506)
Cumulative gap................................. (6,301) (4,807) (1,411) 2,506 --
Gap as a percent of total assets............... (7.3)% (5.6) (1.6) 2.9 --
*[assets - (liabilities + equity) + swaps and options] The gap includes the
effect of off-balance sheet instruments on the corporation's interest
sensitivity.
In addition to adjusting the pricing and levels of assets and liabilities, the
corporation uses off-balance sheet derivative financial instruments to manage
interest rate risk. The corporation primarily enters into interest rate swaps,
interest rate caps and floors, futures contracts and options as part of its
overall risk management activities. Certain of these derivative financial
instruments synthetically change the repricing or other characteristics of
underlying assets and liabilities hedged. The corporation principally uses
interest rate swaps to hedge certain fixed-rate debt and certain deposit
liabilities and to convert these funding sources to floating rates. Interest
rate floors, futures contracts and options on futures contracts are principally
used to hedge the corporation's portfolio of mortgage servicing rights. The
floors provide for the receipt of payments when interest rates are below
predetermined interest rate levels. The cash flows on the floors and futures
contracts are used, as appropriate, to offset lost future servicing revenue
related to increased levels of prepayments associated with lower interest rates.
In Notes 1, 9 and 15 to the consolidated financial statements on pages 36, 45
and 57, respectively, the corporation has disclosed additional information with
respect to its use of derivative financial instruments.
The corporation's net cash flows from off-balance sheet derivative financial
instruments used to manage interest rate risk added approximately $81.9 million
to net interest income in 1997, compared with $56.9 million in 1996 and $7.1
million in 1995. This resulted in an impact on net interest margin of 11 basis
points in 1997, compared with nine basis points in 1996 and one basis point in
1995. Based on interest rate levels at December 31, 1997, total estimated future
cash flows related to the corporation's derivative financial instruments,
including interest rate swaps and floors hedging capitalized mortgage
26
servicing rights, are expected to approximate $207 million in 1998, $114 million
in 1999, $67 million in 2000, $44 million in 2001, $17 million in 2002, and $27
million thereafter.
Liquidity Management Liquidity management involves planning to meet funding
needs and cash flow requirements of customers and the corporation at a
reasonable cost, and is governed by policies formulated and monitored by ALCO.
Each affiliate is responsible for managing its own liquidity position within
overall guidelines, which consider the marketability of assets, the sources and
stability of funding, and the level of unfunded commitments.
The corporation has a significant liquidity reserve in its investment securities
portfolio, as approximately 81 percent of the $18.7 billion portfolio consists
of highly marketable U.S. Treasury or federal agency securities. Several other
factors provide a favorable liquidity position for the corporation compared with
most large bank holding companies, including the large amount of funding that
comes from consumer deposits, which are a more stable source of funding than
purchased funds.
Another source of asset liquidity is the ability to securitize assets such as
automobile and mortgage loans. Through public offerings, affiliates of the
corporation securitized $5.8 billion in mortgage loans in 1997; and $1.1 billion
in automobile loans and $2.7 billion in mortgage loans in 1996.
The corporation also filed shelf registration statements in July 1996 which
permit the corporation to issue up to $5 billion and $2 billion of debt
securities, respectively, in domestic and international money and capital
markets. As of December 31, 1997, the corporation has issued $700 million of
securities under such shelf registrations.
CAPITAL MANAGEMENT
The corporation believes that a strong capital position is vital to continued
profitability and to promote depositor and investor confidence. The
corporation's consolidated capital levels are a result of its capital policy,
which establishes guidelines for each subsidiary based on industry standards,
regulatory requirements, perceived risk of the various businesses, and future
growth opportunities. Pursuant to the capital policy, bank affiliates maintain
capital levels above regulatory minimums for Tier 1 capital and total capital
(Tier 1 plus Tier 2) to risk-weighted assets and leverage ratios. The primary
source of equity capital available for the affiliates is earnings, with other
forms of capital available from the corporation as needed. Earnings above levels
required to meet capital policy requirements are paid to the corporation in the
form of dividends and are used to support capital needs of other affiliates, to
pay corporate dividends or to reduce the corporation's borrowings.
Various federal and state statutes and regulations limit the amount of dividends
the subsidiary banks can pay to the corporation without regulatory approval. The
approval of the Office of the Comptroller of the Currency is required for any
dividend by a national bank if the total of all dividends declared by the bank
in any calendar year would exceed the total of its net income for that year
combined with its retained net income for the preceding two calendar years, less
any required transfers to surplus or a fund for the retirement of preferred
stock. The corporation also has state bank subsidiaries that are subject to
state regulations limiting dividends. Under these provisions, the corporation's
national bank subsidiaries and state-chartered bank subsidiaries could have
declared as of December 31, 1997 aggregate dividends of at least $462.9 million
without obtaining prior regulatory approval and without reducing the capital
below minimum regulatory levels. Additionally, the corporation's non-bank
subsidiaries could have declared dividends totaling $978.0 million at December
31, 1997.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as standby letters of credit) is eight
percent. The minimum Tier 1 capital to risk-adjusted assets is four percent.
Through implementation of its capital policies, the corporation has achieved a
strong capital position. The corporation's total capital and Tier 1 capital to
risk-adjusted assets ratios were 11.01 percent and 9.09 percent, respectively,
at December 31, 1997, compared with 10.42 percent and 8.63 percent,
respectively, at December 31, 1996. The Federal Reserve Board also requires bank
holding companies to comply with minimum leverage ratio guidelines. The leverage
ratio is the ratio of a bank holding company's Tier 1 capital to its total
consolidated quarterly average assets, less goodwill and certain other
intangible assets. The guidelines require a minimum leverage ratio of three
percent for bank holding companies that meet certain specified criteria. The
corporation's leverage ratio was 6.63 percent at December 31, 1997, compared
with 6.15 percent at December 31, 1996.
The Federal Deposit Insurance Act requires federal bank regulatory agencies to
take "prompt corrective action" with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements. A depository
institution's treatment for purposes of the prompt corrective action provisions
will depend upon how its capital levels compare to various capital measures and
certain other factors, as established by regulation.
27
Federal bank regulatory agencies have adopted regulations that classify insured
depository institutions into one of five capital-based categories. The
regulations use the total capital ratio, the Tier 1 capital ratio and the
leverage ratio as the relevant measures of capital. A depository institution is
(a) "well capitalized" if it has a risk-adjusted total capital ratio of at least
ten percent, a Tier 1 capital ratio of at least six percent and a leverage ratio
of at least five percent and is not subject to any order or written directive to
maintain a specific capital level; (b) "adequately capitalized" if it has a
risk-adjusted total capital ratio of at least eight percent, a Tier 1 capital
ratio of at least four percent and a leverage ratio of at least four percent
(three percent in some cases) and is not well capitalized; (c)
"undercapitalized" if it has a risk-adjusted total capital ratio of less than
eight percent, a Tier 1 capital ratio of less than four percent or a leverage
ratio of less than four percent (three percent in some cases); (d)
"significantly undercapitalized" if it has a risk-adjusted total capital ratio
of less than six percent, a Tier 1 capital ratio of less than three percent or a
leverage ratio of less than three percent; and (e) "critically undercapitalized"
if its tangible equity is less than two percent of total assets. As of December
31, 1997, all of the corporation's insured depository institutions met the
criteria for well capitalized institutions as set forth above.
Common stockholders' equity was $6,834.2 million at December 31, 1997, compared
with $5,875.4 million at December 31, 1996. The corporation's internal capital
growth rate (ICGR) in 1997 was 13.74 percent. The ICGR represents the rate at
which the corporation's average common equity grew as a result of earnings
retained (net income less dividends paid).
Since 1986, the corporation has repurchased common stock in the open market in a
systematic pattern to meet the common stock issuance requirements of the
corporation's Savings Investment Plans, the Long-Term Incentive Compensation
Plan, and other stock issuance requirements other than acquisitions accounted
for as pooling of interests. In November 1997, the corporation's board of
directors authorized additional purchases, upon such terms and conditions as
management approves, of 11,000,000 shares of the corporation's common stock, and
as of December 31, 1997, the remaining total common stock purchase authority was
7,876,000 shares.
During 1997, the corporation repurchased 3,526,000 shares of its common stock
for issuance in conjunction with specific purchase acquisitions that were
consummated during the year. In addition, approximately 13,102,000 shares were
repurchased during 1997 for benefit plans, including shares acquired related to
the vesting of options granted in 1996 under the corporation's Best Practices
PartnerShares plan, and other ongoing needs. During 1996, 7,462,000 shares were
repurchased for acquisition purposes and 10,475,000 shares were repurchased for
benefit plans and other ongoing needs.
All shares of the corporation's 10.24% Cumulative Preferred Stock, in the form
of depositary shares, were redeemed on January 2, 1996. The redemption price for
each depositary share, representing one-quarter of a share of preferred stock,
was the $25 stated value.
In October 1997, the board of directors approved an increase in the
corporation's quarterly common stock dividend to 16 1/2 cents per share from 15
cents, representing a 10 percent increase in the quarterly dividend rate. The
dividend increase reflects the corporation's continuing record of strong
earnings performance and the corporation's policy of maintaining the dividend
payout ratio in a range of 30 to 35 percent. The corporation also distributed a
two-for-one split in the form of a 100 percent common stock dividend on October
10, 1997 to stockholders of record on October 2, 1997. In the first quarter of
1997, the corporation increased its quarterly dividend rate 11.1 percent to 15
cents per common share. In the second quarter of 1996, the corporation increased
the quarterly cash dividend paid to common stockholders from 12 cents per share
to 13 1/2 cents per share, representing a 12.5 percent increase in the quarterly
dividend rate.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," (FAS 130) and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (FAS 131). FAS 130 requires disclosures of the components
of comprehensive income and the accumulated balance of other comprehensive
income within total stockholders' equity. FAS 131 requires disclosure of
selected information about operating segments including segment income, revenues
and asset data. Operating segments, as defined in FAS 131, would include those
components for which financial information is available and evaluated regularly
by the chief operating decision maker in assessing performance and making
resource allocation determinations for operating components such as those which
exceed 10 percent or more of combined revenue, income or assets. The corporation
will be required to adopt the provisions of FAS 130 and FAS 131 in 1998; these
standards are not expected to have a material impact on the corporation's
consolidated financial statements.
28
YEAR 2000
Management has initiated a company-wide program to prepare the corporation's
systems for year 2000 compliance. The year 2000 issue relates to systems
designed to use two digits rather than four to define the applicable year. The
corporation has incurred charges in testing and correcting its computer systems
to be year 2000 compliant which include internal staff costs as well as
consulting and other expenses. The corporation estimates these costs of year
2000 compliance to range between $100 million and $125 million over the period
1997-1999. As a result of modifications to existing systems, together with
conversions to new systems, management presently believes that the year 2000
issue will not pose a significant operational matter for the corporation.
ACQUISITIONS
The corporation regularly explores opportunities for acquisitions of financial
institutions and related businesses. Generally, management of the corporation
does not make a public announcement about an acquisition opportunity until a
definitive agreement has been signed.
In Note 2 to the consolidated financial statements on pages 38 and 39, the
corporation has disclosed completed acquisitions for the three years ended
December 31, 1997.
At December 31, 1997, the corporation had six pending acquisitions with total
assets of approximately $483.9 million, and it is anticipated that cash of $48.1
million and approximately 2.1 million common shares will be issued upon
completion of these acquisitions. The pending acquisitions, subject to approval
by regulatory agencies, are expected to be completed during 1998 and are not,
either individually or in the aggregate, significant to the financial statements
of the corporation.
29
Norwest Corporation and Subsidiaries
Consolidated Balance Sheets
In millions, except shares 1997 1996
--------- --------
At December 31,
- ---------------
ASSETS
Cash and due from banks............................................... $ 4,912.1 4,856.6
Interest-bearing deposits with banks.................................. 46.6 1,237.9
Federal funds sold and resale agreements.............................. 967.4 1,276.8
--------- --------
Total cash and cash equivalents.................................... 5,926.1 7,371.3
Trading account securities............................................ 486.9 186.5
Investment and mortgage-backed securities available for sale.......... 17,983.9 16,247.1
Investment securities (fair value $762.8 in 1997 and $745.2 in 1996).. 747.2 712.2
--------- --------
Total investment securities........................................ 18,731.1 16,959.3
Loans held for sale................................................... 3,407.0 2,827.6
Mortgages held for sale............................................... 8,848.0 6,339.0
Loans and leases, net of unearned discount............................ 42,521.6 39,381.0
Allowance for credit losses........................................... (1,233.9) (1,040.8)
--------- --------
Net loans and leases............................................... 41,287.7 38,340.2
Premises and equipment, net........................................... 1,295.5 1,200.9
Mortgage servicing rights, net........................................ 2,774.9 2,648.5
Interest receivable and other assets.................................. 5,783.0 4,302.1
--------- --------
Total assets....................................................... $88,540.2 80,175.4
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing................................................. $16,253.3 14,296.3
Interest-bearing.................................................... 39,203.8 35,833.9
--------- --------
Total deposits.................................................... 55,457.1 50,130.2
Short-term borrowings................................................ 9,557.0 7,572.6
Accrued expenses and other liabilities............................... 3,737.2 3,326.2
Long-term debt....................................................... 12,766.7 13,082.2
--------- --------
Total liabilities................................................. 81,518.0 74,111.2
Preferred stock...................................................... 267.4 249.8
Unearned ESOP shares................................................. (79.4) (61.0)
--------- --------
Total preferred stock............................................. 188.0 188.8
Common stock, $1 2/3 par value--authorized 1,000,000,000 shares:
Issued 769,113,149 and 751,067,250 shares in 1997 and 1996,
respectively....................................................... 1,281.9 625.9
Surplus.............................................................. 419.6 948.6
Retained earnings.................................................... 5,007.7 4,248.2
Net unrealized gains on securities available for sale................ 419.4 303.5
Notes receivable from ESOP........................................... (10.1) (11.1)
Treasury stock -- 10,493,685 and 13,661,838 common shares in 1997 and
1996, respectively.................................................. (274.8) (233.3)
Foreign currency translation......................................... (9.5) (6.4)
--------- --------
Total common stockholders' equity................................. 6,834.2 5,875.4
--------- --------
Total stockholders' equity........................................ 7,022.2 6,064.2
--------- --------
Total liabilities and stockholders' equity........................ $88,540.2 80,175.4
========= ========
See notes to consolidated financial statements.
30
Norwest Corporation and Subsidiaries
Consolidated Statements of Income
In millions, except per common share amounts 1997 1996 1995
-------- -------- --------
Years Ended December 31,
- -----------------------
INTEREST INCOME ON
Loans and leases................................................................. $4,552.8 4,301.5 3,955.8
Investment and mortgage-backed securities available for sale..................... 1,331.1 1,170.1 1,065.3
Investment securities............................................................ 28.3 36.2 83.8
Loans held for sale.............................................................. 231.8 254.3 195.7
Mortgages held for sale.......................................................... 462.0 468.5 366.2
Money market investments......................................................... 50.6 63.0 35.7
Trading account securities....................................................... 40.8 24.7 14.8
-------- ------- -------
Total interest income.......................................................... 6,697.4 6,318.3 5,717.3
-------- ------- -------
INTEREST EXPENSE ON
Deposits......................................................................... 1,446.7 1,324.9 1,156.3
Short-term borrowings............................................................ 439.4 454.1 515.8
Long-term debt................................................................... 777.9 838.0 775.9
-------- ------- -------
Total interest expense......................................................... 2,664.0 2,617.0 2,448.0
-------- ------- -------
NET INTEREST INCOME.............................................................. 4,033.4 3,701.3 3,269.3
Provision for credit losses...................................................... 524.7 394.7 312.4
-------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES............................ 3,508.7 3,306.6 2,956.9
-------- ------- -------
NON-INTEREST INCOME
Trust............................................................................ 353.7 296.3 240.7
Service charges on deposit accounts.............................................. 383.0 329.5 268.8
Mortgage banking................................................................. 875.5 821.5 535.5
Data processing.................................................................. 71.0 72.5 72.4
Credit card...................................................................... 123.0 122.2 132.8
Insurance........................................................................ 330.8 279.6 224.7
Other fees and service charges................................................... 388.7 294.4 230.3
Net investment and mortgage-backed securities available for sale gains (losses).. 37.9 (46.8) (45.1)
Net investment securities gains.................................................. -- -- 0.6
Net venture capital gains........................................................ 190.9 256.4 102.1
Trading.......................................................................... 78.6 35.3 39.9
Other............................................................................ 129.2 103.7 45.5
-------- ------- -------
Total non-interest income...................................................... 2,962.3 2,564.6 1,848.2
-------- ------- -------
NON-INTEREST EXPENSES
Salaries and benefits............................................................ 2,360.9 2,097.1 1,745.1
Net occupancy.................................................................... 326.3 316.3 254.4
Equipment rentals, depreciation and maintenance.................................. 341.4 327.7 272.7
Business development............................................................. 253.9 227.9 172.2
Communication.................................................................... 295.1 285.2 225.0
Data processing.................................................................. 167.6 163.0 136.2
Intangible asset amortization.................................................... 168.9 161.5 124.7
Other............................................................................ 507.2 511.0 452.0
-------- ------- -------
Total non-interest expenses.................................................... 4,421.3 4,089.7 3,382.3
-------- ------- -------
INCOME BEFORE INCOME TAXES....................................................... 2,049.7 1,781.5 1,422.8
Income tax expense............................................................... 698.7 627.6 466.8
-------- ------- -------
NET INCOME....................................................................... $1,351.0 1,153.9 956.0
======== ======= =======
PER COMMON SHARE
NET INCOME
Basic $ 1.78 1.55 1.39
Diluted 1.75 1.54 1.36
DIVIDENDS $ 0.615 0.525 0.450
See notes to consolidated financial statements.
31
Norwest Corporation and Subsidiaries
Consolidated Statements of Cash Flows
In millions 1997 1996 1995
----------- ---------- ----------
Years Ended December 31,
- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 1,351.0 1,153.9 956.0
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for credit losses...................................................... 524.7 394.7 312.4
Depreciation and amortization.................................................... 853.2 681.6 311.8
Gains on sales of loans, securities and other assets, net........................ (416.0) (230.3) (96.8)
Release of preferred shares to ESOP.............................................. 34.1 37.8 40.0
Purchases of trading account securities.......................................... (84,671.2) (58,280.4) (90,793.2)
Proceeds from sales of trading account securities................................ 84,602.9 58,279.6 90,718.4
Originations of mortgages held for sale.......................................... (55,284.6) (52,691.9) (35,045.1)
Proceeds from sales of mortgages held for sale................................... 52,836.8 55,244.7 31,771.4
Originations of loans held for sale.............................................. (1,216.9) (1,305.5) (901.0)
Proceeds from sales of loans held for sale....................................... 650.5 1,867.6 606.8
Deferred income taxes............................................................ 12.1 205.8 (70.4)
Interest receivable.............................................................. (62.4) (25.7) (94.1)
Interest payable................................................................. 39.0 38.0 148.0
Other assets, net................................................................ (1,841.9) (1,336.1) (1,853.4)
Other accrued expenses and liabilities, net...................................... 205.5 245.1 447.2
---------- --------- ---------
Net cash flows from (used for) operating activities............................. (2,383.2) 4,278.9 (3,542.0)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and paydowns of:
Investment securities............................................................ 0.8 106.2 345.6
Investment and mortgage-backed securities available for sale..................... 2,621.7 2,806.6 1,924.3
Proceeds from sales and calls of:
Investment securities............................................................ 85.7 138.7 154.4
Investment and mortgage-backed securities available for sale..................... 9,487.6 5,185.9 5,742.6
Purchases of:
Investment securities............................................................ (167.3) (169.1) (524.8)
Investment and mortgage-backed securities available for sale..................... (12,360.0) (7,341.4) (6,159.9)
Net change in banking subsidiaries' loans and leases.............................. (220.2) 1,751.9 (177.3)
Principal collected on non-bank subsidiaries' loans and leases.................... 8,456.7 5,503.1 5,725.2
Non-bank subsidiaries' loans and leases originated................................ (8,748.1) (6,950.4) (6,241.7)
Purchases of premises and equipment............................................... (310.6) (288.7) (208.0)
Proceeds from sales of premises and equipment and other real estate owned......... 108.2 105.7 50.4
Cash paid for acquisitions, net of cash and cash equivalents acquired............. (66.4) (2,469.0) (94.9)
Divestiture of branches, net of cash and cash equivalents paid.................... -- (14.6) (4.1)
---------- --------- ---------
Net cash flows from (used for) investing activities.............................. (1,111.9) (1,635.1) 531.8
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits, net..................................................................... 2,349.1 2,410.7 1,488.7
Short-term borrowings, net........................................................ 1,442.5 (1,078.3) (1,124.0)
Long-term debt borrowings......................................................... 3,302.9 4,343.6 7,329.1
Repayments of long-term debt...................................................... (4,233.0) (5,109.9) (3,274.8)
Issuances of preferred stock...................................................... -- -- 20.0
Repurchases of preferred stock.................................................... -- (112.7) (0.4)
Issuances of common stock......................................................... 149.6 82.4 65.4
Repurchases of common stock....................................................... (482.7) (355.1) (233.8)
Net decrease in notes receivable from ESOP........................................ 1.0 3.7 --
Dividends paid.................................................................... (479.5) (403.4) (337.8)
---------- --------- ---------
Net cash flows from (used for) financing activities.............................. 2,049.9 (219.0) 3,932.4
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. (1,445.2) 2,424.8 922.2
Cash and cash equivalents
Beginning of year................................................................ 7,371.3 4,946.5 4,024.3
---------- --------- ---------
End of year...................................................................... $ 5,926.1 7,371.3 4,946.5
========== ========= =========
See notes to consolidated financial statements.
32
Norwest Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Net
Unrealized
Gains
(Losses)
on Notes
Unearned Securities Receivable
Preferred ESOP Common Retained Available from Treasury
In millions, except shares Stock Shares Stock Surplus Earnings for Sale ESOP Stock
--------- -------- ------- ------- -------- ---------- --------- --------
BALANCE, DECEMBER 31, 1994....................... $ 526.7 (14.7) 538.5 578.8 2,950.0 (360.4) (13.3) (350.9)
Net income....................................... -- -- -- -- 956.0 -- -- --
Dividends on
Common Stock................................... -- -- -- -- (296.6) -- -- --
Preferred Stock................................ -- -- -- -- (41.2) -- -- --
Issuance of 6,578,500 common shares.............. -- -- -- 120.5 (135.6) -- -- 90.9
Issuance of 69,066,490 common shares.............
for acquisitions................................ -- -- 51.6 40.6 68.3 16.7 -- 95.4
Repurchase of 16,197,300 common shares........... -- -- -- -- -- -- -- (233.8)
Issuance of 63,300 preferred shares to ESOP...... 63.3 (65.8) -- 2.5 -- -- -- --
Release of preferred shares to ESOP.............. -- 41.6 -- (1.6) -- -- -- --
Conversion of 1,181,900 preferred shares
to 27,783,510 common shares..................... (268.4) -- 7.1 (6.6) (4.6) -- -- 272.5
Repurchase of 1,784 preferred shares............. (0.4) -- -- -- -- -- -- --
Sale of 100,000 preferred shares held --
by subsidiary................................... 20.0 -- -- -- -- -- -- --
Change in net unrealized gains (losses)
on securities available for sale................ -- -- -- -- -- 670.8 -- --
Foreign currency translation..................... -- -- -- -- -- -- -- --
------- ----- -------- ------- ------- ------ ----- ------
BALANCE, DECEMBER 31, 1995....................... 341.2 (38.9) 597.2 734.2 3,496.3 327.1 (13.3) (125.9)
Net income....................................... -- -- -- -- 1,153.9 -- -- --
Dividends on
Common stock................................... -- -- -- -- (385.6) -- -- --
Preferred stock................................ -- -- -- -- (17.8) -- -- --
Issuance of 7,490,268 common shares.............. -- -- -- 59.0 (71.2) -- -- 115.9
Issuance of 40,360,762 common shares
for acquisitions................................ -- -- 28.7 149.8 72.6 (1.6) (1.5) 98.8
Repurchase of 17,936,842 common shares........... -- -- -- -- -- -- -- (355.1)
Issuance of 59,000 preferred shares to ESOP...... 59.0 (61.3) -- 2.3 -- -- -- --
Release of preferred shares to ESOP.............. -- 39.2 -- (1.4) -- -- -- --
Conversion of 37,777 preferred shares
to 1,970,310 common shares...................... (37.7) -- -- 4.7 -- -- -- 33.0
Repurchase of 1,127,125 preferred shares......... (112.7) -- -- -- -- -- -- --
Change in net unrealized gains (losses)
on securities available for sale................ -- -- -- -- -- (22.0) -- --
Cash payments received on notes
receivable from ESOP............................ -- -- -- -- -- -- 3.7 --
Foreign currency translation..................... -- -- -- -- -- -- -- --
------- ----- -------- ------- ------- ------ ----- ------
BALANCE, DECEMBER 31, 1996....................... 249.8 (61.0) 625.9 948.6 4,248.2 303.5 (11.1) (233.3)
Net income....................................... -- -- -- -- 1,351.0 -- -- --
Dividends on
Common stock................................... -- -- -- -- (461.7) -- -- --
Preferred stock................................ -- -- -- -- (17.8) -- -- --
Stock split...................................... -- -- 635.2 (635.2) -- -- -- --
Issuance of 12,793,327 common shares............. -- -- -- 77.6 (152.1) -- -- 282.0
Issuance of 23,835,535 common shares
for acquisitions................................ -- -- 20.8 20.9 40.1 1.0 -- 132.0
Repurchase of 16,627,681 common shares........... -- -- -- 0.9 -- -- -- (483.6)
Issuance of 51,700 preferred shares to ESOP...... 51.7 (53.8) -- 2.1 -- -- -- --
Release of preferred shares to ESOP.............. -- 35.4 -- (1.3) -- -- -- --
Conversion of 34,074 preferred shares
to 1,212,871 common shares...................... (34.1) -- -- 6.0 -- -- -- 28.1
Change in net unrealized gains (losses)
on securities available for sale................ -- -- -- -- -- 114.9 -- --
Cash payments received on notes
receivable from ESOP............................ -- -- -- -- -- -- 1.0 --
Foreign currency translation..................... -- -- -- -- -- -- -- --
------- ----- -------- ------- ------- ------ ----- ------
BALANCE, DECEMBER 31, 1997....................... $ 267.4 (79.4) 1,281.9 419.6 5,007.7 419.4 (10.1) (274.8)
======= ===== ======== ======= ======= ====== ===== ======
Foreign
Currency
In millions, except shares Translation Total
----------- -----
BALANCE, DECEMBER 31, 1994....................... (8.3) 3,846.4
Net income....................................... -- 956.0
Dividends on
Common Stock................................... -- (296.6)
Preferred Stock................................ -- (41.2)
Issuance of 6,578,500 common shares.............. -- 75.8
Issuance of 69,066,490 common shares.............
for acquisitions................................ -- 272.6
Repurchase of 16,197,300 common shares........... -- (233.8)
Issuance of 63,300 preferred shares to ESOP...... -- --
Release of preferred shares to ESOP.............. -- 40.0
Conversion of 1,181,900 preferred shares
to 27,783,510 common shares..................... -- --
Repurchase of 1,784 preferred shares............. -- (0.4)
Sale of 100,000 preferred shares held
by subsidiary................................... -- 20.0
Change in net unrealized gains (losses)
on securities available for sale................ -- 670.8
Foreign currency translation..................... 2.5 2.5
---- -------
BALANCE, DECEMBER 31, 1995....................... (5.8) 5,312.1
Net income....................................... -- 1,153.9
Dividends on
Common stock................................... -- (385.6)
Preferred stock................................ -- (17.8)
Issuance of 7,490,268 common shares.............. -- 103.7
Issuance of 40,360,762 common shares
for acquisitions................................ -- 346.8
Repurchase of 17,936,842 common shares........... -- (355.1)
Issuance of 59,000 preferred shares to ESOP...... -- --
Release of preferred shares to ESOP.............. -- 37.8
Conversion of 37,777 preferred shares
to 1,970,310 common shares...................... -- --
Repurchase of 1,127,125 preferred shares......... -- (112.7)
Change in net unrealized gains (losses)
on securities available for sale................ -- (22.0)
Cash payments received on notes
receivable from ESOP............................ -- 3.7
Foreign currency translation..................... (0.6) (0.6)
---- -------
BALANCE, DECEMBER 31, 1996....................... (6.4) 6,064.2
Net income....................................... -- 1,351.0
Dividends on
Common stock................................... -- (461.7)
Preferred stock................................ -- (17.8)
Stock split...................................... -- --
Issuance of 12,793,327 common shares............. -- 207.5
Issuance of 23,835,535 common shares
for acquisitions................................ -- 214.8
Repurchase of 16,627,681 common shares........... -- (482.7)
Issuance of 51,700 preferred shares to ESOP...... -- --
Release of preferred shares to ESOP.............. -- 34.1
Conversion of 34,074 preferred shares
to 1,212,871 common shares...................... -- --
Change in net unrealized gains (losses)
on securities available for sale................ -- 114.9
Cash payments received on notes
receivable from ESOP............................ -- 1.0
Foreign currency translation..................... (3.1) (3.1)
---- -------
BALANCE, DECEMBER 31, 1997....................... (9.5) 7,022.2
==== =======
See notes to consolidated financial statements.
33
NORWEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Norwest Corporation (the corporation) is a diversified financial services
company which was organized in 1929 and is registered under the Bank Holding
Company Act of 1956, as amended. The corporation owns subsidiaries engaged in
banking and a variety of related businesses. The corporation provides retail,
commercial, and corporate banking services to its customers through banks
located in Arizona, Colorado, Illinois, Indiana, Iowa, Minnesota, Montana,
Nebraska, Nevada, New Mexico, North Dakota, Ohio, South Dakota, Texas, Wisconsin
and Wyoming. The corporation provides additional financial services to its
customers through subsidiaries engaged in various businesses, principally
mortgage banking, consumer finance, equipment leasing, agricultural finance,
commercial finance, securities brokerage and investment banking, insurance
agency services, computer and data processing services, trust services,
mortgage-backed securities servicing and venture capital investment.
The accounting and reporting policies of the corporation and its subsidiaries
conform to generally accepted accounting principles and general practices within
the financial services industry. The more significant accounting policies are
summarized below.
Consolidation The consolidated financial statements include the accounts of the
corporation and all subsidiaries. Significant 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.
Supplemental disclosures of cash flow information for the years ended December
31 include:
In millions 1997 1996 1995
-------- ------- -------
Interest.......................................................................... $2,625.0 2,579.0 2,299.9
Income taxes...................................................................... 527.2 43.0 533.1
Transfer of loans to other real estate owned...................................... 66.5 51.3 28.6
See Notes 2 and 10 for certain non-cash common and preferred stock transactions.
In 1995, credit card receivables totaling $1,007.4 million were transferred to
the loans held for sale category pending their sale in 1996.
Investment Securities Investment and mortgage-backed securities which the
corporation intends to hold until maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts using a method that
approximates level yield. Investment and mortgage-backed securities which the
corporation intends to hold for indefinite periods of time, including securities
that management intends to use as part of its asset/liability management
strategy, or that may be sold in response to changes in interest rates, changes
in prepayment risk, securities on which call options have been written, the need
to increase regulatory capital or similar factors, are classified as available
for sale.
Investment and mortgage-backed securities available for sale are measured at
fair value. Net unrealized gains and losses, net of deferred income taxes, on
investments and mortgage-backed securities available for sale are excluded from
earnings and reported as a separate component of stockholders' equity until
realized. The classification of investment securities is determined at the date
of purchase and subsequent transfers, if any, between security classifications
are recorded at fair value.
The corporation's venture capital subsidiaries classify equity securities that
are publicly traded as available for sale and non-publicly traded equity
securities as held for investment.
Realized gains and losses on sales of investment securities are computed by the
specific identification method at the time of disposition and are recorded in
non-interest income.
Trading account securities are purchased with the intent to earn a profit by
trading or selling the security. These securities are stated at fair value.
Adjustments to the fair value are reported in non-interest income.
34
Loans and Leases Loans are stated at their principal amount and interest income
is recognized on an accrual basis. With the exception of certain consumer and
residential real estate loans, loans and leases on which payments are past due
for 90 days are placed on non-accrual status, unless such loan is in the process
of collection and, in management's opinion, is fully secured. Residential real
estate loans over 120 days past due are included in non-accrual while other
consumer loans are generally written off when deemed uncollectible or when they
reach a predetermined number of days past due depending upon loan product,
country, terms and other factors. When a loan is placed on non-accrual status,
uncollected interest accrued in prior years is charged against the allowance for
credit losses. A loan is returned to accrual status when principal and interest
are no longer past due and collectibility is no longer doubtful.
Restructured loans are those on which concessions in terms have been made as a
result of deterioration in a borrower's financial condition. Interest on these
loans is accrued at the new terms.
Under the corporation's credit policies and practices, impaired loans include
all non-accrual and restructured commercial, agricultural, construction, and
commercial real estate loans, but exclude certain consumer loans, residential
real estate loans and lease financing classified as non-accrual. Loan impairment
is measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
observable market price of the loan or the fair value of the collateral if the
loan is collateral dependent.
Lease financing assets include aggregate lease rentals, net of related unearned
income, which includes deferred investment tax credits, and related nonrecourse
debt. Leasing income is recognized as a constant percentage of outstanding lease
financing balances over the lease terms.
Unearned discount on consumer loans is recognized by the interest method or
other methods for which results are not materially different from the interest
method.
Loan origination fees and costs incurred to extend credit are deferred and
amortized over the term of the loan and the loan commitment period as a yield
adjustment. Loan fees representing adjustments of interest rate yield are
generally deferred and amortized into interest income over the term of the loan
using the interest method. Loan commitment fees are generally deferred and
amortized into non-interest income on a straight-line basis over the commitment
period.
Allowance for Credit Losses The allowance for credit losses is based upon
management's evaluation of a number of factors, including credit loss
experience, risk analyses of loan portfolios, as well as current and expected
economic conditions.
Charge-offs are loans or portions thereof evaluated as uncollectible. Loans made
by certain domestic consumer finance subsidiaries, unless fully secured by real
estate, are generally charged off when the loan is 90 days or more contractually
delinquent and no payment has been received for 90 days. Other consumer loans
are generally charged off when the loan is 120 days or more contractually past
due or other delinquency criteria have been met. Credit card receivables are
charged off when they become 180 days past due or sooner upon receipt of a
bankruptcy notice.
Loans Held for Sale Student loans are classified as held for sale because the
corporation does not intend to hold these loans until maturity or sales of the
loans are pending. Such loans are carried at the lower of aggregate cost or
market value. Gains and losses are recorded in non-interest income, based on the
difference between sales proceeds and carrying value.
Mortgages Held For Sale Mortgages held for sale are stated at the lower of
aggregate cost or market value. The determination of market value includes
consideration of all open positions, outstanding commitments from investors, and
related fees paid.
Gains and losses on sales of mortgages are recognized at settlement dates and
are determined by the difference between sales proceeds and the carrying value
of the mortgages. Gains and losses are recorded in non-interest income.
Mortgage Servicing Rights The corporation recognizes as separate assets the
rights to service mortgage loans for others, whether the servicing rights are
acquired through purchases or loan originations. The fair value of capitalized
mortgage servicing rights is based upon the present value of estimated future
cash flows. Based upon current fair values and considering outstanding positions
of derivative financial instruments utilized as hedges, capitalized mortgage
servicing rights are periodically assessed for impairment, which is recognized
in the statement of income during the period in which impairment occurs as an
adjustment to the corresponding valuation allowance. For purposes of performing
its impairment evaluation, the corporation stratifies its portfolio on the basis
of certain risk characteristics including loan type and note rate. Capitalized
mortgage servicing rights are amortized over the period of estimated net
servicing income and take into account appropriate prepayment assumptions.
35
Effective January 1, 1997, the corporation adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125 requires
that after a transfer of financial assets, the corporation must recognize the
financial and servicing assets controlled and liabilities incurred, and
derecognize financial assets and liabilities in which control is surrendered or
debt is extinguished. In such cases, servicing assets are determined based on
estimated future revenues from contractually specified servicing fees and other
ancillary revenues that are expected to compensate the corporation for
performing the servicing. The adoption of FAS 125 has not had a material effect
on the corporation's consolidated financial statements.
Premises and Equipment Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Owned properties are depreciated on a
straight-line basis over their estimated useful lives. Capital lease assets and
leasehold improvements are amortized over lease terms on a straight-line basis.
The costs of improvements are capitalized. Maintenance and repairs, as well as
gains and losses on dispositions of premises and equipment, are included in non-
interest expenses.
Other Real Estate Owned Other real estate owned is stated at the lower of cost
or 70 percent of current appraised value (which is not materially different from
fair value minus estimated costs to sell). When a property is acquired, the
excess of the recorded investment in the property over fair value, if any, is
charged to the allowance for credit losses. Subsequent declines in the estimated
fair value, net operating results and gains or losses on disposition of the
property are included in other non-interest expenses.
Goodwill and Other Intangibles Goodwill represents the unamortized cost of
acquiring subsidiaries and other net assets in excess of the appraised value of
such net assets at the date of acquisition. Goodwill is amortized over a maximum
15-year period using the straight-line method. Other identifiable intangibles
are amortized either on an accelerated basis or straight-line, over various
periods which do not exceed 15 years.
Derivative Financial Instruments The corporation and its subsidiaries use a
variety of derivative financial instruments as part of an overall interest rate
risk management strategy and in conjunction with their customer service and
trading activities. Derivative financial instruments utilized include interest
rate swaps, interest rate futures, caps, floors, options and forward contracts.
Interest rate swaps are used principally as a tool to manage the interest
sensitivity of the corporation's balance sheet. These contracts represent an
exchange of interest payment streams based on an agreed-upon notional principal
amount with at least one stream based on a specified floating-rate index. The
underlying principal balances of the assets or liabilities are not affected. Net
settlement amounts are reported as adjustments to interest income or interest
expense, as appropriate.
Options are contracts which grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell the underlying
financial instrument at a set price during a period or at a specified date in
the future. The writer of the option is obligated to purchase or sell the
underlying financial instrument if the purchaser chooses to exercise the option.
Premiums paid on purchased put options which qualify as hedges are deferred and
amortized over the terms of the contracts. Purchased put options are marked to
market daily with losses limited to the amount of the option fee. Losses are
recognized currently on put options sold when the market value of the underlying
security falls below the put price plus the premium received. A premium received
on a covered call option sold is deferred until the option matures. If the
market value of the related asset is greater than the option strike price, the
option will be exercised and the premium recorded as an adjustment of the gain
or loss recognized. If the option expires, the premium is recorded in other non-
interest income. Uncovered call options sold are marked to market daily with the
gain limited to the amount of the option fee.
Interest rate futures and forward contracts are commitments to either purchase
or sell a financial instrument at a specified price on an agreed-upon future
date. These contracts may be settled either in cash or by delivery of the
underlying financial instruments. Interest rate caps and floors require the
seller to pay the purchaser, at specified dates, the amount, if any, by which
the market interest rate exceeds the agreed-upon cap or falls below the agreed-
upon floor, applied to a notional principal amount. Positions which are
designated and effectively hedge specific mortgage servicing risk tranches are
correlated based on certain duration and convexity parameters. Realized gains
and losses on positions used in the management of specific asset and liability
positions in banking operations are deferred and amortized over the terms of the
items hedged as adjustments to interest income or interest expense. Within
mortgage banking operations, realized and unrealized gains and losses on
positions used as hedges of mortgages held for sale are deferred and recognized
upon sale of the mortgages. Realized gains and losses on positions used as
hedges of capitalized mortgage servicing rights are deferred and amortized over
the estimated remaining life of the hedged asset.
36
Derivative financial instruments which are not hedges of specific assets,
liabilities or commitments are included in the trading account.
For a discussion of the risks associated with derivatives and the corporation's
policies used to monitor such risks refer to Note 15, Derivative Activities.
Income Taxes The corporation and its United States subsidiaries file a
consolidated federal income tax return. The effects of current or deferred taxes
are recognized as a current and deferred tax liability or asset based on current
tax laws. Accordingly, income tax expense in the consolidated statements of
income includes charges or credits to properly reflect the current and deferred
tax asset or liability. Foreign taxes paid are applied as credits to reduce
federal income taxes payable.
Foreign Currency Translation The accounts of the corporation's foreign consumer
finance subsidiaries are measured using local currency as the functional
currency. Assets and liabilities are translated into United States dollars at
period-end exchange rates, and income and expense accounts are translated at
average monthly exchange rates. Net exchange gains or losses resulting from such
translation are excluded from net income and included as a separate component of
stockholders' equity.
Stock-Based Compensation The corporation accounts for its stock incentive plans
in accordance with Accounting Principles Board Opinion No. 25 (APB Opinion No.
25) and related Interpretations. The corporation adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (FAS
123) in 1996. The corporation has included in Note 11, Employee Benefit and
Stock Incentive Plans the impact of the fair value of employee stock-based
compensation plans on net income and earnings per share on a pro forma basis for
awards granted since January 1, 1995, pursuant to FAS 123.
Earnings Per Share Basic earnings per share, pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," (FAS 128) is determined
using net income, adjusted for preferred stock dividends, and divided by
weighted average common shares outstanding. Diluted earnings per share, as
defined by FAS 128, is computed based on the amount of income that would be
available for each common share, assuming all dilutive potential common shares
were issued. Such dilutive potential common shares include stock options, the 6
3/4 percent convertible subordinated debentures and Cumulative Convertible
Preferred Stock, Series B. Amounts used in the determination of basic and
diluted earnings per share are shown in the table below.
In millions, except shares
1997 1996 1995
------------ ----------- -----------
Net Income...................................................... $ 1,351.0 1,153.9 956.0
Less dividends accrued on preferred stock....................... 17.8 17.8 39.9
------------ ----------- -----------
Income available to common stockholders - basic................. 1,333.2 1,136.1 916.1
Add interest expense and amortization of debt expense,
net of related taxes, on convertible subordinated debentures
and dividends accrued on convertible preferred stock.......... -- -- 10.6
------------ ----------- -----------
Income available to common stockholders - diluted............... $ 1,333.2 1,136.1 926.7
============ =========== ===========
Weighted average common shares outstanding...................... 750,058,690 731,836,430 658,363,600
Adjustments for dilutive securities:
Assumed exercise of stock options.............................. 9,986,137 7,582,902 4,995,384
Assumed conversion of preferred stock.......................... -- -- 16,760,474
Assumed conversion of convertible subordinated debentures...... 34,800 35,794 48,340
------------ ----------- -----------
Diluted common shares........................................... 760,079,627 739,455,126 680,167,798
============ =========== ===========
37
2. BUSINESS COMBINATIONS
The corporation regularly explores opportunities for acquisitions of financial
institutions and related businesses. Generally, management of the corporation
does not make a public announcement about an acquisition opportunity until a
definitive agreement has been signed.
Transactions completed in the years ended December 31, 1997, 1996 and 1995
include:
In millions, except share amounts Common
Cash Shares Method of
Date Assets Paid Issued Accounting
---- ------ ---- ------ ----------
1997
Franklin Federal Bancorp., F.S.B., Austin, Texas (B).......... January 1 $ 621.3 $ 90.0 -- Purchase of assets
Central Bancorporation, Inc., Fort Worth, Texas (B)........... January 28 1,105.3 -- 9,399,576 Pooling of interests*
Reliable Financial Services, Inc., San Juan, Puerto Rico (F).. February 21 38.6 -- 1,753,086 Pooling of interests*
Statewide Mortgage Company, Birmingham, Alabama (B)........... February 26 27.9 -- 1,049,992 Purchase
The United Group, Inc., Charlotte, North Carolina (F)......... March 21 40.6 -- 648,348 Purchase
Farmers National Bancorp, Inc., Geneseo, Illinois (B)......... March 24 197.6 -- 1,207,198 Purchase
The First National Bankshares, Inc.,
Tucumcari, New Mexico (B)................................... June 17 90.2 -- 608,900 Purchase
Tennessee Credit Corporation, Nashville, Tennessee (F)........ July 18 13.4 3.3 -- Purchase
Western National Trust Company, National
Association, Odessa, Texas (B).............................. July 31 0.3 0.9 -- Purchase
Fidelity Acceptance Corporation, St. Louis, Missouri (F)...... August 31 1,134.5 343.6 -- Purchase
The Bank of the Southwest, National Association
Pagosa Springs, Colorado (B)................................ September 2 85.4 -- 490,790 Purchase
International Bancorporation, Inc.,
Golden Valley, Minnesota (B)................................ October 21 483.4 -- 3,601,935 Pooling of interests*
Subsidiaries of Cityside Holding, L.L.C.,
Eden Prairie, Minnesota (F)................................. October 30 104.2 42.2 -- Purchase
J.L.J. Financial Services Corporation,
Montvale, New Jersey (B).................................... October 31 26.0 6.4 -- Purchase
Myers Bancshares Inc., Dallas, Texas (B)...................... November 14 134.5 -- 613,247 Purchase
Packers Management Company, Inc.,
Omaha, Nebraska (B)......................................... November 25 162.0 -- 1,171,161 Purchase
First Valley Bank Group, Inc., Los Fresnos, Texas (B)......... December 1 519.1 -- 3,291,302 Pooling of interests*
--------- ------ ----------
$ 4,784.3 $486.4 23,835,535
========= ====== ==========
1996
The Bank of Robstown, Robstown, Texas (B)..................... January 12 $ 71.4 $ 9.5 -- Purchase
AMFED Financial, Inc., Reno, Nevada (B)....................... January 18 1,518.8 -- 12,093,272 Pooling of interests*
Irene Bancorporation, Inc., Viborg, South Dakota (B).......... January 31 39.7 7.1 -- Purchase
Canton Bancshares, Inc., Canton, Illinois (B)................. February 15 49.7 -- 558,540 Purchase
Henrietta Bancshares, Inc., Henrietta, Texas (B).............. March 12 164.0 24.4 -- Purchase
Victoria Bankshares, Inc., Victoria, Texas (B)................ April 11 1,918.7 -- 17,021,602 Pooling of interests*
The Prudential Home Mortgage Company, Inc. (M)................ May 7 3,335.6 3,335.6 -- Purchase of assets
Cardinal Credit Corporation, Lexington, Kentucky (F).......... May 13 34.2 33.6 -- Purchase of assets
Benson Financial Corporation, San Antonio, Texas (B).......... May 31 463.8 -- 4,088,070 Pooling of interests*
Regional Bank of Colorado, N.A., Rifle, Colorado (B).......... June 1 56.0 -- 709,934 Purchase
AmeriGroup, Incorporated, Minneapolis, Minnesota (B).......... June 4 155.1 -- 1,832,400 Purchase
Union Texas Bancorporation, Inc., Laredo, Texas (B)........... June 27 245.0 -- 789,958 Purchase
B & G Investment Company, San Antonio, Texas (B).............. July 3 71.2 -- 541,996 Purchase
PriMerit Bank, F.S.B., Las Vegas, Nevada (B).................. July 19 1,577.6 190.7 -- Purchase of assets
DUMAE Insurance Agency, Inc., Baltic, South Dakota (B)........ July 25 0.2 0.2 -- Purchase of assets
Aman Collection Service, Inc., Aberdeen, South Dakota (F)..... August 2 4.1 -- 1,200,000 Pooling of interests*
Rapid Finance, Inc., Jacksonville, Mississippi (F)............ August 16 28.6 28.6 -- Purchase of assets
National Business Finance, Inc., Denver, Colorado (B).........September 30 8.4 7.5 -- Purchase
American Bank Moorhead, Moorhead, Minnesota (B)............... October 1 154.7 23.9 -- Purchase
38
In millions, except share amounts Common
Cash Shares Method of
Date Assets Paid Issued Accounting
---- ------ ---- ------ ----------
1996, CONTINUED
Texas Bancorporation, Inc., Odessa, Texas (B)............. November 1 173.6 -- 1,524,990 Purchase
West Columbia National Bank, West Columbia, Texas (B)..... December 27 34.4 5.0 -- Purchase
--------- -------- ----------
$10,104.8 $3,666.1 40,360,762
========= ======== ==========
1995
Ken-Caryl Investment Company, Littleton, Colorado (B)..... January 5 $ 29.0 $ -- 299,548 Purchase
American Republic Bancshares, Inc.,
Belen, New Mexico (B).................................. January 6 222.0 -- 2,413,092 Purchase
Independent Bancorp of Arizona, Inc.,
Phoenix, Arizona (B)................................... February 12 1,600.0 159.7 -- Purchase
Parker Bankshares, Incorporated, Parker, Colorado (B)..... February 28 59.0 -- 789,990 Pooling of interests*
Directors Mortgage Loan Corporation,
Riverside, California (M).............................. March 13 270.8 -- 21,091,556 Pooling of interests*
Babbscha Company, Fridley, Minnesota (B).................. April 1 53.0 -- 551,842 Purchase
The First National Bank of Bay City, Bay City, Texas (B).. April 10 146.0 -- 1,865,284 Purchase
Goldenbanks of Colorado, Inc., Golden, Colorado (B)....... May 1 361.3 -- 5,433,258 Pooling of interests*
ITT Financial Corporation - Island Finance business (F)... May 4 1,016.1 574.3 -- Purchase
New Braunfels Bancshares, Inc., New Braunfels, Texas (B).. May 10 43.1 7.0 -- Purchase
United Texas Financial Corporation,
Wichita Falls, Texas (B)............................... June 1 296.3 -- 3,031,702 Purchase
First American National Bank, Chandler, Arizona (B)....... June 1 39.0 -- 385,662 Pooling of interests*
First Tule Bancorp, Inc., Tulia, Texas (B)................ June 1 61.4 8.3 -- Purchase
The Ryland Group, Inc. - Mortgage-related
institutional financial services business (B).......... June 30 -- 47.1 -- Purchase
Comfort Bancshares, Inc., Comfort, Texas (B).............. July 10 41.1 6.2 -- Purchase
Valley-Hi Investment Company, San Antonio, Texas (B)...... August 1 121.6 -- 855,996 Purchase
Dickinson Bancorporation, Inc.,
Dickinson, North Dakota (B)............................ August 8 123.3 -- 1,083,182 Purchase
Alice Bancshares, Inc., Alice, Texas (B).................. September 15 187.6 40.2 -- Purchase
State National Bank, El Paso, Texas (B)................... October 2 1,052.3 157.0 -- Purchase
Liberty National Bank, Austin, Texas (B).................. October 16 167.1 27.3 -- Purchase
The Foothill Group, Inc., Los Angeles, California (B)..... October 19 905.1 -- 31,265,378 Pooling of interests*
The First National Bank in Big Spring,
Big Spring, Texas (B).................................. November 1 216.9 38.0 -- Purchase
Beacon Business Credit Corp.,
Boston, Massachusetts (B).............................. December 1 30.6 12.5 -- Purchase
--------- -------- ----------
$ 7,042.6 $1,077.6 69,066,490
========= ======== ==========
*Pooling of interests transaction was not material to the corporation's
consolidated financial statements; accordingly, previously reported results
were not restated.
B - Banking Group; M - Mortgage Banking; F - Norwest Financial
At December 31, 1997, the corporation had six pending acquisitions with total
assets of approximately $483.9 million, and it is anticipated that cash of $48.1
million and approximately 2.1 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 1998 and
are not significant to the financial statements of the corporation, either
individually or in the aggregate.
39
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 $328 million and $580 million for the years ended December 31,
1997 and 1996, respectively.
4. INVESTMENT SECURITIES
Information related to the amortized cost and fair values of investment
securities at December 31 is provided in the table below.
Amortized Cost and Fair Values of Investment Securities
1997 1996
---------------------------------------------------- -------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized
Cost Gains Losses Value Cost Gains
--------- -------------- ----------- -------- --------- --------------
In millions
Investment securities available for sale:
U.S. Treasury and
federal agencies..................... $ 1,059.0 22.7 (5.3) 1,076.4 1,173.6 13.4
State, municipal and
housing-tax exempt................... 1,420.5 70.4 (2.4) 1,488.5 917.5 37.6
Other................................... 787.4 250.4 (4.1) 1,033.7 868.8 356.9
--------- ----- ----- -------- -------- -----
Total investment
securities available
for sale................................ 3,266.9 343.5 (11.8) 3,598.6 2,959.9 407.9
--------- ----- ----- -------- -------- -----
Mortgage-backed securities
available for sale:
Federal agencies....... ................ 13,812.9 326.4 (12.1) 14,127.2 12,651.0 194.4
Collateralized mortgage
obligations........... ................ 255.8 4.9 (2.6) 258.1 165.5 7.8
--------- ----- ----- -------- -------- -----
Total mortgage-backed
securities available
for sale................................ 14,068.7 331.3 (14.7) 14,385.3 12,816.5 202.2
--------- ----- ----- -------- -------- -----
Total investment and
mortgage-backed securities
available for sale....................... 17,335.6 674.8 (26.5) 17,983.9 15,776.4 610.1
Other securities held
for investment........................... 747.2 17.9 (2.3) 762.8 712.2 35.8
--------- ----- ----- -------- -------- -----
Total investment securities............... $18,082.8 692.7 (28.8) 18,746.7 16,488.6 645.9
========= ===== ===== ======== ======== =====
1996
----------------------
Gross
Unrealized Fair
Losses Value
----------------------
In millions
Investment securities available for sale:
U.S. Treasury and
federal agencies.................... (6.9) 1,180.1
State, municipal and
housing-tax exempt.................. (3.2) 951.9
Other.................................. (67.5) 1,158.2
------ --------
Total investment
securities available
for sale............................... (77.6) 3,290.2
------ --------
Mortgage-backed securities
available for sale:
Federal agencies....................... (61.2) 12,784.2
Collateralized mortgage
obligations............................ (0.6) 172.7
------ --------
Total mortgage-backed
securities available
for sale............................... (61.8) 12,956.9
------ --------
Total investment and
mortgage-backed securities
available for sale..................... (139.4) 16,247.1
Other securities held
for investment......................... (2.8) 745.2
------ --------
Total investment securities............... (142.2) 16,992.3
====== ========
The carrying and fair values of investment securities by maturity at December
31 were:
1997 1996
--------------------- ------------------
In millions Carrying Fair Carrying Fair
Value Value Value Value
--------- -------- -------- --------
AVAILABLE FOR SALE:
Investment securities:
In one year or less................................ $ 504.1 504.1 649.8 649.8
After one year through five years.................. 1,319.1 1,319.1 1,295.4 1,295.4
After five years through ten years................. 595.9 595.9 372.3 372.3
After ten years.................................... 1,179.5 1,179.5 972.7 972.7
--------- -------- -------- --------
Total investment securities available for sale.... 3,598.6 3,598.6 3,290.2 3,290.2
--------- -------- -------- --------
Mortgage-backed securities:
In one year or less................................ 79.7 79.7 132.8 132.8
After one year through five years.................. 340.3 340.3 409.9 409.9
After five years through ten years................. 151.3 151.3 152.0 152.0
After ten years.................................... 13,814.0 13,814.0 12,262.2 12,262.2
--------- -------- -------- --------
Total mortgage-backed securities
available for sale............................... 14,385.3 14,385.3 12,956.9 12,956.9
--------- -------- -------- --------
Total investment and mortgage-backed
securities available for sale...................... 17,983.9 17,983.9 16,247.1 16,247.1
--------- -------- -------- --------
HELD FOR INVESTMENT:
In one year or less................................ -- -- -- --
After one year through five years.................. 332.0 347.6 294.8 327.8
After five years through ten years................. -- -- -- --
After ten years.................................... 415.2 415.2 417.4 417.4
--------- -------- -------- --------
Total investment securities held for investment..... 747.2 762.8 712.2 745.2
--------- -------- -------- --------
Total investment securities......................... $18,731.1 18,746.7 16,959.3 16,992.3
========= ======== ======== ========
40
In November 1995, the Financial Accounting Standards Board announced it would
permit companies to make a one-time reclassification of their investment
securities in conjunction with the issuance of a Special Report entitled "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities." The corporation transferred the remaining
federal agency and state, municipal and housing tax exempt securities with
amortized costs of $27.4 million and $665.2 million, respectively, from held for
investment to available for sale as of December 31, 1995. Unrealized gains
related to such securities transferred amounted to $25.3 million.
Investment securities (including securities available for sale) carried at
$7,394.4 million and $6,515.9 million were pledged to secure public or trust
deposits or for other purposes at December 31, 1997 and 1996, respectively.
Interest income on investment securities for each of the three years ended
December 31 was:
In millions 1997 1996 1995
------------ ------------ ------------
Investment securities available for sale:
U.S. Treasury and federal agencies..................................... $ 149.4 79.8 73.5
State, municipal and housing-tax exempt................................ 74.6 53.5 6.5
Other.................................................................. 48.7 48.5 39.5
-------- ------- -------
Total investment securities available for sale..................... 272.7 181.8 119.5
-------- ------- -------
Mortgage-backed securities available for sale:
Federal agencies....................................................... 1,040.6 974.7 934.1
Collateralized mortgage obligations.................................... 17.8 13.6 11.7
-------- ------- -------
Total mortgage-backed securities available for sale................ 1,058.4 988.3 945.8
-------- ------- -------
Total investment and mortgage-backed securities available for sale........ 1,331.1 1,170.1 1,065.3
Other securities held for investment...................................... 28.3 36.2 83.8
-------- ------- -------
Total investment securities............................................... $1,359.4 1,206.3 1,149.1
======== ======= =======
Total gross realized gains and gross realized losses from the sale of investment
securities for each of the three years ended December 31 were:
In millions 1997 1996 1995
------------- ------------- -------------
AVAILABLE FOR SALE:
Investment securities:
Gross realized gains................................................... $ 76.5 16.1 14.8
Gross realized losses.................................................. (55.4) (71.1) (21.3)
------ ----- -----
Net realized gains (losses)............................................ 21.1 (55.0) (6.5)
Mortgage-backed securities:
Gross realized gains................................................... 28.0 97.5 50.5
Gross realized losses.................................................. (11.2) (89.3) (89.1)
------ ----- -----
Net realized gains (losses)............................................ 16.8 8.2 (38.6)
------ ----- -----
Net realized gains (losses) on investment
and mortgage-backed securities available for sale...................... $ 37.9 (46.8) (45.1)
====== ===== =====
HELD FOR INVESTMENT:
Investment securities:
Gross realized gains................................................... $ -- -- 0.7
Gross realized losses.................................................. -- -- (0.1)
------ ----- -----
Net realized gains (losses) on
investment securities held for investment................................ $ -- -- 0.6
====== ===== =====
VENTURE CAPITAL SECURITIES:
Gross realized gains................................................... $217.4 269.3 129.3
Gross realized losses.................................................. (26.5) (12.9) (27.2)
------ ----- -----
Net venture capital realized gains........................................ $190.9 256.4 102.1
====== ===== =====
41
Certain investment securities with a total amortized cost of $100.6 million,
$138.7 million and $97.0 million were sold by the corporation during 1997, 1996
and 1995, respectively, due to significant deterioration in the creditworthiness
of the related issuers or called by the issuers prior to maturity.
5. LOANS AND LEASES
The carrying values of loans and leases at December 31 were:
In millions 1997 1996
----------- -----------
Commercial, financial and industrial.............................................. $10,680.2 10,204.9
Agricultural...................................................................... 1,276.2 1,107.7
Real estate
Secured by 1-4 family residential properties................................... 10,746.6 10,376.3
Secured by development properties.............................................. 2,131.4 2,104.5
Secured by construction and land development................................... 1,005.8 943.8
Secured by owner-occupied properties........................................... 2,866.1 2,644.6
Consumer.......................................................................... 12,298.0 10,431.2
Credit card....................................................................... 1,632.2 1,566.2
Lease financing................................................................... 921.2 812.4
Foreign
Consumer....................................................................... 864.0 774.9
Commercial..................................................................... 212.4 187.7
--------- --------
Total loans and leases....................................................... 44,634.1 41,154.2
Unearned discount................................................................. (2,112.5) (1,773.2)
--------- --------
Total loans and leases, net of
unearned discount........................................................... $42,521.6 39,381.0
========= ========
Changes in the allowance for credit losses were:
In millions 1997 1996 1995
-------- ------- ------
Balance at beginning of year........................................................... $1,040.8 917.2 789.9
Allowances related to assets
acquired, net........................................................................ 168.1 111.3 119.1
Provision for credit losses........................................................... 524.7 394.7 312.4
Credit losses......................................................................... (652.5) (511.8) (421.2)
Recoveries............................................................................ 152.8 129.4 117.0
-------- ------- ------
Net credit losses.................................................................... (499.7) (382.4) (304.2)
-------- ------- ------
Balance at end of year................................................................. $1,233.9 1,040.8 917.2
======== ======= ======
Total non-performing assets and 90-day past due loans and leases at December 31 were:
In millions 1997 1996
-------- -------
Impaired loans:
Non-accrual........................................................................... $ 89.4 94.0
Restructured.......................................................................... 0.1 0.2
-------- -------
Total impaired loans................................................................. 89.5 94.2
Other non-accrual loans and leases..................................................... 88.7 62.5
-------- -------
Total non-accrual and restructured
loans and leases..................................................................... 178.2 156.7
Other real estate owned................................................................ 50.3 43.3
-------- -------
Total non-performing assets........................................................... 228.5 200.0
Loans and leases past due 90 days or more*............................................. 153.8 110.7
-------- -------
Total non-performing assets and
90-day past due loans and leases..................................................... $ 382.3 310.7
======== =======
*Excludes non-accrual and restructured loans and leases.
42
The average balances of impaired loans for the years ended December 31, 1997 and
1996 were $103.4 million and $113.1 million, respectively. The allowance for
credit losses related to impaired loans at December 31, 1997 and 1996 was $33.5
million and $31.4 million, respectively. Impaired loans of $1.8 million and $0.9
million were not subject to a related allowance for credit losses at December
31, 1997 and 1996, respectively, because of the net realizable value of loan
collateral, guarantees and other factors.
The effect of non-accrual and restructured loans on interest income for each of
the three years ended December 31 was:
In millions 1997 1996 1995
--------------- --------------- ---------------
Interest income
As originally contracted............................................. $20.6 25.1 15.3
As recognized........................................................ (4.4) (7.3) (3.6)
----- ---- ----
Reduction of interest income......................................... $16.2 17.8 11.7
===== ==== ====
There were no material commitments to lend additional funds to customers whose
loans were classified as non-accrual or restructured at December 31, 1997.
Leveraged lease financing amounted to $167.7 million and $151.1 million at
December 31, 1997 and 1996, respectively. Deferred income taxes related to
leveraged leases amounted to $132.6 million and $115.5 million at the same
dates, respectively.
Loans and leases totaling $4,697.3 million and $4,614.6 million were pledged to
secure Federal Home Loan Bank (FHLB) advances at December 31, 1997 and 1996,
respectively.
Loans to executive officers and directors (and their associates) of the
corporation and its significant subsidiaries, made in the ordinary course of
business, were not material at December 31, 1997 and 1996.
6. PREMISES AND EQUIPMENT
The carrying values of premises and equipment at December 31 were:
In millions 1997 1996
-------------- ---------------
OWNED
Land................................................................................ $ 165.2 151.1
Premises and improvements........................................................... 1,087.6 988.7
Furniture, fixtures and equipment................................................... 1,452.4 1,298.3
--------- --------
Total............................................................................ 2,705.2 2,438.1
--------- --------
CAPITALIZED LEASES
Premises............................................................................ 19.2 19.1
Equipment........................................................................... 2.1 2.1
--------- --------
Total............................................................................ 21.3 21.2
--------- --------
Total premises and equipment........................................................ 2,726.5 2,459.3
Less accumulated depreciation and amortization...................................... (1,431.0) (1,258.4)
--------- --------
Premises and equipment, net......................................................... $ 1,295.5 1,200.9
========= ========
7. CERTIFICATES OF DEPOSIT OVER $100,000
The corporation had certificates of deposit over $100,000 of $4,478.1 million
and $3,457.1 million at December 31, 1997 and 1996, respectively. Interest
expense on certificates of deposit over $100,000 was $227.1 million, $177.1
million and $139.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. There were no brokered certificates of deposit at December 31,
1997 and 1996.
43
8. SHORT-TERM BORROWINGS
Information related to short-term borrowings for the three years ended December
31 is provided in the table below.
At December 31, 1997, the corporation had available lines of credit totaling
$2,362.4 million, including $2,062.4 million at a subsidiary, Norwest Financial.
A portion of these financing arrangements require the maintenance of
compensating balances or payment of fees, which are not material.
At December 31, 1997, the corporation had commercial paper placement agreements
totaling $300.0 million (included in the $2,362.4 million reported in the
preceding paragraph).
Short-Term Borrowings
1997 1996 1995
---------------- --------------- ----------------
In millions, except rates Amount Rate Amount Rate Amount Rate
--------- ----- -------- ----- --------- -----
AT DECEMBER 31,
Commercial paper............................................... $4,692.0 5.68% $3,466.0 5.26% $3,129.2 5.77%
Federal funds purchased and securities sold under
agreements to repurchase.................................... 3,349.9 5.72 2,665.0 5.47 3,563.6 5.10
Other.......................................................... 1,515.1 5.96 1,441.6 5.75 1,834.4 5.88
-------- -------- --------
Total....................................................... $9,557.0 5.74 $7,572.6 5.43 $8,527.2 5.52
======== ======== ========
FOR THE YEAR ENDED DECEMBER 31,
AVERAGE DAILY BALANCE
Commercial paper............................................... $4,027.1 5.42% $4,277.5 5.37% $3,364.3 6.01%
Federal funds purchased and securities sold under
agreements to repurchase.................................... 3,045.3 4.96 2,925.0 5.03 3,854.9 5.78
Other.......................................................... 1,159.4 6.05 1,351.1 5.71 1,518.4 5.97
-------- -------- --------
Total....................................................... $8,231.8 5.34 $8,553.6 5.31 $8,737.6 5.90
======== ======== ========
MAXIMUM MONTH-END BALANCE
Commercial paper............................................... $4,695.3 NA $5,357.7 NA $4,981.0 NA
Federal funds purchased and securities sold under
agreements to repurchase.................................... 5,210.1 NA 3,366.9 NA 5,670.6 NA
Other.......................................................... 1,515.1 NA 1,760.9 NA 2,321.1 NA
NA--Not applicable.
44
9. LONG-TERM DEBT
Long-term debt at December 31 consisted of:
In millions, except rates Stated Effective
Rate(s) Rate(s) 1997 1996
------------------ ------------------ -------- --------
NORWEST CORPORATION (PARENT COMPANY ONLY)
Medium-Term Notes, Series A, due 1998 5.58% to 5.74% 5.657% to 5.819% $ 6.6 6.6
Medium-Term Notes, Series C, due 1998 4.93% to 5.14% 5.029% to 5.240% 1.5 1.5
Floating Rate Medium-Term Notes, Series C, due 1998 5.956% to 6.006% 6.069% to 6.190% 55.0 105.0
Medium-Term Notes, Series D, due 1999 to 2001 7.125% to 8.15% 5.803% to 6.023% 375.0 375.0
Floating Rate Medium-Term Notes, Series D, due 1999 5.956% 6.075% to 6.103% 200.0 200.0
Medium-Term Notes, Series E, due 2002 7.75% 7.842% 125.0 550.0
Floating Rate Medium-Term Notes, Series E, due 1998 5.893% 5.993% 50.0 250.0
Medium-Term Notes, Series F, due 2000 to 2005 6.50% to 7.68% 5.847% to 7.696% 1,000.0 1,000.0
Medium-Term Notes, Series G, due 1998 to 2006 5.75% to 6.875% 5.835% to 6.043% 1,950.0 1,950.0
Floating Rate Medium-Term Notes, Series G, due 1998 5.986% 6.069% 25.0 25.0
Medium-Term Notes, Series H, due 2001 to 2007 5.625% to 6.75% 5.78% to 6.895% 600.0 400.0
Medium-Term Notes, Series J, due 2006 to 2027 6.55% to 6.75% 5.929% to 6.788% 400.0 200.0
Floating Rate Euro Medium-Term Notes, due 2001 5.863% 6.001% 300.0 300.0
5.75% Senior Notes, due 1998 5.75% 6.028% 100.0 100.0
6% Senior Notes, due 2000 6.00% 6.161% 200.0 200.0
6.003% Senior Notes, due 1997 6.003% -- -- 200.0
ESOP Series B Notes, Due 1999 8.52% 8.709% 8.9 13.3
9 1/4% Subordinated Capital Notes, due 1997 9.25% -- -- 100.0
6 5/8% Subordinated Notes, due 2003 6.625% 6.092% 200.0 200.0
6 3/4% Convertible Subordinated Debentures, due 2003 6.75% 6.805% 0.1 0.1
6.65% Subordinated Debentures, due 2023 6.65% 6.692% 200.0 200.0
Other notes 5.75% to 6.625% 5.75% to 6.625% 7.8 7.5
--------- --------
Total 5,804.9 6,384.0
--------- --------
NORWEST FINANCIAL, INC. AND ITS SUBSIDIARIES
Senior Notes, due 1998 to 2009 4.79% to 8.65% 4.90% to 8.93% 5,219.4 4,080.9
Senior Subordinated Notes, due 1998 7.34% 7.34% 2.0 52.0
--------- --------
Total 5,221.4 4,132.9
--------- --------
OTHER CONSOLIDATED SUBSIDIARIES
FHLB Notes and Advances, due 1998 through 2027 3.15% to 8.38% 3.15% to 8.38% 376.7 477.2
Floating Rate FHLB Advances, due 1998 through 2011 5.343% to 5.919% 5.343% to 6.059% 1,325.3 2,050.0
12.25% Senior Notes, due 1998 to 2000 12.25% 12.25% 1.8 2.5
Other notes and debentures, due 1998 through 2006 3.00% to 11.90% 3.00% to 11.90% 20.1 18.7
Mortgages payable 8.00% to 12.00% 8.00% to 12.00% 0.3 0.4
Capital lease obligations 16.2 16.5
--------- --------
Total 1,740.4 2,565.3
--------- --------
Consolidated long-term debt $12,766.7 13,082.2
========= ========
The corporation has entered into various interest rate swap agreements to
exchange the fixed interest rate on certain debt issuances for a variable rate
and to exchange the variable rate on certain debt issuances for a fixed rate.
Through the use of such instruments, the corporation has synthetically altered
the stated rate on certain notional amounts of outstanding debt. The effective
rates included in the table are based upon rates in effect at December 31, 1997
and also reflect any related amortization of premium or discount.
Notes and debentures of the corporation and Norwest Financial, Inc. and its
subsidiaries are unsecured. Medium-Term Notes represent senior, unsubordinated
debt and rank equally with all other unsecured and unsubordinated debt of the
corporation.
The 6 5/8% Subordinated Notes due 2003 are unsecured and subordinated to all
present and future senior debt of the corporation. Payment of principal may be
accelerated only in the case of bankruptcy of the corporation. There is no right
of acceleration in the case of a default in the payment of principal or interest
or in the lack of performance of any covenant or agreement of the corporation.
45
The 6 3/4% Convertible Subordinated Debentures due 2003 can be converted into
common stock of the corporation at $2.50 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.
The 6.65% Subordinated Debentures due 2023 are unsecured and subordinated to all
present and future senior debt of the corporation. There is no right of
acceleration in the case of 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 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. Advances maturing within the next year are expected to be refinanced,
extending the maturity of such borrowings beyond one year.
The corporation has the option to call $100 million of Medium-Term Notes, Series
F beginning May 10, 1998 upon 30 days' notice. During 1997, the corporation
called $50 million of Medium-Term Notes, Series C and $25 million of Medium-Term
Notes, Series E.
Maturities of long-term debt at December 31, 1997 were:
Parent
In millions Consolidated Company Only
------------ ------------
1998............................................ $ 1,918.2 694.6
1999............................................ 1,806.9 780.8
2000............................................ 1,744.3 801.5
2001............................................ 1,243.1 801.4
2002............................................ 1,317.7 625.8
Thereafter...................................... 4,736.5 2,100.8
--------- -------
Total.......................................... $12,766.7 5,804.9
========= =======
10. STOCKHOLDERS' EQUITY
Preferred and Preference Stock The corporation is authorized to issue 5,000,000
shares of preferred stock without par value and 4,000,000 shares of preference
stock, without par value. Shares of preferred stock and preference stock have
such powers, preferences and rights as may be determined by the corporation's
board of directors, provided that each share of preference stock will not be
entitled to more than one vote per share. No shares of preference stock are
currently outstanding. A summary of the corporation's preferred stock at
December 31 is presented below.
Annual
Dividend Amount
In millions, except share and per share amounts Shares Outstanding Rate Outstanding
---------------------- --------- --------------------
1997 1996 1997 1997 1996
---------- ---------- --------- -------- -------
Cumulative Tracking, $200 stated value....................... 980,000 980,000 9.30% $196.0 196.0
1997 ESOP Cumulative Convertible, $1,000 stated value........ 22,927 -- 9.50% 23.0 --
1996 ESOP Cumulative Convertible, $1,000 stated value........ 22,831 24,469 8.50% 22.8 24.5
1995 ESOP Cumulative Convertible, $1,000 stated value........ 20,625 22,716 10.00% 20.6 22.7
ESOP Cumulative Convertible, $1,000 stated value............. 10,022 11,594 9.00% 10.0 11.6
Less: Cumulative Tracking shares held by a subsidiary........ (25,000) (25,000) (5.0) (5.0)
--------- --------- ------ -----
1,031,405 1,013,779 267.4 249.8
========= =========
Unearned ESOP shares......................................... (79.4) (61.0)
------ -----
Total preferred stock................................. $188.0 188.8
====== =====
All shares of the corporation's 1997 ESOP Cumulative Convertible Preferred
Stock, 1996 ESOP Cumulative Convertible Preferred Stock, 1995 ESOP Cumulative
Convertible Preferred Stock and ESOP Cumulative Convertible Preferred Stock
(collectively, ESOP Preferred Stock) were issued to a trustee acting on behalf
of the Norwest Corporation Savings Investment Plan and Master Savings Trust (the
Plan). Dividends on the ESOP Preferred Stock are cumulative from the date of
initial issuance and are payable quarterly at annual rates ranging from 8.50
percent to 10.00 percent, depending upon the year of issuance, as shown in the
table. Each share of ESOP Preferred Stock released from the unallocated reserve
of the Plan is
46
converted 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. The ESOP Preferred Stock is also convertible at the
option of the holder at any time, unless previously redeemed. The ESOP Preferred
Stock is redeemable at any time, in whole or in part, at the option of the
corporation at a redemption price per share equal to the higher of (a) $1,000
per share plus accrued and unpaid dividends and (b) the fair market value, as
defined in the Certificates of Designation of the ESOP Preferred Stock.
In accordance with the American Institute of Certified Public Accountants
(AICPA) Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans," the corporation recorded a corresponding charge to unearned
ESOP shares in connection with the issuance of the ESOP Preferred Stock. The
unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are
committed to be released.
On December 30, 1994, the corporation issued 980,000 shares of Cumulative
Tracking Preferred Stock, $200 stated value per share, of which 25,000 shares
were held by a subsidiary at December 31, 1997, 1996 and 1995. Dividends on
shares of Cumulative Tracking Preferred Stock are cumulative from the date of
issue and are payable quarterly. The initial dividend rate is 9.30 percent per
annum. The dividend rate is reset on January 1, 2000, and on January 1 of each
fifth year thereafter. The reset rate is the greater of the 5-, 10-, 30-year
Treasury rate or three-month LIBOR plus 250 basis points. At the time of initial
issuance of the shares of Cumulative Tracking Preferred Stock, the holders
thereof became assignees of the corporation's beneficial interest in an
equivalent number of Class A preferred limited liability company interests of
Residential Home Mortgage, L.L.C., a subsidiary of the corporation. Holders of
shares of Cumulative Tracking Preferred Stock are entitled to receive, in
addition to the dividends, certain additional cash distributions that are based
on the results of operations of the limited liability company. The shares of
Cumulative Tracking Preferred Stock may be redeemed after December 31, 1999, at
the option of the corporation. The shares of Cumulative Tracking Preferred Stock
rank on a parity, both as to payment of dividends and the distribution of assets
upon liquidation, with the corporation's ESOP Preferred Stock. The Cumulative
Tracking Preferred Stock ranks prior, both as to payment of dividends and the
distribution of assets upon liquidation, to common stock and, if any, the
corporation's junior participating preferred stock. At December 31, 1997, there
were two holders of record of the Cumulative Tracking Preferred Stock.
All shares of the corporation's Cumulative Convertible Preferred Stock, Series
B, $200 stated value per share, in the form of depositary shares, were called
for redemption on September 1, 1995 at a price of $52.10 per depositary share
plus accrued dividends. All shares of the corporation's 10.24% Cumulative
Preferred Stock, $100 stated value, were redeemed on January 2, 1996 at the
stated value.
Common Stock On April 22, 1997, the stockholders approved an amendment to the
corporation's Restated Certificate of Incorporation increasing the authorized
shares of common stock to 1,000,000,000. On September 23, 1997, the
corporation's board of directors declared a two-for-one stock split of the
common shares to be effected in the form of a 100 percent stock dividend,
distributed on October 10, 1997, to stockholders of record on October 2, 1997.
The stock split resulted in an increase in issued common stock of 381,109,956
shares and was accounted for by a transfer of $635.2 million to common stock
from surplus. All prior year common share and per share disclosures have been
restated to reflect the stock split.
Each share of the corporation's common stock includes one preferred share
purchase right. These rights will become exercisable only if a person or group
acquires or announces an offer to acquire 25 percent or more of the
corporation's common stock. This triggering percentage may be reduced to no less
than 15 percent by the board of directors prior to the time the rights become
exercisable. When exercisable, each right will entitle the holder to buy one
eight-hundredth of a share of a new series of junior participating preferred
stock at a price of $175 for each one one-hundredth of a preferred share. In
addition, upon the occurrence of certain events, holders of the rights will be
entitled to purchase either the corporation's common stock or shares in an
"acquiring entity" at one-half of the then current market value. The corporation
will generally be entitled to redeem the rights at one-eighth 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.
During 1996 and 1995, holders of $10,000 and $270,000, respectively, of
convertible subordinated debentures exchanged such debt for 2,000 shares and
54,000 shares, respectively, of the corporation's common stock. There were no
conversions in 1997. At December 31, 1997, there were four holders of record of
the convertible subordinated debentures.
Under the corporation's direct purchase plan, individuals may purchase shares of
common stock at market prices up to $10,000 per month and may reinvest
dividends.
47
The corporation had reserved shares of authorized but unissued common stock at
December 31, as follows:
1997 1996
------------- -------------
Stock incentive plans.......................................... 92,211,575 90,803,952
Convertible subordinated debentures and warrants*.............. 35,963,348 35,963,348
Dividend reinvestment.......................................... 2,500,057 3,344,260
Invest Norwest Program......................................... 1,488,600 2,241,986
Savings Investment Plans and Executive Incentive Compensation
Plan.......................................................... 5,695,384 8,798,768
Directors' Formula Stock Award and Stock Deferral Plans........ 624,436 653,582
Employees' deferral plans...................................... 1,815,212 1,884,680
------------- -------------
Total.......................................................... 140,298,612 143,690,576
============= =============
*Includes warrants issued by the corporation to subsidiaries to purchase shares
of the corporation's common stock as follows: 8,928,172 shares at $42.50 per
share in 1996, 11,000,176 shares at $37.50 per share in 1995 and 16,000,000
shares at $35.00 per share in 1994.
11. EMPLOYEE BENEFIT AND STOCK INCENTIVE PLANS
Savings Investment Plans Under the Savings Investment Plan (SIP), each eligible
SIP participant was permitted in 1997 to contribute on a before-tax basis up to
12 percent of his or her certified earnings. However, SIP participants who were
also eligible to participate in the Employees' Deferred Compensation Plan were
only allowed to contribute up to six percent of certified earnings. Effective
January 1, 1998, participants not eligible for the Employees' Deferred
Compensation Plan may contribute on a before-tax basis up to 18 percent of
certified earnings. Contributions will be matched 100 percent by the corporation
up to six percent of the participant's certified earnings. The corporation's
matching contributions vest 25 percent per year of employment. All of the
corporation's matching contributions are invested in the corporation's common
stock. The participant's contributions may be invested in one or more of ten
investment funds, including a Norwest common stock fund, or a combination
thereof, at the participant'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 $50.1 million, $33.0 million and
$37.5 million in 1997, 1996 and 1995, respectively.
SIP contains Employee Stock Ownership Plan (ESOP) provisions under which SIP may
borrow money to purchase the corporation's common or preferred stock. Beginning
in 1994, the corporation loaned money to SIP which has been used to purchase
shares of the corporation's ESOP Preferred Stock. As ESOP Preferred Stock is
released and converted into common shares, compensation expense is recorded
equal to the current market price of the common shares. Dividends on the common
shares allocated as a result of the release and conversion of the ESOP Preferred
Stock are recorded as a reduction of retained earnings and the shares are
considered outstanding for purposes of earnings per share computations.
Dividends on the unallocated ESOP Preferred Stock are not recorded as a
reduction of retained earnings, and the shares are not considered to be common
stock equivalents for purposes of earnings per share computations. Loan
principal and interest payments are made from the corporation's contributions to
SIP, along with dividends paid on the ESOP Preferred Stock. With each principal
and interest payment, a portion of the ESOP Preferred Stock is released and,
after conversion of the ESOP Preferred Stock into common shares, allocated to
SIP participants.
In 1989, the corporation loaned money to 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 SIP related to the purchase
of the 1989 ESOP shares are recorded as a reduction of stockholders' equity, and
compensation expense based on the cost of the shares is recorded as shares are
released and allocated to participants' accounts. The 1989 ESOP shares are
considered outstanding for purposes of earnings per share computations and
dividends on the shares are recorded as a reduction to retained earnings. The
1989 ESOP shares also include ESOP shares acquired in conjunction with business
combinations accounted for under the pooling of interests method of accounting.
The loans from the corporation to SIP are repayable in monthly installments
through April 26, 1999, with interest at 8.45 percent. Interest income on these
loans was $1.0 million, $1.2 million and $1.1 million in 1997, 1996 and 1995,
respectively, and is included as a reduction in salaries and benefits expense.
Total interest expense on the Series A and B ESOP Notes was $0.8 million, $ 3.7
million and $3.7 million in 1997, 1996 and 1995, respectively. Total dividends
paid to SIP on ESOP shares were as follows:
48
In millions 1997 1996 1995
----------- ---------- ----------
ESOP Preferred Stock:
Common dividends........................ $ 4.4 2.9 1.5
Preferred dividends..................... 4.0 3.2 3.5
1989 ESOP shares:
Common dividends........................ 10.6 9.1 7.7
----------- ---------- ----------
Total..................................... $ 19.0 15.2 12.7
=========== ========== ==========
The ESOP shares as of December 31 were as follows:
In millions, except shares 1997 1996
----------- ----------
ESOP Preferred Stock:
Allocated shares (common)............. 7,793,681 6,580,846
Unreleased shares (preferred)......... 76,405 58,779
1989 ESOP shares:
Allocated shares...................... 15,555,673 15,382,122
Unreleased shares..................... 1,053,925 1,993,978
Fair value of unearned ESOP shares....... $ 76.4 58.8
Norwest Financial Services, Inc. has a thrift and profit sharing plan for its
employees in which eligible employees may make basic contributions of up to 6%
of their compensation and supplemental contributions up to an additional 4% of
their compensation. Norwest Financial Services, Inc. makes a matching
contribution of 25 percent of the basic employee contributions. Norwest
Financial Services, Inc. may also make a profit sharing contribution with the
amount determined by the percentage return on equity of Norwest Financial
Services, Inc. and its subsidiaries. Contribution expense for the plan was $17.3
million, $15.3 million and $12.1 million in 1997, 1996 and 1995, respectively.
49
Pension Plans The corporation's noncontributory defined benefit pension plans
cover substantially all full-time employees. Pension benefits provided are based
on the employee's highest compensation in three consecutive years during the
last ten years of employment. The corporation's funding policy is to maximize
the federal income tax benefits of the contributions while maintaining adequate
assets to provide for both benefits earned to date and those expected to be
earned in the future.
The combined plans' funded status at December 31 is presented below.
In millions 1997 1996
--------- --------
Plan assets at fair value*.................................................... $1,338.6 1,111.3
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $824.0 and $693.1 in 1997 and 1996, respectively...................... 889.2 755.8
Projected benefit obligation for service rendered to date.................. 1,083.5 927.6
-------- -------
Plan assets greater than projected benefit obligation......................... 255.1 183.7
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions................................. (225.5) (155.6)
Unrecognized net asset being amortized over
approximately 17 years..................................................... (8.8) (10.1)
Unrecognized prior service cost............................................... 7.4 (0.6)
-------- -------
Prepaid pension assets included in other assets............................... $ 28.2 17.4
======== =======
*Consists primarily of listed stocks and bonds and obligations of the U.S.
government and its agencies.
The components of net pension expense for the years ended December 31 are
presented below.
In millions 1997 1996 1995
------- -------- -------
Service cost-benefits earned during the year......................... $ 48.8 42.8 45.4
Interest cost on projected benefit obligation........................ 69.1 57.2 55.4
Actual return on plan assets......................................... (237.4) (156.4) (156.5)
Net amortization and deferral*....................................... 147.1 79.5 105.6
------- -------- -------
Net pension expense.................................................. $ 27.6 23.1 49.9
======= ======== =======
*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 $84.2 million and $70.5 million as of December 31, 1997 and 1996,
respectively, and is not included in plan assets as presented above.
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was seven percent for both 1997 and
1996. The rate of increase in future compensation levels used in actuarial
computations was five percent in 1997 and 1996. The expected long-term rate of
return on assets was nine percent in 1997 and eight percent in 1996.
50
Other Postretirement Benefits The corporation sponsors medical plans for
retired employees. Substantially all employees become eligible for these
benefits if they retire under the corporation's pension plans. The corporation's
funding policy is to maximize the federal income tax benefits of the
contributions while maintaining adequate assets to provide for both benefits
earned to date and those expected to be earned in the future. The combined
plans' funded status at December 31 is presented below.
In millions
1997 1996
------ ------
Plan assets at fair value*.............................. $140.4 124.4
Accumulated postretirement benefit obligation:
Retirees............................................... 74.7 77.2
Fully eligible active plan participants................ 1.0 0.8
Other active plan participants......................... 145.1 124.8
------ -----
220.8 202.8
Plan assets less than accumulated
postretirement benefit obligation...................... 80.4 78.4
Unrecognized net gain (loss)............................ 18.6 15.9
Unrecognized prior service cost......................... (1.7) (1.9)
------ -----
Accrued postretirement benefit liabilities included in
other liabilities...................................... $ 97.3 92.4
====== =====
*Consists primarily of life insurance policies, listed stocks and bonds and
obligations of the U.S. government and its agencies.
The components of net periodic postretirement benefit expense for the years
ended December 31 are presented below.
In millions 1997 1996 1995
-------- ------- -------
Service cost-benefits earned during the year........ $ 12.2 11.6 10.7
Interest cost on accumulated postretirement
benefit obligation................................ 14.2 13.0 12.7
Actual return on plan assets........................ (17.5) (13.7) (15.2)
Net amortization and deferral*...................... 2.5 4.9 13.6
-------- ------- -------
Net periodic postretirement benefit expense......... $ 11.4 15.8 21.8
======== ======= =======
*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 10.0 percent annual increase in the cost of covered
health care benefits is assumed in the first year. This rate is assumed to
decrease to eight percent after five years and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, a one percent increase in the health care cost
trend rate would increase the accumulated postretirement benefit obligation by
approximately $32.5 million at December 31, 1997, and the service and interest
components of the net periodic cost by $5.1 million for the year. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was seven percent in 1997 and 1996. The expected long-term rate of
return on plan assets after taxes was 5.4 percent for 1997 and 4.8 percent for
1996.
Stock Incentive Plans The corporation grants stock incentives to key employees
under the Long-Term Incentive Compensation Plan (LTICP) approved by the
stockholders in 1985. In 1988, 1991, 1993 and 1996, the stockholders approved
amendments which increased the number of shares that may be distributed under
the LTICP. Shares which are not used because the terms of an award are not met,
and shares which are used by a participant to pay all or part of the purchase
price of an option, may again be used for awards under the LTICP.
At the discretion of a committee comprised of non-management directors,
participants may be granted stock options, stock appreciation rights, restricted
stock, performance awards, and stock awards without restrictions. At December
31, 1997, 265,640 shares of restricted stock and options to acquire 42,432,953
shares of common stock were outstanding under the LTICP.
51
Stock options may be granted as incentive stock options or non-qualified
options, but may not be granted at prices less than market value at the dates of
grant. Options may be exercised during a period fixed by the committee of not
more than ten years. At the discretion of the committee, a stock option grant
may include the right to acquire an Accelerated Ownership Non-Qualified Stock
Option ("AO"). If an option grant contains the AO feature and if a participant
pays all or part of the purchase price of the option with shares of the
corporation's stock held by the participant for at least six months, then upon
exercise of the option the participant is granted an AO to purchase, at the fair
market value as of the date of the AO grant, the number of shares of common
stock of the corporation equal to the sum of the number of shares used in
payment of the purchase price and a number of shares with respect to taxes.
On July 23, 1996, the corporation's board of directors approved the Norwest
Corporation Best Practices PartnerShares Plan, a broad-based employee stock
option plan. In conjunction with the plan's approval, options for 9,751,800
shares, with an exercise price of $16.56 per share, were granted to full and
part-time employees who were not participants in the LTICP (the 1996
PartnerShares grant). On July 10, 1997, the market value of the corporation's
common stock closed above the vesting price for the 1996 PartnerShares grant. Of
7.6 million options that vested, 4.4 million had been exercised at December 31,
1997. On September 23, 1997, the corporation's board of directors approved a
second grant under this plan to eligible employees (the 1997 PartnerShares
grant). The 1997 PartnerShares grant awarded options to acquire 21.9 million
common shares, at an exercise price of $31.34 per share, which are generally
exercisable upon the earlier of September 24, 2002, or the first date the
closing market value of the corporation's common stock equals or exceeds $60 per
share.
The corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock incentive plans. Accordingly, no compensation cost has
been recognized for the fixed option plans. Proceeds from stock options
exercised are credited to common stock and surplus. There are no charges or
credits to expense with respect to the granting or exercise of options since the
options were issued at fair market value on their respective dates of grant. Had
compensation cost for the corporation's stock-based compensation plans been
determined consistent with FAS 123, the corporation's net income and earnings
per share would have been reduced to the pro forma amounts indicated below.
In millions, except per common share amounts
1997 1996 1995
-------- -------- -------
Net income
As reported............................... $1,351.0 1,153.9 956.0
Pro forma................................. 1,315.9 1,143.8 953.2
Earnings per common share:
Basic
As reported.............................. 1.78 1.55 1.39
Pro forma................................ 1.73 1.54 1.39
Diluted
As reported.............................. 1.75 1.54 1.36
Pro forma................................ 1.71 1.52 1.36
The fair value for each option grant for the LTICP and the Best Practices
PartnerShares Plan used in the foregoing pro forma amounts is estimated on the
date of grant using an option pricing model. The model incorporates the
following weighted-average assumptions used for grants in 1997, 1996 and 1995:
15.45 percent dividend growth; 20 percent expected volatility; risk-free
interest rates ranging from 5.11 percent to 7.84 percent; and expected lives
ranging from 1 to 5 years.
Stock Option Transactions In connection with the acquisition of Benson
Financial Corporation (Benson) in 1996, the corporation assumed Benson's
obligations under a stock option plan. As a result of the merger, all options
under the plan were converted into options to acquire 110,764 shares of the
corporation's common stock. At December 31, 1997, 28,482 of such options remain
outstanding.
In connection with the 1994 acquisition of First National Bank of Kerrville
(Kerrville), the corporation assumed Kerrville's obligations under a stock
option plan. As a result of the acquisition, all options under the plan were
converted into options to acquire 362,600 shares of the corporation's common
stock, of which 77,500 options remain outstanding as of December 31, 1997.
In connection with the 1993 acquisition of Financial Concepts Bancorp, Inc.
(Financial Concepts), the corporation assumed Financial Concepts' obligations
under a stock option plan. As a result of the merger, all options under the plan
were
52
converted into options to acquire 199,424 shares of the corporation's common
stock. At December 31, 1997, 78,528 of such options remain outstanding.
In connection with the 1993 acquisition of Lincoln Financial Corporation
(Lincoln), the corporation assumed Lincoln's obligations under two stock option
plans and a Director's Stock Compensation Plan. At December 31, 1997, options to
acquire 26,112 shares of common stock were outstanding under one of Lincoln's
stock option plans.
In connection with the United Banks of Colorado, Inc. (United) merger in 1992,
the corporation assumed United's obligations under two stock option plans and
the Outside Directors' Supplemental Compensation Plan. At December 31, 1997,
options to acquire 30,500 shares were outstanding under one of United's stock
option plans.
A summary of stock option activity under the LTICP and acquired plans is
presented below.
Weighted
Available Options Average
for Grant Outstanding Exercise Price
----------- ----------- --------------
December 31, 1994 (16,968,666 options exercisable)... 15,845,078 31,432,216 $ 10.5380
Granted* (Weighted average fair
value $1.9713 per option).......................... (3,720,442) 3,720,442 14.7885
Shares Swapped...................................... 1,231,618 --
Exercised........................................... -- (3,853,152) 8.0416
Cancelled........................................... 659,036 (659,272) 12.6506
Restricted Stock Awards............................. (87,400) --
----------- ---------- -------------
December 31, 1995 (19,227,188 options exercisable)... 13,927,890 30,640,234 11.3225
Shareholder amendment............................... 35,000,000 --
Granted* (Weighted average fair
value $2.9143 per option).......................... (4,242,450) 4,242,450 18.0401
Shares Swapped...................................... 4,041,922 --
Exercised........................................... -- (6,867,658) 10.7668
Cancelled........................................... 522,358 (522,358) 13.6879
Restricted Stock Awards............................. (48,000) --
Acquisition of Benson............................... -- 110,764 4.7410
----------- ---------- -------------
December 31, 1996 (20,817,912 options exercisable)... 49,201,720 27,603,432 12.4818
Granted* (weighted average fair
value $4.4054 per option).......................... (25,231,462) 25,231,462 30.7314
Shares Swapped...................................... 868,407 --
Exercised........................................... -- (9,287,984) 11.4908
Cancelled........................................... 914,435 (872,835) 26.6733
Restricted Stock Awards............................. (92,000) --
----------- ---------- -------------
December 31, 1997 (20,506,305 options exercisable)... 25,661,100 42,674,075 $23.1511
=========== ========== =============
*Includes 2,687,762, 2,680,800 and 1,178,276 AO grants at December 31, 1997,
1996, and 1995, respectively.
53
The following table summarizes information about stock options outstanding at
December 31, 1997 with respect to the LTICP and acquired plans.
Options Outstanding Options Exercisable
----------------------------------------------------------- ---------------------------------------
Weighted Average
Number Remaining
Range of Outstanding on Contractual Life Weighted Average Number Exercisable Weighted Average
Exercise Prices December 31, 1997 in Years Exercise Price on December 31, 1997 Exercise Price
- --------------- ----------------- ------------------ ---------------- -------------------- ----------------
$ 2.24-4.99 446,509 3.2 $ 3.77 446,509 $ 3.77
5.00-9.99 2,914,413 2.9 7.93 2,914,413 7.93
10.00-14.99 10,339,587 5.4 12.80 10,339,587 12.80
15.00-19.99 4,176,936 6.9 17.21 3,832,866 17.25
20.00-24.99 701,722 6.3 22.73 696,722 22.72
25.00-29.99 796,730 6.5 27.08 708,730 27.30
30.00-34.99 23,036,892 9.3 30.90 1,479,692 31.33
35.00-38.53 261,286 8.6 36.16 87,786 37.17
----------- -----------
Total 42,674,075 20,506,305
=========== ===========
The weighted average fair value of options granted under the corporation's Best
Practices PartnerShares Plan was $2.8365 per option for the 1996 PartnerShares
grant and $4.8093 per option for the 1997 PartnerShares grant. At December 31,
1997, 23,876,400 options were outstanding under the Best Practices PartnerShares
Plan, of which 3,238,400 options were exercisable at an option price of $16.56
and 76,800 options were exercisable at an option price of $31.34. During 1997,
4,415,800 options were exercised and 3,164,900 options were cancelled. During
1996, 300 options were exercised and 462,750 options were cancelled.
12. INCOME TAXES
Components of income tax expense were:
In millions 1997 1996 1995
------ ------ ------
Current
Federal.............................. $606.7 374.2 468.2
State................................ 47.0 10.5 41.7
Foreign.............................. 32.9 37.1 27.3
------ ----- -----
Total current....................... 686.6 421.8 537.2
------ ----- -----
Deferred
Federal.............................. 21.3 173.5 (56.5)
State................................ 2.4 36.7 (11.4)
Foreign.............................. (11.6) (4.4) (2.5)
------ ----- -----
Total deferred...................... 12.1 205.8 (70.4)
------ ----- -----
Total............................... $698.7 627.6 466.8
====== ===== =====
Income tax expense applicable to net gains on investment securities for the year
ended December 31, 1997 was $13.3 million. Income tax benefit applicable to net
losses on investment securities for the years ended December 31, 1996 and 1995
was $16.5 million and $14.6 million, respectively.
Income before income taxes from operations outside the United States was $56.0
million, $85.5 million, and $56.6 million for the years ended December 31, 1997,
1996 and 1995, respectively.
54
The net deferred tax liability (asset) included the following major temporary
differences at December 31:
In millions
1997 1996
--------- -------
Deferred tax liabilities
Depreciation...................................... $ 36.4 38.9
Lease financing................................... 224.6 252.0
Mark to market.................................... 122.4 160.1
Mortgage servicing................................ 747.1 483.2
FAS 115 adjustment................................ 239.8 167.2
Other............................................. 149.3 121.3
--------- -------
Total deferred tax liabilities.................. 1,519.6 1,222.7
--------- -------
Deferred tax assets
Provision for credit losses....................... (344.2) (271.3)
Expenses deducted when paid....................... (476.1) (233.8)
Other............................................. (245.2) (263.4)
--------- -------
Total deferred tax assets....................... (1,065.5) (768.5)
Valuation allowance.................................... -- --
--------- -------
Deferred tax assets, net.......................... (1,065.5) (768.5)
--------- -------
Total net deferred tax liability....................... $ 454.1 454.2
========= =======
The corporation has determined that it is not required to establish a valuation
reserve for any of the deferred tax assets since it is more likely than not that
these assets will be principally realized through carryback to taxable income in
prior years, and future reversals of existing taxable temporary differences,
and, to a lesser extent, future taxable income and tax planning strategies. The
corporation's conclusion that it is "more likely than not" that the deferred tax
assets will be realized is based on federal taxable income of over $1.9 billion
in the carryback period, substantial state taxable income in the carryback
period, as well as a history of growth in earnings and the prospects for
continued growth.
The deferred tax liability related to FAS 115 had no impact on 1997, 1996 or
1995 income tax expense as the effect of unrealized gains and losses, net of
taxes, was recorded in stockholders' equity.
A reconciliation of the federal income tax rate to effective income tax rates
follows:
1997 1996 1995
---- ---- ----
Federal income tax rate.................... 35.0% 35.0 35.0
Adjusted for
State income taxes...................... 1.6 1.7 1.4
Tax-exempt income....................... (1.8) (1.5) (1.9)
Other, net.............................. (0.7) -- (1.7)
---- ---- ----
Effective income tax rate.................. 34.1% 35.2 32.8
==== ==== ====
13. COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 1997, 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 $213.1
million, $227.6 million and $187.4 million in 1997, 1996 and 1995, respectively.
55
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,
1997 were:
Capital Operating
In millions Leases Leases
------ ---------
1998................................................ $ 2.0 $ 146.1
1999................................................ 2.1 128.6
2000................................................ 2.1 115.7
2001................................................ 2.1 92.4
2002................................................ 1.9 66.8
Thereafter.......................................... 27.2 546.6
------ ---------
Total minimum rental payments....................... 37.4 $ 1,096.2
=========
Less interest....................................... (21.2)
------
Present value of net minimum rental payments........ $ 16.2
======
To meet the financing needs of its customers and as part of its overall risk
management strategy, the corporation is a party to financial instruments with
off-balance sheet risk. These financial instruments include commitments to
extend credit, recourse obligations, options, standby letters of credit,
interest rate futures, caps and floors and interest rate swaps and forward
contracts. These instruments involve elements of credit and interest rate risk
in addition to amounts recognized in the financial statements.
The corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, recourse obligations, and financial guarantees
written is represented by the contractual amount of those instruments. The
corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The corporation also
uses the same credit and collateral policies in making loans which are
subsequently sold with recourse obligations as it does for loans not sold. Refer
to Note 15, Derivative Activities, for contractual or notional amounts of
derivatives held by the corporation and a discussion of risks associated with
such instruments.
A summary of the contractual amounts of these financial instruments at December
31 is as follows:
In millions 1997 1996
----------- --------
Commitments to extend credit.................... $ 16,964.8 10,191.7
Standby letters of credit*...................... 1,104.0 1,117.3
Other letters of credit......................... 374.0 284.0
*Total standby letters of credit are net of participations sold to other
institutions of $487.6 million in 1997 and $386.4 million in 1996.
Commitments to extend credit generally have fixed expiration dates or other
termination clauses and usually require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
amount of collateral obtained is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include cash, marketable
securities, accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by subsidiaries of the corporation to guarantee the
performance of a customer to a third party. Outstanding standby letters of
credit at December 31, 1997 supported $734.9 million of industrial revenue
bonds, $366.3 million of supplier payment guarantees, $148.5 million of
insurance premium financing, $167.2 million of performance bonds and $174.7
million of other obligations of unaffiliated parties with maturities up to 20
years, 10 years, three years, 17 years and 17 years, respectively. Risks
associated with such standby letters of credit are considered in the evaluation
of overall credit risk in determining the allowance for credit losses. The
collateral requirements are essentially the same as those involved in extending
loan facilities to customers. As part of its overall risk management strategy,
the corporation does not believe it has any significant concentrations of credit
risk.
56
Other commitments include sales of mortgage loans prior to 1985 in non-standard,
negotiated transactions, primarily with the Federal Home Loan Mortgage
Corporation, which provide for recourse to Norwest Inc. The Mortgage,
outstanding loan balances which relate to these sales transactions amounted to
$73.6 million and $79.1 million at December 31, 1997 and 1996, respectively. The
corporation has also provided a financial guarantee related to the sale of
certain mortgage participation certificates in the event LIBOR exceeds specified
levels. The liability under the foregoing arrangements is not material.
The corporation and certain subsidiaries are defendants in various matters of
litigation generally incidental to their business. Although it is difficult to
predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability will not materially affect
the consolidated financial position or results of operations of the corporation
and its subsidiaries.
14. TRADING REVENUES
The corporation conducts trading of debt and equity securities, money market
instruments, derivative products and foreign exchange contracts to satisfy the
investment and risk management needs of its customers and those of the
corporation. Trading activities are conducted within risk limits established and
monitored by the Asset and Liability Management Committee as further discussed
in the Interest Rate Sensitivity and Liquidity Management section of the
Financial Review. The table below provides a summary of the corporation's
trading revenues in the principal markets in which the corporation participates.
In millions 1997 1996 1995
---- ---- ----
Interest income:
Securities..................................................... $ 40.8 24.7 11.2
Swaps and other interest rate contracts........................ -- -- 3.6
-------- ---- ----
Total interest income........................................ 40.8 24.7 14.8
-------- ---- ----
Non-interest income:
Gains on securities sold....................................... 68.3 26.7 15.6
Foreign exchange trading....................................... 13.6 9.2 7.8
Swaps and other interest rate contracts........................ 1.1 (0.9) 6.0
Options........................................................ 4.4 (3.0) 11.6
Futures........................................................ (8.8) 3.3 (1.1)
-------- ---- ----
Total non-interest income.................................... 78.6 35.3 39.9
-------- ---- ----
Total trading revenues............................................ $ 119.4 60.0 54.7
======== ==== ====
15. DERIVATIVE ACTIVITIES
Derivatives are financial instruments that are used by banks, corporations,
governments, and individuals to manage the financial risks associated with their
business activities. For example, a futures contract can be used to guard
against price fluctuations and a swap can be used to change fixed interest rate
payments into floating interest rate payments. In general terms, derivative
instruments are contracts or agreements whose value can be linked to interest
rates, exchange rates, security prices, or financial indices. A derivative
financial instrument is a futures, forward, swap, or option contract or other
financial instrument with similar characteristics. The corporation uses
derivatives in both its trading and its asset and liability management
activities. The corporation's trading activities include acting as a dealer to
satisfy the investment and risk management needs of its customers and, in
addition, the corporation assumes trading positions based on market expectations
and to benefit from price differentials between financial instruments and
markets. As an end-user, the corporation uses various types of derivative
products (principally interest rate swaps, interest rate caps and floors,
futures contracts and options) as part of its overall interest rate risk
management strategy.
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
57
fraction of the notional value of the instrument and is represented by the fair
value of the derivative instrument. For example, the notional amount for
interest rate swaps does not represent the amount at risk because the notional
amount will not be exchanged. The notional amount does, however, provide the
basis for determining the contractual cash flows, which are discounted to
determine fair values of the related derivatives. For foreign exchange forward
contracts, the fair value is based on the gap between the current forward market
rate of the underlying currency and the contractual rate.
The corporation attempts to limit its credit risk by dealing with creditworthy
counterparties, obtaining collateral where appropriate, and utilizing master
netting agreements in accordance with Financial Accounting Standards Board
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts" as
amended by Financial Accounting Standards Board Interpretation No. 41,
"Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements." The market risk of derivatives arises from the potential for
changes in value due to fluctuations in interest and foreign exchange rates and
in prices of debt and equity securities.
Derivative Financial Instruments Held or Issued for Trading Purposes The
following table provides the notional and fair value of the corporation's
derivatives included in its trading portfolio at December 31, 1997 and 1996, and
the average fair value of derivatives held or issued for trading purposes during
the years ended December 31, 1997 and 1996:
1997 1996
--------------------------------- -------------------------------
Average Average
Notional Fair Daily Fair Notional Fair Daily Fair
In millions Value Value Value Value Value Value
- ----------- -------- ----- ---------- -------- ----- -----------
Swaps:
In a favorable position.......................... $ 525.0 3.5 4.0 226.0 2.8 4.0
In an unfavorable position....................... 614.0 (4.0) (4.0) 383.0 (1.5) (4.0)
Caps and Floors:
In a favorable position.......................... 471.0 1.1 1.0 450.0 2.1 1.0
In an unfavorable position....................... 574.0 (1.5) (2.0) 505.0 (2.0) (1.0)
Options:
Purchased........................................ 40.0 -- -- -- -- --
Written.......................................... -- -- (1.0) -- -- (3.0)
Futures contracts:
In a favorable position.......................... 2.0 -- -- 434.0 -- --
In an unfavorable position....................... 15.0 -- -- 449.0 -- --
Foreign exchange contracts:
In a favorable position.......................... 573.0 20.5 14.0 246.0 10.3 6.0
In an unfavorable position....................... 540.0 (19.2) (13.0) 290.0 (10.0) (5.0)
Foreign exchange options:
Purchased........................................ 6.0 0.1 -- 4.0 0.4 --
Written.......................................... 4.0 0.1 -- 4.0 (0.4) --
Derivative Financial Instruments Held or Issued for Purposes Other Than Trading
The corporation and its subsidiaries, as end-users, utilize various types of
derivative products (principally interest rate swaps and interest rate caps and
floors) as part of an overall interest rate risk management strategy.
The use of interest rate contracts enables the corporation to synthetically
alter the repricing characteristics of designated assets and interest-bearing
liabilities. In the following information for cash flows and maturities,
variable rates are assumed to remain constant at December 31, 1997 levels. To
the extent that rates change, both the average notional and variable interest
rate information may change. Interest rate swaps generally involve the exchange
of fixed and floating rate interest payments based on an underlying notional
amount. Generic swaps' notional amounts do not change for the life of the
contract. The current outstanding amortizing swaps' average notional amounts
change based on a remaining principal amount of a pool of mortgage-backed
securities. Generally, as rates fall, the notional amounts decline more rapidly
and as rates increase notional amounts decline more slowly. Basis swaps are
contracts where the corporation receives an amount and pays an amount based on
different floating indices. Currently, interest rate floors, futures contracts
and options on futures contracts are principally
58
being used by the corporation in hedging its portfolio of mortgage servicing
rights. The floors provide for the receipt of payments when interest rates are
below predetermined interest rate levels. The cash flows on interest rate floors
and futures contracts are used, as appropriate, to offset lost future servicing
revenue related to increased levels of prepayments associated with lower
interest rates. Option contracts allow the holder of the option to purchase or
sell a financial instrument at a specified price and within a specified period
of time from or to the seller or "writer" of the option. The writer of the
option receives a premium at the outset and then bears the risk of an
unfavorable change in the price of the underlying financial instrument. Forward
foreign exchange contracts are used by the corporation to hedge uncertainties in
funding costs related to certain commercial paper issuances denominated in
foreign currencies. The table below presents the maturity and weighted average
rates for end-user derivatives by type at December 31, 1997.
For the year ended December 31, 1997, end-user derivative activities increased
interest income by $0.7 million and reduced interest expense by $81.2 million,
for a total benefit to net interest income of $81.9 million. For 1996 and 1995,
end-user derivative activities increased interest income by $9.8 million and
decreased interest income by $2.7 million, respectively, and reduced interest
expense by $47.1 million and $9.8 million, respectively, for a total benefit to
net interest income of $56.9 million and $7.1 million, respectively.
Maturity
----------------------------------------------------------------
Dollars in millions 1998 1999 2000 2001 2002 Thereafter Total
------ ---- ---- ---- ---- ---------- -----
Swaps:
Generic receive fixed-
Notional value......................... $ 650 766 400 500 500 1,500 4,316
Weighted average receive rate.......... 6.34% 7.28 6.17 6.35 6.81 6.53 6.61
Weighted average pay rate.............. 5.82 5.93 5.85 5.83 5.94 5.84 5.86
Amortizing receive fixed-
Notional value......................... $ -- 1,939 1,246 -- -- -- 3,185
Weighted average receive rate.......... --% 7.46 6.43 -- -- -- 7.06
Weighted average pay rate.............. --% 5.71 5.91 -- -- -- 5.78
Generic pay fixed-
Notional value......................... $ -- -- 5 6 100 110 221
Weighted average receive rate.......... --% -- 5.81 5.94 5.94 5.89 5.91
Weighted average pay rate.............. --% -- 6.15 6.33 5.99 5.75 5.88
Basis-
Notional value......................... $ 29 -- -- -- -- -- 29
Weighted average receive rate.......... 4.41% -- -- -- -- -- 4.41
Weighted average pay rate.............. 2.99% -- -- -- -- -- 2.99
Interest rate caps and floors:*
Notional value......................... $ 527 400 3,200 4,750 -- 5,500 14,377
Futures contracts:*
Notional value......................... $ 4,690 -- -- -- -- 4,690
Options on futures contracts:*
Notional value......................... $ 9,886 -- -- -- -- -- 9,886
Security options:*
Notional value......................... $ 1,200 40 -- -- -- -- 1,240
Forward foreign exchange contracts:
Notional value......................... $ 491 -- -- -- -- -- 491
------- ----- ----- ----- ---- ----- ------
Total notional value.................. $17,473 3,145 4,851 5,256 600 7,110 38,435
======= ===== ===== ===== ==== ===== ======
Total weighted average rates on swaps:
Receive rate.......................... 6.25% 7.41 6.37 6.34 6.67 6.49 6.77
======= ===== ===== ===== ==== ===== ======
Pay rate.............................. 5.70% 5.77 5.90 5.83 5.95 5.83 5.82
======= ===== ===== ===== ==== ===== ======
*Average rates are not meaningful for interest rate caps and floors, futures,
contracts or options.
Note: Weighted average variable rates are the actual rates as of December 31,
1997.
59
Activity in the notional amounts of end-user derivatives for each of the three
years ended December 31, 1997, 1996, and 1995, is summarized as follows:
Swaps
----------------------------------------------------------------
Interest
Generic Amortizing Generic Rate
Receive Receive Pay Total Caps/
In millions Fixed Fixed Fixed Basis Swaps Floors
------- ---------- ------- ----- ----- --------
Balance, December 31, 1994.. $1,025 -- 130 229 1,384 751
Additions.................. 1,891 1,575 200 -- 3,666 7,100
Amortizations and
maturities................ -- -- -- -- -- 8
Terminations............... 100 -- -- -- 100 --
------ ----- --- ----- ----- ------
Balance, December 31, 1995.. 2,816 1,575 330 229 4,950 7,843
Additions.................. 2,911 522 154 -- 3,587 11,000
Amortizations and
maturities................ 675 168 30 200 1,073 16
Terminations............... 450 1,846 100 -- 2,396 2,850
------ ----- --- ----- ----- ------
Balance, December 31, 1996.. 4,602 83 354 29 5,068 15,977
Additions.................. 1,003 3,261 20 -- 4,284 7,000
Amortizations and
maturities................ 650 79 3 -- 732 --
Terminations............... 639 80 150 -- 869 8,600
------ ----- --- ----- ----- ------
Balance, December 31, 1997.. $4,316 3,185 221 29 7,751 14,377
====== ===== === ===== ===== ======
Options Forward
on Foreign
Futures Security Exchange Total
In millions Futures Contracts Options Contracts Derivatives
------- --------- -------- --------- -----------
Balance, December 31, 1994.. -- -- -- -- 2,135
Additions.................. -- -- 5,951 -- 16,717
Amortizations and
maturities................ -- -- 3,670 -- 3,678
Terminations............... -- -- 2,281 -- 2,381
------ ------ ----- ---------- -------
Balance, December 31, 1995.. -- -- -- -- 12,793
Additions.................. 18,196 26,753 6,675 -- 66,211
Amortizations and
maturities................ 2,651 13,576 5,650 -- 22,966
Terminations............... 11,928 7,618 200 -- 24,992
------ ------ ----- ---------- -------
Balance, December 31, 1996.. 3,617 5,559 825 -- 31,046
Additions.................. 27,135 63,853 5,655 1,234 109,161
Amortizations and
maturities................ 250 20,806 3,765 743 26,296
Terminations............... 25,812 38,720 1,475 -- 75,476
------ ------ ----- ---------- -------
Balance, December 31, 1997.. 4,690 9,886 1,240 491 38,435
====== ====== ===== ========== =======
60
The following table provides the gross gains and gross losses not yet recognized
in the consolidated financial statements for open end-user derivatives
applicable to certain hedged assets and liabilities as of December 31, 1997 and
1996:
Balance Sheet Category
-------------------------------------------------------------------------------------------
Loans Mortgage Interest- Short- Long-
Investment and Servicing bearing term term
In millions Securities Leases Rights Deposits Borrowings Debt Total
- ----------- ---------- ------ --------- --------- ---------- ----- -----
1997:
Swaps
Pay variable unrealized gains...... $ -- -- 27.5 77.0 -- 88.3 192.8
Pay variable unrealized losses..... -- -- -- -- -- (3.3) (3.3)
------ ------ ------ ------ ------ ------ ------
Pay variable net................. -- -- 27.5 77.0 -- 85.0 189.5
------ ------ ------ ------ ------ ------ ------
Pay fixed unrealized gains......... -- -- -- 1.2 -- -- 1.2
Pay fixed unrealized losses........ -- (0.4) -- -- -- -- (0.4)
------ ------ ------ ------ ------ ------ ------
Pay fixed net.................... -- (0.4) -- 1.2 -- -- 0.8
------ ------ ------ ------ ------ ------ ------
Basis unrealized gains............. -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total unrealized gains............. -- -- 27.5 78.2 -- 88.3 194.0
Total unrealized losses............ -- (0.4) -- -- -- (3.3) (3.7)
------ ------ ------ ------ ------ ------ ------
Total net........................ $ -- (0.4) 27.5 78.2 -- 85.0 190.3
====== ====== ====== ====== ====== ====== ======
Interest rate caps/floors
Unrealized gains................... $ -- -- 133.1 -- -- -- 133.1
Unrealized losses.................. -- -- (0.1) -- -- -- (0.1)
------ ------ ------ ------ ------ ------ ------
Total net......................... $ -- -- 133.0 -- -- -- 133.0
====== ====== ====== ====== ====== ====== ======
Futures contracts
Unrealized gains................... $ -- -- 39.0 -- -- -- 39.0
Unrealized losses.................. -- -- (0.2) -- -- -- (0.2)
------ ------ ------ ------ ------ ------ ------
Total net......................... $ -- -- 38.8 -- -- -- 38.8
====== ====== ====== ====== ====== ====== ======
Options on futures contracts
Unrealized gains................... $ -- -- 45.5 -- -- -- 45.5
Unrealized losses.................. (0.2) -- (14.5) -- -- -- (14.7)
------ ------ ------ ------ ------ ------ ------
Total............................. $ (0.2) -- 31.0 -- -- -- 30.8
====== ====== ====== ====== ====== ====== ======
Security options
Unrealized gains................... $ -- 0.5 -- -- -- -- 0.5
Unrealized losses.................. -- (1.0) -- -- -- -- (1.0)
------ ------ ------ ------ ------ ------ ------
Total net......................... $ -- (0.5) -- -- -- -- (0.5)
====== ====== ====== ====== ====== ====== ======
Forward foreign exchange contracts
Unrealized gains................... $ -- -- -- -- 3.0 -- 3.0
Unrealized losses.................. -- -- -- -- (9.3) -- (9.3)
------ ------ ------ ------ ------ ------ ------
Total net......................... $ -- -- -- -- (6.3) -- (6.3)
====== ====== ====== ====== ====== ====== ======
Grand total unrealized gains........ $ -- 0.5 245.1 78.2 3.0 88.3 415.1
Grand total unrealized losses....... (0.2) (1.4) (14.8) -- (9.3) (3.3) (29.0)
====== ====== ====== ====== ====== ====== ======
Grand total net..................... $ (0.2) (0.9) 230.3 78.2 (6.3) 85.0 386.1
====== ====== ====== ====== ====== ====== ======
61
Balance Sheet Category
-------------------------------------------------------------------------------
Loans Mortgage Interest- Short- Long-
Investment and Servicing bearing term term
In millions Securities Leases Rights Deposits Borrowings Debt Total
- ----------- ---------- ------ --------- --------- ---------- ----- -----
1996:
Swaps
Pay variable unrealized gains..................... $ -- -- -- -- -- 59.7 59.7
Pay variable unrealized losses.................... -- (0.1) (2.9) -- -- (17.8) (20.8)
---------- ----- ----- ------ ------ ------ ------
Pay variable net................................ -- (0.1) (2.9) -- -- 41.9 38.9
---------- ----- ----- ------ ------ ------ ------
Pay fixed unrealized gains........................ -- 1.4 -- 3.9 -- -- 5.3
Pay fixed unrealized losses....................... -- (0.2) -- -- -- -- (0.2)
---------- ----- ----- ------ ------ ------ ------
Pay fixed net................................... -- 1.2 -- 3.9 -- -- 5.1
---------- ----- ----- ------ ------ ------ ------
Basis unrealized gains............................ 0.3 -- -- -- -- -- 0.3
---------- ----- ----- ------ ------ ------ ------
Total unrealized gains............................ 0.3 1.4 -- 3.9 -- 59.7 65.3
Total unrealized losses........................... -- (0.3) (2.9) -- -- (17.8) (21.0)
---------- ----- ----- ------ ------ ------ ------
Total net....................................... $0.3 1.1 (2.9) 3.9 -- 41.9 44.3
========== ===== ===== ====== ====== ====== ======
Interest rate caps/floors
Unrealized gains.................................. $ -- -- 22.6 -- -- -- 22.6
Unrealized losses................................. -- -- (34.5) (0.2) -- (0.2) (34.9)
---------- ----- ----- ------ ------ ------ ------
Total net........................................ $ -- -- (11.9) (0.2) -- (0.2) 12.3
========== ===== ===== ====== ====== ====== ======
Futures contracts
Unrealized gains.................................. $ -- 1.4 0.5 -- -- -- 1.9
========== ===== ===== ====== ====== ====== ======
Options on futures contracts
Unrealized gains.................................. $ -- 4.3 1.4 -- -- -- 5.7
Unrealized losses................................. -- (5.0) (9.3) -- -- -- (14.3)
---------- ----- ----- ------ ------ ------ ------
Total............................................ $ -- (0.7) (7.9) -- -- -- (8.6)
========== ===== ===== ====== ====== ====== ======
Security options
Unrealized gains.................................. $ -- 0.6 -- -- -- -- 0.6
Unrealized losses................................. -- (2.5) -- -- -- -- (2.5)
---------- ----- ----- ------ ------ ------ ------
Total net........................................ $ -- (1.9) -- -- -- -- (1.9)
========== ===== ===== ====== ====== ====== ======
Grand total unrealized gains....................... $ 0.3 7.7 24.5 3.9 -- 59.7 96.1
Grand total unrealized losses...................... -- (7.8) (46.7) (0.2) -- (18.0) (72.7)
---------- ----- ----- ------ ------ ------ ------
Grand total net.................................... $ 0.3 (0.1) (22.2) 3.7 -- 41.7 23.4
========== ===== ===== ====== ====== ====== ======
As a result of interest rate fluctuations, off-balance sheet derivatives have
resulting unrealized appreciation or depreciation in market values as compared
with their costs. As these derivatives hedge certain assets and liabilities of
the corporation, as noted in the table above, there has been offsetting
unrealized appreciation and depreciation in the assets and liabilities hedged.
Deferred gains and losses on terminated end-user derivatives were not material
at December 31, 1997 and 1996.
The corporation has entered into mandatory and standby forward contracts,
including options on forward contracts, to reduce interest risk on certain
mortgage loans held for sale and other commitments. The contracts provide for
the delivery of securities at a specified future date, at a specified future
price or yield. At December 31, 1997 and 1996, the corporation had forward
contracts totaling $27.5 billion and $19.8 billion, respectively. The contracts
mature within 180 days. Gains and losses on forward contracts are included in
the determination of market value of mortgages held for sale. The net unrealized
gain (loss) on these contracts at December 31, 1997 and 1996, was $(28.9)
million and $20.1 million, respectively.
62
16. BUSINESS SEGMENTS
The corporation's operations include three primary business segments: banking,
mortgage banking and consumer finance. The corporation, through its subsidiary
banks, offers diversified banking services including retail, commercial and
corporate banking, equipment leasing, and trust services; and through their
affiliates offers insurance, securities brokerage, investment banking and
venture capital investment. Mortgage banking activities include the origination
and purchase of residential mortgage loans for sale to various investors as well
as providing servicing of mortgage loans for others. Norwest Financial
(including Norwest Financial Services, Inc. and Island Finance) provides
consumer finance services, including direct installment loans to individuals,
purchase of sales finance contracts, private label and lease accounts receivable
financing, and other related products and services. Selected financial
information by business segment for each of the three years ended December 31 is
included in the following summary:
Organizational Total
In millions Revenues* Earnings* Assets
-------- --------- ------
1997:
Banking.............................................. $6,209.1 957.2 61,532.8
Mortgage Banking..................................... 1,509.8 151.0 16,434.3
Norwest Financial.................................... 1,940.8 242.8 10,573.1
-------- ------- --------
Total............................................... $9,659.7 1,351.0 88,540.2
======== ======= ========
1996:
Banking.............................................. $5,672.7 764.6 59,282.8
Mortgage Banking..................................... 1,423.2 125.0 11,939.8
Norwest Financial.................................... 1,787.0 264.3 8,952.8
-------- ------- --------
Total............................................... $8,882.9 1,153.9 80,175.4
======== ======= ========
1995:
Banking.............................................. $5,008.9 602.2 53,479.4
Mortgage Banking..................................... 999.0 104.9 10,089.3
Norwest Financial.................................... 1,557.6 248.9 8,565.7
-------- ----- --------
Total............................................... $7,565.5 956.0 72,134.4
======== ===== ========
*Revenues (interest income plus non-interest income), where applicable, and
organizational earnings by business segment are impacted by intercompany
revenues and expenses, such as interest on borrowings from the parent company,
corporate service fees and allocations of federal income taxes.
17. MORTGAGE BANKING ACTIVITIES
The components of mortgage banking non-interest income for each of the three
years ended December 31 is presented below:
In millions 1997 1996 1995
-------- ----- ------
Origination and other closing fees............... $314.1 305.3 198.4
Servicing fees................................... 294.6 296.2 211.7
Net gains (losses) on sales of servicing rights.. (8.4) 57.4 81.3
Net gains (losses) on sales of mortgages......... 98.2 13.1 (24.2)
Other............................................ 177.0 149.5 68.3
------ ----- -----
Total mortgage banking non-interest income...... $875.5 821.5 535.5
====== ===== =====
63
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The outstanding balances of serviced loans were
$205.8 billion, $179.7 billion and $107.4 billion at December 31, 1997, 1996 and
1995, respectively.
Changes in capitalized mortgage loan servicing rights for each of the three
years ended December 31 were:
In millions 1997 1996 1995
---------- -------- --------
Balance at beginning of year............... $2,712.7 1,290.9 649.2
Originations.............................. 361.1 360.8 233.1
Purchases................................. 359.6 1,458.7 757.1
Sales..................................... (34.4) (72.0) (202.1)
Amortization.............................. (444.3) (300.6) (139.6)
Other..................................... (115.6) (25.1) (6.8)
-------- ------- -------
2,839.1 2,712.7 1,290.9
Less valuation allowance.................. (64.2) (64.2) (64.2)
-------- ------- -------
Balance at end of year..................... $2,774.9 2,648.5 1,226.7
======== ======= =======
The fair value of capitalized mortgage servicing rights included in the
consolidated balance sheet at December 31, 1997 was approximately $3.1 billion,
calculated using discount rates ranging from 500 to 700 basis points over the
ten-year U.S. Treasury rate.
Changes in the valuation allowance for capitalized mortgage servicing rights for
each of the three years ended December 31 were:
In millions 1997 1996 1995
----- ---- ----
Balance at beginning of year........................................... $64.2 64.2 --
Provision for capitalized mortgage servicing rights in excess of fair
value................................................................ -- -- 64.2
----- ---- ----
Balance at end of year................................................. $64.2 64.2 64.2
===== ==== ====
64
18. FAIR VALUE OF 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.
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 services companies.
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 on the
consolidated balance sheets 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, Investment and Mortgage-
Backed Securities Available for Sale Fair values of these financial instruments
were estimated using quoted market prices, when available. If quoted market
prices were not available, fair value was estimated using quoted market prices
for similar assets. The fair value of trading account securities and investment
and mortgage-backed securities available for sale are recognized in the
consolidated balance sheets. See Note 4 for additional information on the
amortized cost and fair value of investment securities.
Mortgages Held for Sale Fair values of mortgages held for sale are stated at
market.
Loans and Leases and Loans Held for Sale Fair values for loans and leases are
estimated based on contractual cash flows, adjusted for prepayment assumptions
and credit risk factors, discounted using the current market rate for loans and
leases. Variable rate loans, including loans held for sale, are valued at
carrying value since the loans reprice to market rates over short periods of
time. The fair value of the corporation's consumer finance subsidiaries' loans
have been reported at carrying value since the estimated life, assuming
prepayments, is short-term in nature.
Interest Receivable and Payable The carrying value of interest receivable and
payable approximates fair value due to the relatively short period of time
between accrual and expected realization. At December 31, 1997 and 1996,
interest receivable was $549.9 million and $487.5 million, respectively, and
interest payable was $484.0 million and $445.0 million, respectively.
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 equal to the
amount payable on demand, the carrying amount in the consolidated balance
sheets.
Short-term Borrowings The carrying value of short-term borrowings in the
consolidated balanced sheets approximates fair value due to the relatively short
period of time between the origination of the instruments and their expected
repayment.
Long-term Debt The fair value of long-term debt is the present value of the
contractual cash flows, discounted by the investor yield which considers the
corporation's credit rating.
Commitments to Extend Credit, Standby Letters of Credit and Recourse Obligations
The majority of the corporation's commitment agreements and letters of credit
contain variable interest rates and counterparty credit deterioration clauses
and therefore, the carrying value of the corporation's commitments to extend
credit and letters of credit approximates fair value. The fair value of the
corporation's recourse obligations are valued based on estimated cash flows
associated with such obligations. As any potential liabilities under such
recourse obligations are recognized on the corporation's balance sheet, the
carrying value of such recourse obligations approximates fair value.
65
Forward Delivery Commitments, Interest Rate Swaps, Interest Rate Caps and
Floors, Futures Contracts, Options on Futures, Contracts, Security Options and
Foreign Exchange Contracts The fair value of forward delivery commitments,
interest rate swaps, interest rate caps and floors, futures contracts, security
options 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.
As discussed above, certain of the corporation's asset and liability financial
instruments are short-term, and therefore, the carrying amounts in the
consolidated balance sheets approximate fair value. Other significant assets and
liabilities, which are not considered financial assets or liabilities and for
which fair values have not been estimated, include premises and equipment,
goodwill and other intangibles, deferred taxes and other liabilities. The fair
value of the corporation's remaining financial instruments are summarized below.
Fair Values of Financial Instruments
1997 1996
---------------------------- ----------------------------
Carrying Fair Carrying Fair
In millions Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Investment securities held for investment.. $ 747.2 762.8 712.2 745.2
Mortgages held for sale.................... 8,848.0 8,954.8 6,339.0 6,339.0
Loans and leases, net...................... 41,287.7 41,825.7 38,340.2 38,708.4
Financial liabilities:
Deposits with stated maturities............ 17,502.0 17,449.5 16,317.0 16,290.3
Long-term debt............................. 12,766.7 12,872.2 13,082.2 13,022.2
Off-balance sheet financial instruments:
Forward delivery commitments............... (28.9) (28.9) 20.1 20.1
Interest rate swaps........................ 1.0 191.3 1.3 45.6
Futures contracts and options
on futures contracts..................... (22.0) 47.6 10.9 (17.6)
Interest rate caps/floors.................. 152.0 285.0 150.4 138.1
Option contracts to sell................... 3.6 3.1 3.7 1.8
Foreign exchange contracts and options..... 1.5 (4.8) 0.3 0.3
66
19. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Norwest Corporation (parent company only)
follows:
Balance Sheets
In millions 1997 1996
-------- --------
At December 31,
- --------------
ASSETS
Interest-bearing deposits with subsidiary banks............ $ 547.6 12.7
Interest-bearing deposits with non-affiliates.............. 2.1 2.4
--------- --------
Total cash and cash equivalents..................... 549.7 15.1
Advances to non-bank subsidiaries.......................... 5,590.0 5,450.4
Capital notes and term loans of subsidiaries
Banks................................................. 10.2 24.5
Non-banks............................................. 1,561.5 1,466.8
--------- --------
Total capital notes and term loans of subsidiaries.. 1,571.7 1,491.3
--------- --------
Investments in subsidiaries
Banks................................................. 5,222.6 4,108.5
Non-banks............................................. 2,075.0 2,304.6
--------- --------
Total investments in subsidiaries................... 7,297.6 6,413.1
Investment securities available for sale................... 1,190.8 1,233.9
Other assets............................................... 1,236.3 495.2
--------- --------
Total assets........................................ $17,436.1 15,099.0
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings...................................... $ 3,997.7 2,232.5
Accrued expenses and other liabilities..................... 601.8 408.8
Long-term debt with non-affiliates......................... 5,804.9 6,384.0
Stockholders' equity....................................... 7,031.7 6,073.7
--------- --------
Total liabilities and stockholders' equity.......... $17,436.1 15,099.0
========= ========
67
STATEMENTS OF INCOME
1997 1996 1995
In millions -------- -------- -------
Years Ended December 31,
- ------------------------
INCOME
Dividends from subsidiaries
Banks............................................... $ 793.8 796.1 981.7
Non-banks........................................... 343.4 713.3 268.0
-------- -------- -------
Total dividends from subsidiaries................. 1,137.2 1,509.4 1,249.7
Interest from subsidiaries............................. 387.8 430.7 332.6
Service fees from subsidiaries......................... 118.3 112.7 89.2
Other income........................................... 152.0 157.5 66.6
-------- -------- -------
Total income...................................... 1,795.3 2,210.3 1,738.1
-------- -------- -------
EXPENSES
Interest to subsidiaries............................... 27.8 10.6 10.6
Other interest......................................... 489.0 530.7 409.2
Other expenses......................................... 178.9 95.8 150.2
-------- -------- -------
Total expenses.................................... 695.7 637.1 570.0
-------- -------- -------
Income before income taxes and equity
in undistributed earnings of subsidiaries........... 1,099.6 1,573.2 1,168.1
Income tax (provision) benefit......................... 16.4 (32.3) 27.2
-------- -------- -------
Income before equity in
undistributed earnings of subsidiaries.............. 1,116.0 1,540.9 1,195.3
Equity in undistributed earnings of subsidiaries....... 235.0 (387.0) (239.3)
-------- -------- -------
Net income............................................. $1,351.0 1,153.9 956.0
======== ======== =======
Federal law prevents the corporation and its non-bank subsidiaries from
borrowing from its subsidiary banks unless the loans are secured by specified
assets. Such secured loans by any subsidiary bank are generally limited to 10
percent of the subsidiary bank's capital and surplus and aggregate loans to the
corporation and its non-bank subsidiaries are limited to 20 percent of the
subsidiary bank's capital and surplus.
The payment of dividends to the corporation by subsidiary banks is subject to
various federal and state regulatory limitations. A national bank must obtain
the approval of the Comptroller of the Currency if the total of all dividends
declared in any calendar year exceeds that bank's net income for that year
combined with its retained net income for the preceding two calendar years, less
any required transfers to surplus or a fund for the retirement of preferred
stock. The corporation also has several state bank subsidiaries that are subject
to state regulations limiting dividends. Under these provisions, the
corporation's national and state-chartered bank subsidiaries could have declared
as of December 31, 1997 aggregate dividends of at least $462.9 million without
obtaining prior regulatory approval and without reducing the capital below
minimum regulatory levels. In addition, the corporation's non-bank subsidiaries
could have declared dividends totaling $978.0 million at December 31, 1997.
68
STATEMENTS OF CASH FLOWS
In millions 1997 1996 1995
-------- -------- --------
Years Ended December 31,
- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $1,351.0 1,153.9 956.0
Adjustments to reconcile net income to net
cash flows from operating activities:
Equity in undistributed earnings of subsidiaries.... (235.0) 387.0 239.3
Depreciation and amortization....................... 18.6 20.6 20.0
Release of preferred shares to ESOP................. 34.1 37.8 40.0
Other assets, net................................... (797.7) (102.4) (146.8)
Accrued expenses and other liabilities, net......... 248.0 (64.7) 205.4
-------- -------- -------
Net cash flows from operating activities............... 619.0 1,432.2 1,313.9
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to non-bank subsidiaries, net................. (139.6) (901.5) (2,096.5)
Investment securities available for sale, net.......... 130.5 (222.3) (551.2)
Principal collected on capital notes and
term loans of subsidiaries.......................... 46.0 841.4 296.8
Capital notes and term loans made to subsidiaries...... (112.8) (165.3) (1,318.5)
Investments in subsidiaries, net....................... (384.2) (851.7) (865.9)
-------- -------- -------
Net cash flows used for investing activities........... (460.1) (1,299.4) (4,535.3)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net............................. 1,765.2 (5.6) 689.9
Proceeds from issuance of long-term debt with 403.0 1,803.0 3,405.0
non-affiliates.........................................
Repayment of long-term debt with non-affiliates........ (980.9) (1,259.6) (309.4)
Issuances of common stock.............................. 149.6 82.4 65.4
Repurchases of common stock............................ (482.7) (402.0) (186.8)
Issuance of stock warrants to subsidiaries............. -- 1.8 1.1
Repurchases of preferred stock......................... -- (112.7) (0.4)
Net decrease in ESOP loans............................. 1.0 3.7 --
Dividends paid......................................... (479.5) (403.4) (337.8)
-------- -------- -------
Net cash flows (used for) from financing activities.... 375.7 (292.4) 3,327.0
-------- -------- -------
Net increase (decrease) in cash and cash equivalents... 534.6 (159.6) 105.6
Cash and cash equivalents
Beginning of year................................... 15.1 174.7 69.1
-------- -------- -------
End of year......................................... $ 549.7 15.1 174.7
======== ======== =======
69
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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 15, 1998
70
MANAGEMENT'S REPORT
The management of Norwest Corporation has prepared and is responsible for the
content of the financial statements included in this annual report and the
information contained in other sections of this annual report, which information
is consistent with the content of the financial statements. Management believes
that the financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances to reflect, in
all material respects, the substance of events and transactions that should be
included. In preparing the financial statements, management makes judgments and
estimates of the expected effects of events and transactions that are accounted
for or disclosed.
Management has long recognized the importance of the corporation maintaining and
reinforcing the highest possible standards of conduct in all of its actions,
including the preparation and dissemination of statements fairly presenting the
financial condition of the corporation. In this regard, it has developed a
system of internal accounting control which plays an important role in assisting
management in fulfilling its responsibilities in preparing the corporation's
financial statements. The corporation's system of internal accounting control is
designed to provide reasonable assurance that assets are safeguarded and that
transactions are executed in accordance with management's authorizations. This
system is augmented by written policies, operating procedures and accounting
manuals, plus a strong program of internal audit carried out by qualified
personnel. Management recognizes that estimates and judgments are required to
assess and balance the relative costs and expected benefits of the controls and
errors or irregularities may nevertheless occur. However, management believes
that the corporation's internal accounting control system provides reasonable
assurance that errors or irregularities that could be material to the financial
statements are prevented or would be detected on a timely basis and corrected in
the normal course of business.
The board of directors oversees these financial statements through an audit and
examination committee comprised of outside directors. The committee meets
periodically with management and internal audit to monitor the discharge by each
of its responsibilities. The independent auditors, who are engaged to express an
opinion on the financial statements, meet periodically with and have free access
to the committee or the board, without management present, to discuss internal
accounting control, auditing and financial reporting matters.
/s/ RICHARD M. KOVACEVICH
Richard M. Kovacevich
Chairman and
Chief Executive Officer
/s/ LESLIE S. BILLER
Leslie S. Biller
President and
Chief Operating 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 15, 1998
71
Norwest Corporation and Subsidiaries
Six-Year Consolidated Financial Summary
In millions, except per common share amounts and
ratios
Years Ended December 31, 1997 1996 1995 1994
- ------------------------ ------- ------- ------- -------
STATEMENTS OF INCOME
Interest income..................................... $6,697.4 6,318.3 5,717.3 4,393.7
Interest expense.................................... 2,664.0 2,617.0 2,448.0 1,590.1
-------- -------- ------- -------
Net interest income.............................. 4,033.4 3,701.3 3,269.3 2,803.6
Provision for credit losses......................... 524.7 394.7 312.4 164.9
-------- -------- ------- -------
Net interest income after provision for credit
losses......................................... 3,508.7 3,306.6 2,956.9 2,638.7
Non-interest income................................. 2,962.3 2,564.6 1,848.2 1,638.3
Non-interest expenses............................... 4,421.3 4,089.7 3,382.3 3,096.4
-------- -------- ------- -------
Income before income taxes and cumulative effect of
a change in accounting for postretirement medical
benefits......................................... 2,049.7 1,781.5 1,422.8 1,180.6
Income tax expense.................................. 698.7 627.6 466.8 380.2
Cumulative effect on years ended prior to
December 31, 1992 of a change in accounting for
postretirement medical benefits, net of
tax.............................................. -- -- -- --
-------- -------- -------- -------
Net income.......................................... $1,351.0 1,153.9 956.0 800.4
======== ======== ======== =======
PER COMMON SHARE
Net income (a)
Basic............................................ $ 1.78 1.55 1.39 1.23
Diluted.......................................... 1.75 1.54 1.36 1.20
Dividends declared.................................. 0.6150 0.5250 0.4500 0.3825
Stockholders' equity................................ 9.01 7.97 7.10 5.39
Stock price range................................... 39 1/2-21 3/8 23 7/16-15 1/4 17 3/8-11 5/16 14 1/8-10 1/2
Selected Consolidated Balance Sheet Data At December 31,
Assets.............................................. $ 88,540 80,175 72,134 59,316
Investment and mortgage-backed securities available
for sale......................................... 17,984 16,247 15,243 13,602
Investment securities............................... 747 712 761 1,235
Loans, leases, and loans and mortgages held for
sale(b).......................................... 54,777 48,548 46,012 37,723
Deposits............................................ 55,457 50,130 42,029 36,424
Long-term debt...................................... 12,767 13,082 13,677 9,186
Stockholders' equity................................ 7,022 6,064 5,312 3,846
Ratios(c)
Per $100 of average assets
Net interest income (tax-equivalent basis)....... $ 4.93 4.88 4.98 5.14
Provision for credit losses...................... 0.63 0.52 0.47 0.30
-------- -------- ------- -------
Net interest income after provision for credit
losses......................................... 4.30 4.36 4.51 4.84
Non-interest income.............................. 3.58 3.35 2.82 2.97
Non-interest expenses............................ 5.35 5.34 5.13 5.62
-------- -------- ------- -------
Income before income taxes and cumulative effect
of a change in accounting for postretirement
medical benefits.............................. 2.53 2.37 2.20 2.19
Income tax expense............................... 0.85 0.82 0.71 0.69
Less tax equivalent adjustment................... 0.05 0.04 0.05 0.05
Cumulative effect on years ended prior to
December 31, 1992 of a change in accounting for
postretirement medical benefits, net of tax ... -- -- -- --
-------- -------- ------- -------
Net income(a)....................................... $ 1.63 1.51 1.44 1.45
======== ======== ======= =======
Leverage(d)......................................... 12.7x 13.5 14.3 14.3
Return on realized common equity(a)(e).............. 22.1% 21.9 22.3 21.4
Return on realized total equity(a)(e)............... 21.7% 21.5 20.9 20.3
Stockholders' equity to average assets.............. 7.9% 7.4 7.0 7.0
Dividend payout ratio............................... 34.6% 33.9 32.4 31.1
Tier 1 capital ratio at December 31................. 9.09% 8.63 8.11 9.89
Tier 1 and Tier 2 capital ratio at December 31...... 11.01% 10.42 10.18 12.23
Leverage ratio...................................... 6.63% 6.15 5.65 6.94
Years Ended December 31, 1993 1992
- ------------------------ ------- -------
STATEMENTS OF INCOME
Interest income......................................... 3,946.3 3,806.4
Interest expense........................................ 1,442.9 1,610.6
------- -------
Net interest income.................................. 2,503.4 2,195.8
Provision for credit losses............................. 158.2 270.8
------- -------
Net interest income after provision for credit
losses............................................. 2,345.2 1,925.0
Non-interest income..................................... 1,585.0 1,273.7
Non-interest expenses................................... 3,050.4 2,553.1
------- -------
Income before income taxes and cumulative effect of
a change in accounting for postretirement medical
benefits............................................. 879.8 645.6
Income tax expense...................................... 266.7 175.6
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.............................................. 613.1 394.0
======= =======
PER COMMON SHARE
Net income (a)
Basic................................................ 0.95 0.60
Diluted.............................................. 0.93 0.60
Dividends declared...................................... 0.320 0.2700
Stockholders' equity.................................... 5.50 4.94
Stock price range....................................... 14 1/2-10 5/16 11 1/16-8 5/16
Selected Consolidated Balance Sheet Data At December 31,
Assets.................................................. 54,665 50,037
Investment and mortgage-backed securities available
for sale............................................. 11,023 10,932
Investment securities................................... 1,694 2,031
Loans, leases, and loans and mortgages held for
sale(b).............................................. 36,201 31,667
Deposits................................................ 35,977 31,609
Long-term debt.......................................... 6,851 4,553
Stockholders' equity.................................... 3,761 3,372
RATIOS(c)
Per $100 of average assets
Net interest income (tax-equivalent basis)........... 4.98 4.81
Provision for credit losses.......................... 0.31 0.58
------- -------
Net interest income after provision for credit
losses............................................. 4.67 4.23
Non-interest income.................................. 3.11 2.74
Non-interest expenses................................ 5.99 5.50
------- -------
Income before income taxes and cumulative effect
of a change in accounting for postretirement
medical benefits................................... 1.79 1.47
Income tax expense................................... 0.52 0.38
Less tax equivalent adjustment....................... 0.07 0.08
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)........................................... 1.20 0.85
======= =======
Leverage(d)............................................. 14.2 13.2
Return on realized common equity(a)(e).................. 18.2 11.7
Return on realized total equity(a)(e)................... 17.1 11.2
Stockholders' equity to average assets.................. 7.1 7.6
Dividend payout ratio................................... 33.7 45.0
Tier 1 capital ratio at December 31..................... 9.71 9.74
Tier 1 and Tier 2 capital ratio at December 31.......... 12.39 12.42
Leverage ratio.......................................... 6.46 6.62
(a) Excluding the cumulative effect of a change in accounting for
postretirement medical benefits, 1992 basic net income per common share
would have been $0.73, diluted net income per common share would have been
$0.71, 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 21.0% and return on total equity was
20.7% in 1997. In 1996, 1995 and 1994, return on common equity was 20.8% ,
21.9% and 22.1% respectively, and return on total equity was 20.4%, 20.6%
and 20.8% respectively.
72
Norwest Corporation and Subsidiaries
Consolidated Average Balance Sheets and Related Yields and Rates*
1997 1996 1995
-------------------------- --------------------------- ------------------
Interest Average Interest Average Interest
Average Income/ Yields/ Average Income/ Yields/ Average Income/
In millions, except ratios Balance Expense Rates Balance Expense Rates Balance Expense
------- -------- ------- ------- -------- ------- ------- --------
ASSETS
Money market investments........................... $ 913 $ 50.6 5.54% $1,156 $ 63.0 5.47% $ 604 $ 35.7
Trading account securities......................... 595 41.6 6.99 378 25.2 6.62 180 15.2
Investment securities available for sale
U.S. Treasury and federal agencies.............. 2,369 149.4 6.31 1,274 79.8 6.29 1,105 73.5
State, municipal and housing-tax exempt......... 1,338 111.1 8.62 894 78.4 9.05 123 9.4
Mortgage-backed ................................ 14,408 1,058.4 7.43 13,376 988.2 7.41 12,628 945.8
Other........................................... 1,053 48.8 6.31 1,123 48.6 6.36 671 39.6
------ ------- ------ ------- ------- --------
Total investment securities available
for sale..................................... 19,168 1,367.7 7.32 16,667 1,195.0 7.36 14,527 1,068.3
Other securities held for investment............... 726 28.3 3.91 806 36.2 4.49 1,395 106.5
------ ------- ------ ------- ------- --------
Total investment securities..................... 19,894 1,396.0 7.20 17,473 1,231.2 7.23 15,922 1,174.8
Loans held for sale................................ 2,953 231.8 7.85 2,897 254.3 8.78 2,232 195.7
Mortgages held for sale............................ 6,403 462.0 7.22 6,358 468.5 7.37 4,804 366.2
Loans and leases (net of unearned discount)
Commercial...................................... 13,429 1,228.2 9.15 12,728 1,165.2 9.15 10,754 1,003.1
Real estate..................................... 15,044 1,463.6 9.73 13,850 1,345.0 9.71 13,113 1,232.3
Consumer........................................ 12,272 1,868.1 15.22 11,966 1,798.1 15.03 11,694 1,727.8
------ ------- ------ ------- ------- --------
Total loans and leases........................ 40,745 4,559.9 11.19 38,544 4,308.3 11.18 35,561 3,963.2
Allowance for credit losses..................... (1,117) (1,005) (861)
------ ------ -------
Net loans and leases.......................... 39,628 37,539 34,700
------ ------- ------ ------- ------- --------
Total earning assets
(before the allowance for credit losses).... 71,503 6,741.9 9.49 66,806 6,350.5 9.57 59,303 5,750.8
------- ------- --------
Cash and due from banks............................ 3,589 3,594 3,214
Other assets....................................... 8,658 7,107 4,597
------ ------ -------
Total assets.................................. $82,633 $76,502 $66,253
====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits....................... $14,110 $12,212 $ 9,985
Interest-bearing deposits
Savings and NOW accounts........................ 9,593 157.2 1.64 7,017 120.9 1.72 4,992 98.9
Money market accounts........................... 10,771 353.4 3.28 11,062 348.1 3.15 10,595 332.9
Savings certificates............................ 13,008 708.0 5.44 12,420 677.3 5.45 10,809 583.1
Certificates of deposit and other time.......... 3,496 199.5 5.71 2,862 161.8 5.65 1,860 106.7
Foreign time.................................... 669 28.6 4.28 381 16.8 4.41 609 34.7
------ ------- ------ ------- ------- --------
Total interest-bearing deposits............... 37,537 1,446.7 3.85 33,742 1,324.9 3.93 28,865 1,156.3
Short-term borrowings.............................. 8,232 439.4 5.34 8,554 454.1 5.31 8,738 515.8
Long-term debt..................................... 12,464 777.9 6.24 13,667 838.0 6.13 11,918 776.0
------ ------- ------ ------- ------- --------
Total interest-bearing liabilities............ 58,233 2,664.0 4.57 55,963 2,617.0 4.68 49,521 2,448.1
Capitalized interest expense....................... -- -- -- (0.1)
------ ------- ------- --------
Net interest expense.......................... 2,664.0 2,617.0 2,448.0
Other liabilities.................................. 3,761 2,677 2,109
Stockholders' equity............................... 6,529 5,650 4,638
------ ------ -------
Total liabilities and stockholders' equity.... $82,633 $76,502 $66,253
====== ------- ====== ------- ======= --------
Net Interest income (tax-equivalent basis)......... $4,077.9 $3,733.5 $3,302.8
======= ======= =======
Yield spread....................................... 4.92 4.89
Net interest income to earning assets.............. 5.74 5.63
Interest-bearing liabilities to earning assets..... 81.44 83.77
* Interest income/expense and yields/rates are calculated on a tax-equivalent
basis utilizing a federal incremental tax rate of 35% in 1997, 1996, 1995,
1994 and 1993 and 34% in 1992. Non-accrual loans and the related negative
income effect have been included in the calculation of average rates.
NM -- Not meaningful
73
1994 1993 1992 Average Balance
---------- -------------------------- -------------------------- -------------------------- ------------------
Average Interest Average Interest Average Interest Average 5 Year % Change
Yields/ Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ Growth 1997 Over
Rates Balance Expense Rates Balance Expense Rates Balance Expense Rates Rate % 1996
---------- -------- -------- ------- -------- ------- ------- -------- ------- ------- ------- ---------
5.92% $ 472 $ 21.9 4.66% $ 624 $ 19.8 3.18% $ 779 $ 28.9 3.71% 3.2% (21.0)%
8.48 250 25.2 10.11 254 30.3 11.90 344 23.9 6.95 11.6 57.4
6.71 1,646 93.9 5.74 159 8.2 5.16 7,183 562.7 7.83 (19.9) 85.9
7.62 93 7.8 8.36 61 6.7 10.92 -- -- -- NM 50.0
7.46 10,407 715.7 6.73 8,827 592.4 6.71 2,093 164.9 7.88 47.1 7.7
7.89 398 20.9 6.50 1,623 114.8 7.07 456 38.6 8.46 18.2 (6.2)
------- ------- ------- ------- ------- -------
7.42 12,544 838.3 6.61 10,670 722.1 6.77 9,732 766.2 7.87 14.5 15.0
7.64 1,118 92.4 8.26 1,846 141.0 7.64 3,483 259.8 7.46 (26.9) (9.9)
------- ------- ------- ------- ------- -------
7.44 13,662 930.7 6.74 12,516 863.1 6.90 13,215 1,026.0 7.76 8.5 13.9
8.77 1,563 111.4 7.13 1,266 85.3 6.74 345 24.2 6.99 53.6 1.9
7.62 3,757 257.2 6.85 4,932 326.8 6.63 3,639 279.4 7.68 12.0 0.7
9.33 9,301 749.9 8.06 8,433 648.3 7.69 8,105 670.8 8.28 10.6 5.5
9.40 11,445 997.2 8.71 10,720 934.7 8.72 8,478 834.3 9.84 12.2 8.6
14.78 9,498 1,329.2 13.99 7,415 1,071.3 14.45 6,749 956.8 14.18 12.7 2.6
------- ------- ------- ------- ------- -------
11.14 30,244 3,076.3 10.17 26,568 2,654.3 9.99 23,332 2,461.9 10.55 11.8 5.7
(801) (791) (721) 9.1 11.1
------- ------- -------
29,443 25,777 22,611 11.9 5.6
------- ------- ------- ------- ------- --------
9.72 49,948 4,422.7 8.83 46,160 3,979.6 8.62 41,654 3,844.3 9.23 11.4 7.0
------- ------- --------
2,974 2,871 2,566 6.9 (0.1)
2,952 2,647 2,904 24.4 21.8
------- ------- -------
$55,073 $50,887 $46,403 12.2 8.0
======= ======= =======
$ 8,704 $7,726 $ 6,225 17.8 15.5
1.98 4,617 85.0 1.84 4,244 85.3 2.01 3,872 107.5 2.78 19.9 36.7
3.14 10,487 247.4 2.36 9,106 201.1 2.21 8,159 205.9 2.52 5.7 (2.6)
5.39 9,794 446.9 4.56 9,582 473.1 4.94 10,352 603.9 5.83 4.7 4.7
5.73 1,544 69.9 4.53 1,650 77.7 4.71 1,754 94.7 5.40 14.8 22.2
5.70 328 14.2 4.34 489 15.1 3.09 112 3.6 3.23 43.0 75.6
------- ------- ------ ------- ------- --------
4.01 26,770 863.4 3.23 25,071 852.3 3.40 24,249 1,015.6 4.19 9.1 11.2
5.90 6,628 290.3 4.38 7,316 238.1 3.25 7,058 277.9 3.94 3.1 (3.8)
6.51 7,508 436.4 5.82 5,871 352.6 6.01 4,086 317.3 7.77 25.0 (8.8)
------- ------- ------ ------- ------- --------
4.94 40,906 1,590.1 3.89 38,258 1,443.0 3.77 35,393 1,610.8 4.55 10.5 4.1
-- (0.1) (0.2)
------- ------- --------
1,590.1 1,442.9 1,610.6
1,620 1,315 1,276 24.1 40.5
3,843 3,588 3,509 13.2 15.6
------- ------ -------
$55,073 $50,887 $46,403 12.2 8.0
======= ------- ====== ------- ======= -------
$2,832.6 $2,536.7 $2,233.7
======= ======= =======
4.78 4.94 4.85 4.68
5.58 5.66 5.50 5.36
83.50 81.90 82.88 84.97
74
Norwest Corporation and Subsidiaries
Income Statement Data
1997 Over 1996 1996 Over 1995
---------------------------------- ---------------------------------
In millions Volume Yield/Rate Total Volume Yield/Rate Total
---------- ------------ ---------- ---------- ------------ ---------
Changes in Tax-Equivalent Net Interest Income*
Interest income
Loans and leases................................... $ 246.1 5.5 251.6 332.5 12.6 345.1
Investment and mortgage-backed securities
available for sale.............................. 176.6 (3.9) 172.7 132.5 (5.8) 126.7
Investment securities.............................. (3.6) (4.3) (7.9) (45.0) (25.3) (70.3)
-------- -------- -------- -------- -------- --------
Total investment securities................... 173.0 (8.2) 164.8 87.5 (31.1) 56.4
Money market and trading account securities........ (1.4) 5.4 4.0 48.6 (11.3) 37.3
Loans held for sale................................ 4.9 (27.4) (22.5) 58.3 0.3 58.6
Mortgages held for sale............................ 3.3 (9.8) (6.5) 118.5 (16.2) 102.3
-------- -------- -------- -------- -------- --------
Total......................................... 425.9 (34.5) 391.4 645.4 (45.7) 599.7
-------- -------- -------- -------- -------- --------
Interest expense
Interest-bearing deposits.......................... 149.0 (27.2) 121.8 195.4 (26.8) 168.6
Short-term borrowings.............................. (17.1) 2.4 (14.7) (10.9) (50.8) (61.7)
Long-term debt..................................... (73.8) 13.7 (60.1) 113.9 (51.8) 62.1
-------- -------- -------- -------- -------- --------
Total......................................... 58.1 (11.1) 47.0 298.4 (129.4) 169.0
-------- -------- -------- -------- -------- --------
Net interest income................................ $ 367.8 (23.4) 344.4 347.0 83.7 430.7
======== ======== ======== ======== ======== ========
*Changes in the average balance/rate are allocated entirely to the yield/rate
changes.
Analysis of Selected Non-interest Expenses
1997 % Change 1996 % Change 1995 1994 1993
------- -------- -------- -------- -------- --------- --------
Salaries and benefits
Salaries............................... $2,002.7 12.5% $1,780.1 24.5% $1,430.2 1,260.9 1,210.8
Benefits............................... 358.2 13.0 317.0 0.7 314.9 312.8 263.5
-------- -------- -------- --------- -------
Total............................. $2,360.9 12.6% $2,097.1 20.2% $1,745.1 1,573.7 1,474.3
======== ======== ======== ========= =======
Business development
Advertising............................ $ 101.2 5.1% $ 96.3 31.9% $ 73.0 98.6 73.0
Other business development............. 152.7 16.0 131.6 32.7 99.2 91.9 78.3
-------- -------- -------- -------- ------
Total............................. $ 253.9 11.4% $ 227.9 32.3% $ 172.2 190.5 151.3
======== ======== ======== ======== ======
Other non-interest expenses
Professional fees...................... $ 152.7 32.0% $ 115.7 28.0% $ 90.4 60.2 60.2
Insurance claims and commissions....... 122.0 49.0 81.9 49.2 54.9 42.7 42.2
Other employment....................... 75.6 16.3 65.0 37.1 47.4 45.6 38.7
Other real estate owned, net........... 12.2 (37.8) 19.6 39.0 14.1 (11.8) 3.3
FDIC assessment and regulatory
examination fees.................... 18.8 (53.1) 40.1 (49.0) 78.6 87.6 79.7
Other.................................. 125.9 (33.3) 188.7 13.3 166.6 270.0 458.0
-------- -------- -------- -------- ------
Total............................. $ 507.2 (0.7)% $ 511.0 13.1% $ 452.0 494.3 682.1
======== ======== ======== ======== ======
75
Norwest Corporation and Subsidiaries
Loan Information
In millions, except ratios 1997 1996 1995 1994 1993 1992
-------- -------- --------- -------- -------- --------
LOANS AND LEASES AT DECEMBER 31,
Commercial, financial and industrial............... $ 10,680 10,205 9,327 7,434 6,686 6,577
Agricultural....................................... 1,276 1,108 1,091 956 938 830
Construction and land development.................. 1,006 944 742 568 566 454
Real Estate
Secured by 1-4 family residential properties.... 10,747 10,376 8,593 8,959 8,321 7,582
Secured by other properties..................... 4,998 4,749 4,174 3,590 3,418 3,186
Consumer........................................... 12,298 10,431 10,521 8,305 6,879 6,046
Credit card........................................ 1,632 1,566 1,666 2,511 1,727 994
Lease financing.................................... 921 812 816 765 699 627
Foreign
Consumer installment............................ 799 703 652 444 425 425
Real estate secured by 1-4 family residential
properties.................................... 65 72 53 42 30 15
Other........................................... 212 188 196 130 93 62
-------- -------- ------- ------- -------- --------
Total loans and leases........................ 44,634 41,154 37,831 33,704 29,782 26,798
Unearned discount............................. (2,112) (1,773) (1,678) (1,128) (1,021) (1,015)
-------- -------- ------- ------- -------- --------
Total loans and leases net of unearned
discount.................................. $ 42,522 39,381 36,153 32,576 28,761 25,783
======== ======== ======= ======= ======== ========
ALLOWANCE FOR CREDIT LOSSES
Balance at beginning of year....................... $1,040.8 917.2 789.9 789.2 773.1 704.3
Allowances related to assets acquired, net......... 168.1 111.3 119.1 29.0 36.2 23.4
Provision for credit losses........................ 524.7 394.7 312.4 164.9 158.2 270.8
Credit losses
Commercial, financial and industrial............ 83.6 53.9 41.3 31.0 58.9 90.9
Agricultural.................................... 4.2 6.1 2.7 4.5 2.6 4.2
Construction and land development............... 1.6 0.6 0.6 2.8 11.9 15.8
Real estate..................................... 29.4 26.5 20.8 44.2 53.2 68.4
Consumer........................................ 399.1 301.8 201.7 130.5 116.4 118.9
Credit card..................................... 92.7 83.5 121.8 73.2 46.1 36.9
Lease financing................................. 5.5 4.5 2.6 2.3 2.2 2.6
Foreign
Consumer installment.......................... 35.9 33.7 27.5 17.4 18.5 2.9
Other......................................... 0.5 1.2 2.2 8.9 0.5 0.5
-------- -------- ------- ------- -------- --------
Total credit losses........................... 652.5 511.8 421.2 314.8 310.3 341.1
-------- -------- ------- ------- -------- --------
Recoveries
Commercial, financial and industrial............ 32.1 33.1 26.9 34.0 39.4 41.4
Agricultural.................................... 2.9 1.9 2.6 2.5 4.0 4.9
Construction and land development............... 0.6 1.3 4.5 7.2 7.2 2.4
Real estate..................................... 15.7 15.5 17.5 26.9 36.6 24.9
Consumer........................................ 76.7 54.4 44.6 35.4 32.1 30.1
Credit card..................................... 13.1 13.8 13.0 10.6 7.8 6.7
Lease financing................................. 0.9 1.0 2.1 0.7 0.3 0.6
Foreign
Consumer installment.......................... 7.4 5.6 4.3 3.5 3.5 --
Other......................................... 3.4 2.8 1.5 0.8 1.1 4.7
-------- -------- ------- ------- -------- --------
Total recoveries.............................. 152.8 129.4 117.0 121.6 132.0 115.7
-------- -------- ------- ------- -------- --------
Net credit losses.................................. 499.7 382.4 304.2 193.2 178.3 225.4
-------- -------- ------- ------- -------- --------
Balance at end of year............................. $1,233.9 1,040.8 917.2 789.9 789.2 773.1
======== ======== ======= ======= ======== ========
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
Commercial......................................... $ 207.7 208.6 186.4 151.9 137.4 154.5
Consumer........................................... 422.6 285.7 276.5 209.0 195.2 155.4
Real estate........................................ 168.1 150.3 171.8 163.5 203.4 220.6
Foreign............................................ 42.0 32.3 27.0 20.0 21.2 22.0
Unallocated........................................ 393.5 363.9 255.5 245.5 232.0 220.6
-------- -------- ------- ------- -------- --------
Total......................................... $1,233.9 1,040.8 917.2 789.9 789.2 773.1
======== ======== ======= ======= ======== ========
CREDIT QUALITY RATIOS
Net credit losses as a percent of average loans and 1.23% 0.99 0.86 0.64 0.67 0.97
leases..........................................
Allowance for credit losses to
Total loans and leases at year-end............ 2.90% 2.64 2.54 2.42 2.74 3.00
Net credit losses............................. 2.47x 2.72 3.02 4.09 4.43 3.43
Provision for credit losses to average loans and
leases.......................................... 1.29% 1.02 0.88 0.55 0.60 1.16
Earnings coverage of net credit losses............. 5.15x 5.69 5.70 6.96 5.82 3.53
76
Norwest Corporation and Subsidiaries
Other Balance Sheet Data
In millions, except ratios
MATURITY OF TOTAL INVESTMENT SECURITIES (A)
Carrying Value
-------------------------------------------------------------------------------------
Total
Within 1 Year 1-5 Years 5-10 Years After 10 Years Total Market
Amount/Yield Amount/Yield Amount/Yield Amount/Yield Amount/Yield Value
-------------- ------------ ------------ -------------- ------------- --------
At December 31, 1997
- --------------------
Investment securities
available for sale:
U.S. Treasury and federal
agencies............. $ 198.2 5.86% $ 590.9 6.63% $ 239.0 5.25% $ 48.3 7.61% $ 1,076.4 6.22% $ 1,076.4
State, municipal and
housing-tax exempt (b) 69.6 6.01 315.5 5.98 192.7 6.18 910.7 6.43 1,488.5 6.28 1,488.5
Other................... 236.3 5.81 412.7 5.30 164.2 6.94 220.5 6.14 1,033.7 5.87 1,033.7
------- -------- ------- -------- -------- ---------
Total investment
securities
available for sale 504.1 5.88 1,319.1 6.07 595.9 6.00 1,179.5 6.43 3,598.6 6.16 3,598.6
------- -------- ------- -------- -------- ---------
Mortgage-backed
securities:
Federal agencies........ 79.7 5.75 323.8 7.15 137.6 6.96 13,586.1 7.49 14,127.2 7.47 14,127.2
Collateralized mortgage
obligations.......... -- -- 16.5 5.76 13.7 7.71 227.9 7.57 258.1 7.47 258.1
------- -------- ------- -------- -------- ---------
Total
mortgage-backed
securities available
for sale.............. 79.7 5.75 340.3 7.06 151.3 6.99 13,814.0 7.49 14,385.3 7.47 14,385.3
------- -------- ------- -------- -------- ---------
Total securities
available for sale... 583.8 5.87 1,659.4 6.21 747.2 6.35 14,993.5 7.41 17,983.9 7.22 17,983.9
------- -------- ------ -------- -------- ---------
Other investment
securities held for
investment........... -- -- 332.0 0.27 -- -- 415.2 6.87 747.2 3.94 762.8
------- -------- ------ --------- -------- ---------
Total investment
securities........... $ 583.8 5.87 $1,991.4 5.13 $747.2 6.35 $15,408.7 7.40 $18,731.1 7.09 $18,746.7
======= ======== ====== ========== ========= =========
MATURITY OF LOANS (C) Within 1 Year 1-5 Years After 5 Years Total
------------- --------- ------------- --------
Commercial .................................................. $7,101 3,913 942 11,956
Construction and land development ........................... 625 298 83 1,006
Real estate ................................................. 930 2,360 1,708 4,998
Foreign...................................................... 101 71 40 212
------ ----- ----- ------
Total ....................................................... $8,757 6,642 2,773 18,172
====== ===== ===== ======
Predetermined interest rates ................................ $4,376 3,605 1,440 9,421
Floating interest rates...................................... 4,381 3,037 1,333 8,751
------ ----- ----- ------
Total........................................................ $8,757 6,642 2,773 18,172
====== ===== ===== ======
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE Within 3 Months 3-6 Months 6-12 Months Over 12 Months Total
--------------- ---------- ----------- -------------- --------
Certificates of deposit and other time............... $ 1,479 771 840 632 3,722
Foreign time......................................... 756 -- -- -- 756
------- ----- ----- ----- -------
Total................................................ $ 2,235 771 840 632 4,478
======= ===== ===== ===== =======
DEPOSITS AT DECEMBER 31, 1997 1996 1995 1994 1993
------- ------ ----- ----- -------
Noninterest-bearing deposits.......................... $16,253 14,296 11,624 9,283 9,054
Interest-bearing deposits
Savings and NOW accounts.......................... 10,204 8,069 5,378 4,790 4,421
Money market accounts............................. 11,498 11,418 11,268 10,403 10,592
Savings certificates.............................. 12,975 12,814 11,244 9,773 10,043
Certificates of deposit and other time............ 3,722 3,187 2,316 1,528 1,678
Foreign time (d).................................. 805 346 199 647 189
------- ------ ------ ------ -------
Total deposits....................................... $55,457 50,130 42,029 36,424 35,977
======= ====== ====== ====== =======
(a) Based on contractual maturities.
(b) The yield on state, municipal and housing securities is increased by the
benefit of tax exemption, assuming a 35% federal income tax rate. For the
year ended December 31, 1997, the amount of the increases in the yields for
these securities and for total securities available for sale is 2.84% and
0.20%, respectively.
(c) Excludes leases of $921 million and consumer and residential mortgage loans
of $25.5 billion.
(d) Includes $48 million of foreign time deposits less than $100,000 in 1997.
77
Norwest Corporation and Subsidiaries
Quarterly Condensed Consolidated Financial Information
1997 Quarters
-------------------------------------------------------------------
In millions, except per common share
amounts and ratios Fourth Third Second First
------------- ------------- ------------- -------------
Interest income........................ $1,735.6 1,692.9 1,661.5 1,607.4
Interest expense....................... 682.9 670.3 661.7 649.1
------------- ------------- ------------- -------------
Net interest income.................... 1,052.7 1,022.6 999.8 958.3
Provision for credit losses............ 146.2 146.7 122.8 109.0
Non-interest income.................... 767.9 753.4 756.4 684.6
Non-interest expenses.................. 1,148.8 1,111.3 1,119.7 1,041.5
------------- ------------- ------------- -------------
Income before income taxes............. 525.6 518.0 513.7 492.4
Income tax expense..................... 169.5 176.4 182.3 170.5
------------- ------------- ------------- -------------
Net income............................. $ 356.1 341.6 331.4 321.9
============= ============= ============= =============
PER COMMON SHARE
Net income
Basic............................... $ 0.47 0.45 0.43 0.43
Diluted............................. 0.46 0.44 0.43 0.42
Dividends declared..................... 0.165 0.150 0.150 0.150
Stockholders' equity................... 9.01 8.83 8.44 7.98
Stock price range.................... 39 1/2-29 1/4 32 5/32-28 1/8 29 5/8-22 3/16 26 5/8-21 5/8
Period end stock price............... 38 1/4 30 5/8 28 1/8 23 1/8
TAX-EQUIVALENT YIELDS AND RATES
Money market investments............... 5.80% 5.76 5.64 5.29
Trading account securities............. 6.46 7.14 7.48 6.98
Investment securities.................. 4.03 3.89 3.83 3.89
Investment and mortgage-backed
securities available for sale....... 7.38 7.30 7.26 7.37
Total investment securities....... 7.24 7.17 7.14 7.23
Mortgages held for sale................ 7.15 7.36 7.26 7.13
Loans held for sale.................... 7.94 7.76 7.89 7.79
Loans and leases....................... 11.30 11.27 11.12 11.07
Total earning assets.............. 9.58 9.55 9.42 9.42
Interest-bearing deposits.............. 3.87 3.81 3.83 3.91
Short-term borrowings.................. 5.46 5.45 5.25 5.19
Long-term debt......................... 6.29 6.32 6.26 6.10
Total interest-bearing liabilities 4.61 4.58 4.54 4.57
Yield spread........................... 4.97 4.97 4.88 4.85
Net interest income to earning assets.. 5.85 5.81 5.69 5.62
RATIOS*
Return on assets....................... 1.66% 1.64 1.61 1.63
Leverage............................... 11.95x 12.55 13.15 13.10
Return on realized common equity....... 21.1% 22.2 22.1 22.7
1996 Quarters
------------------------------------------------------------------
In millions, except per common share
amounts and ratios Fourth Third Second First
--------------- --------- ------------- --------------
Interest income........................ 1,608.2 1,611.1 1,575.0 1,524.0
Interest expense....................... 661.9 663.4 658.5 633.2
--------------- --------- ------------- --------------
Net interest income.................... 946.3 947.7 916.5 890.8
Provision for credit losses............ 113.6 105.9 87.4 87.8
Non-interest income.................... 738.1 631.8 641.9 552.8
Non-interest expenses.................. 1,103.0 1,032.4 1,011.1 943.2
--------------- --------- ------------- --------------
Income before income taxes............. 467.8 441.2 459.9 412.6
Income tax expense..................... 159.7 152.2 174.5 141.2
--------------- --------- ------------- --------------
Net income............................. 308.1 289.0 285.4 271.4
=============== ========= ============= ==============
PER COMMON SHARE
Net income
Basic............................... 0.41 0.38 0.38 0.38
Diluted............................. 0.41 0.38 0.38 0.37
Dividends declared..................... 0.135 0.135 0.135 0.120
Stockholders' equity................... 7.97 7.76 7.36 7.32
Stock price range.................... 23 7/16-20 3/8 20 1/2-16 18 3/4-16 1/2 18 9/16-15 1/4
Period end stock price............... 21 3/4 20 3/8 17 7/6 18 3/8
TAX-EQUIVALENT YIELDS AND RATES
Money market investments............... 5.41 5.97 5.14 5.63
Trading account securities............. 6.83 6.95 6.66 6.14
Investment securities.................. 4.74 4.05 4.73 4.50
Investment and mortgage-backed
securities available for sale....... 7.38 7.38 7.29 7.42
Total investment securities....... 7.27 7.22 7.16 7.27
Mortgages held for sale................ 7.33 7.84 7.45 6.83
Loans held for sale.................... 7.75 7.77 8.94 10.19
Loans and leases....................... 11.15 11.15 11.13 11.28
Total earning assets.............. 9.48 9.59 9.50 9.71
Interest-bearing deposits.............. 3.94 3.91 3.91 3.95
Short-term borrowings.................. 5.32 5.31 5.22 5.39
Long-term debt......................... 6.14 6.14 6.04 6.21
Total interest-bearing liabilities 4.65 4.66 4.65 4.75
Yield spread........................... 4.83 4.93 4.85 4.96
Net interest income to earning assets.. 5.60 5.66 5.54 5.69
Ratios*
Return on assets....................... 1.55 1.48 1.50 1.51
Leverage............................... 13.19 13.54 13.76 3.71
Return on realized common equity....... 22.0 21.0 22.1 22.7
(Continued on page 79)
*Based on average balances and net income for the periods.
78
Norwest Corporation and Subsidiaries
Quarterly Condensed Consolidated Financial Information (Continued from page 78)
In millions 1997 Quarters 1996 Quarters
--------------------------------------- -------------------------------------
Fourth Third Second First Fourth Third Second First
------- ------ ------ ------ ------- ------ ------- ------
AVERAGE ASSETS
Money market investments.................... $ 766 619 663 1,620 2,633 629 790 559
Trading account securities.................. 767 741 591 272 253 365 498 398
Investment securities....................... 728 720 738 720 723 864 839 796
Investment and mortgage-backed securities
available for sale....................... 18,276 18,987 20,937 18,472 17,053 17,540 16,827 15,237
------- ------ ------ ------ ------ ------ ------ ------
Total investment securities............ 19,004 19,707 21,675 19,192 17,776 18,404 17,666 16,033
Mortgages held for sale..................... 7,725 6,980 5,391 5,485 5,553 6,385 7,160 6,344
Loans held for sale......................... 3,172 2,874 2,841 2,924 2,691 2,493 2,970 3,440
Loans and leases, net of unearned discount.. 41,974 40,795 40,244 39,946 39,654 39,431 38,049 37,020
------- ------ ------ ------- ------ ------ ------ ------
Total average earning assets........... 73,408 71,716 71,405 69,439 68,560 67,707 67,133 63,794
Allowance for credit losses................. (1,213) (1,118) (1,075) (1,058) (1,041) (1,034) (991) (952)
Cash and due from banks..................... 3,644 3,553 3,514 3,646 3,691 3,503 3,632 3,551
Other assets................................ 9,274 8,584 8,608 8,150 7,902 7,663 6,938 5,909
------- ------- ------ ------ ------ ------ ------- -------
Total average assets................... $85,113 82,735 82,452 80,177 79,112 77,839 76,712 72,302
======= ======= ====== ====== ====== ====== ====== ======
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits................ $15,514 14,351 13,460 13,086 13,243 12,499 11,926 11,167
Interest-bearing deposits................... 38,109 37,514 37,551 36,962 35,272 34,545 33,553 31,573
Short-term borrowings....................... 8,169 8,142 8,872 7,741 8,135 8,825 8,986 8,269
Long-term debt.............................. 12,670 12,510 11,958 12,719 13,299 13,409 14,279 13,689
Other liabilities........................... 3,529 3,626 4,339 3,550 3,165 2,814 2,393 2,330
Stockholders' equity........................ 7,122 6,592 6,272 6,119 5,998 5,747 5,575 5,274
------ ------- ------ ------- ------ ------ ------- -------
Total average liabilities and
stockholders' equity................ $85,113 82,735 82,452 80,177 79,112 77,839 76,712 72,302
======= ====== ====== ====== ====== ====== ====== ======
The financial information on pages 78 and 79 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.
79