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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-2979
NORWEST CORPORATION
A DELAWARE CORPORATION--I.R.S. NO. 41-0449260
NORWEST CENTER
SIXTH AND MARQUETTE
MINNEAPOLIS, MINNESOTA 55479
TELEPHONE (612) 667-1234
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock ($1 2/3 par value) New York Stock Exchange
Chicago Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Chicago Stock Exchange
Depositary Shares Representing New York Stock Exchange
10.24% Cumulative Preferred Stock
Depositary Shares Representing Cumulative New York Stock Exchange
Convertible Preferred Stock, Series B
6 3/4% Convertible Subordinated New York Stock Exchange
Debentures Due 2003
NO SECURITIES ARE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [_]
ON JANUARY 31, 1995, 310,641,508 SHARES OF COMMON STOCK WERE OUTSTANDING
HAVING AN AGGREGATE MARKET VALUE, BASED UPON A CLOSING PRICE OF $24.00 PER
SHARE, OF $7,455.4 MILLION. AT THAT DATE, THE AGGREGATE MARKET VALUE OF THE
VOTING STOCK HELD BY NON-AFFILIATES WAS IN EXCESS OF $6,651.4 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the corporation's Notice of Annual Meeting and Proxy Statement
for the annual meeting of stockholders to be held April 25, 1995, are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
Norwest Corporation (the corporation) is a diversified financial services
company organized under the laws of Delaware in 1929 and registered under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a diversified
financial services organization, the corporation operates through subsidiaries
engaged in banking and in related businesses. The corporation provides retail,
commercial, and corporate banking services to its customers through banks
located in Arizona, Colorado, Illinois, Indiana, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Ohio, South Dakota, Texas, Wisconsin, and
Wyoming. The corporation provides additional financial services to its
customers through subsidiaries engaged in various businesses, principally
mortgage banking, consumer finance, equipment leasing, agricultural finance,
commercial finance, securities brokerage and investment banking, insurance
agency services, computer and data processing services, trust services, and
venture capital investments.
At December 31, 1994, the corporation and its subsidiaries employed
approximately 38,800 persons, had consolidated total assets of $59.3 billion,
total deposits of $36.4 billion, and total stockholders' equity of $3.8
billion. Based on total assets at December 31, 1994, the corporation was the
13th largest bank holding company in the United States.
As a holding company, the corporation's role is to coordinate the
establishment of goals, objectives, policies and strategies, to monitor
adherence to policies and to provide capital funds to its subsidiaries. In
addition, the corporation provides its subsidiaries with strategic planning
support, asset and liability management services, investment administration and
portfolio planning, tax planning, new product and business development support,
advertising, administrative services and human resources management. The
corporation derives substantially all its income from investments in and
advances to its subsidiaries and service fees received from its subsidiaries.
The Financial Review, which begins on page 17 in the Appendix, discusses
developments in the corporation's business during 1994 and provides financial
and statistical data relative to the business and operations of the
corporation. A brief description of the primary business lines of the
corporation follows. Refer to Note 15 of the corporation's consolidated
financial statements for additional information about the corporation's
business segments.
BANKING
The corporation's subsidiary banks, located in 15 states with 619 locations,
offer diversified financial services including community and corporate banking,
trust, capital management, data processing and credit card services. Investment
services are provided to customers through Norwest Investment Services, Inc.,
which operates in 15 states with 140 offices, primarily in banking locations.
Norwest Insurance, Inc., its subsidiaries and ATI Title Company operate
insurance agencies in 17 states with 139 offices offering complete lines of
commercial, personal, and title coverages to customers. A subsidiary of the
corporation operates one of the nation's top two crop insurance managing
general agencies. In addition to insurance company subsidiaries owned by
Norwest Financial Services, Inc., there are three insurance companies that are
owned by bank affiliates and three other insurance companies that are owned
directly or indirectly by the corporation that reinsure credit-related
insurance products.
Norwest Bank Minnesota, N.A. is the largest bank in the group with total
assets of $15.5 billion at December 31, 1994. Eleven other banks in the group
equaled or exceeded $1.0 billion in total assets: Norwest Bank Iowa, N.A. ($6.6
billion), Norwest Bank South Dakota, N.A. ($4.3 billion), Norwest Bank
Colorado, N.A. ($3.9 billion), Norwest Bank Arizona, N.A. ($2.2 billion),
Norwest Bank Nebraska, N.A. ($2.0 billion), Norwest Bank Indiana, N.A. ($1.9
billion), Norwest Bank New Mexico, N.A. ($1.9 billion), Norwest Bank Wyoming,
N.A. ($1.7 billion), Norwest Bank Wisconsin, N.A. ($1.6 billion), Norwest Bank
Texas, N.A. ($1.2 billion), and Norwest Bank North Dakota, N.A. ($1.1 billion).
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Norwest Venture Capital consists of a group of five affiliated companies
engaged in making and managing investments in start-up businesses, emerging
growth companies, management buy-outs, acquisitions and corporate
recapitalizations. During 1994, Norwest Venture Capital made new investments of
$75 million in 48 companies. In addition, the $200 million Norwest Equity
Partners V was formed to continue to provide equity capital to businesses in
all stages of corporate life cycles. Norwest Venture Capital's investments
typically range from $1,500,000 to $15,000,000; however, larger sums may be
invested in a single company, sometimes through syndication with other venture
capitalists. Most Norwest Venture Capital emerging growth company clients are
engaged in technology-related businesses, such as information processing,
microelectronics, biotechnology, computer software, medical products, health
care delivery, telecommunications, industrial automation, environmental related
businesses and non-technology businesses, such as specialty retailing and
consumer related businesses. Financing of management buy-outs is done for a
variety of businesses.
MORTGAGE BANKING
The corporation, through its mortgage banking operations, originates and
purchases residential first mortgage loans for sale to various investors and
provides servicing of mortgage loans for others. Income is primarily earned
from origination fees, loan servicing fees, interest on mortgages held for
sale, and the sale of mortgages and servicing rights. Norwest Mortgage offers a
wide range of FHA, VA and conventional loan programs through a network of 683
offices in all 50 states. Approximately 55 percent of the mortgages are FHA and
VA mortgages guaranteed by the federal government and sold as GNMA securities.
In 1994 the company funded $24.9 billion of mortgages, with the average loan
being approximately $97,600. This compares with $33.7 billion of fundings in
1993 and $21.0 billion in 1992. The five states with the highest originations
in 1994 are: California $4,846.1 million; Minnesota $1,796.0 million; Colorado
$1,494.2 million, Illinois $1,119.8 million and Virginia $1,101.1 million. The
originations in these five states comprise approximately 42 percent of total
originations in 1994. As of December 31, 1994 the mortgage banking servicing
portfolio totaled $71.5 billion with a weighted average coupon of 7.53 percent,
as compared with $45.7 billion and 7.22 percent, respectively, at December 31,
1993. During 1994, approximately $18.2 billion of servicing was acquired,
including $8.6 billion from Michigan National Bank. In 1994, sales of servicing
rights were $11.7 billion with gains on sales of $130.0 million, compared with
$2.9 billion and $61.7 million, respectively, during 1993,and $7.2 billion and
$62.4 million, respectively, in 1992. The sales of servicing in 1994 were in
consideration of the mix of the portfolio and opportunistic pricing spreads.
CONSUMER FINANCE
Consumer finance activities, provided through the corporation's subsidiary,
Norwest Financial Services, Inc. and its subsidiaries ("Norwest Financial"),
include providing direct installment loans to individuals, purchasing of sales
finance contracts, providing private label and lease accounts receivable
services and providing other related products and services. Norwest Financial
provides consumer finance products and services through 1,042 stores in 46
states, Guam, and all 10 Canadian provinces. At December 31, 1994, consumer
finance receivables accounted for 91 percent of Norwest Financial's total
receivables. Direct installment loans to individuals constitute the largest
portion of the consumer finance business and, in addition, sales finance
contracts are purchased from retailers. The five states with the largest
consumer finance receivables are: California $435.0 million; Texas $214.2
million; Florida $210.4 million; Ohio $162.1 million; and Illinois $159.7
million. Canadian consumer finance receivables totaled $427.8 million at
December 31, 1994. The consumer finance receivables of Canada and the five
states listed above comprise approximately 38 percent of total consumer finance
receivables at year-end 1994. The average installment loan made during 1994 was
approximately $2,797, while sales finance contracts purchased during the year
averaged approximately $1,001. Comparable amounts in 1993 and 1992 were $2,799
and $976, and $2,652 and $932, respectively.
Norwest Financial's insurance subsidiaries are primarily engaged in the
business of providing, directly or through reinsurance arrangements, credit
life and credit disability insurance as a part of Norwest
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Financial's consumer finance business. Property, involuntary unemployment and
non-filing insurance also is sold as part of Norwest Financial's consumer
finance business, either directly or through a reinsurance arrangement with one
of its insurance subsidiaries or on an agency basis.
COMPETITION
Legislative and regulatory changes coupled with technological advances have
significantly increased competition in the financial services industry. The
corporation's banks and financial services subsidiaries compete with other
commercial banks and financial institutions including savings and loan
associations, credit unions, finance companies, mortgage banking companies,
brokerage houses and insurance agencies.
GOVERNMENT POLICIES, SUPERVISION AND REGULATION
GENERAL
As a bank holding company, the corporation is subject to supervision and
examination by the Federal Reserve Board. The corporation's banking
subsidiaries are subject to supervision and examination by applicable federal
and state banking agencies. Deposits of all of the corporation's banking
subsidiaries are insured, and therefore the subsidiaries are subject to
regulation by the Federal Deposit Insurance Corporation (FDIC). In addition to
the impact of regulation, commercial banks are affected significantly by the
actions of the Federal Reserve Board affecting the money supply and credit
availability.
DIVIDEND RESTRICTIONS
Various federal and state statutes and regulations limit the amount of
dividends the subsidiary banks can pay to the corporation without regulatory
approval. The approval of the Office of the Comptroller of the Currency (OCC)
is required for any dividend by a national bank if the total of all dividends
declared by the bank in any calendar year would exceed the total of its net
profits, as defined by regulation, for that year combined with its retained net
profits for the preceding two years less any required transfers to surplus or a
fund for the retirement of any preferred stock. In addition, a national bank
may not pay a dividend in an amount greater than its net profits then on hand
after deducting its losses and bad debts. For this purpose, bad debts are
defined to include, generally, loans which have matured and are in arrears with
respect to interest by six months or more, other than such loans which are well
secured and in the process of collection. Under these provisions the
corporation's national bank subsidiaries could have declared, as of December
31, 1994, aggregate dividends of $361.4 million without obtaining prior
regulatory approval and without reducing the capital of the respective banks
below regulatory minimum levels. The corporation also has several state bank
subsidiaries that are subject to state regulations limiting dividends; however,
the amount of dividends payable by the corporation's state bank subsidiaries,
with or without state regulatory approval, would represent an immaterial
contribution to the corporation's revenues. Additionally, the corporation's
non-bank subsidiaries could have declared dividends totaling $1,144.3 million
at December 31, 1994.
If, in the opinion of the applicable regulatory authority, a bank under its
jurisdiction is engaged in an unsafe or unsound practice (which, depending on
the financial condition of the bank, could include the payment of dividends),
such authority may require, after notice and hearing, that such bank cease and
desist from such practice. The Federal Reserve Board, the OCC, and the FDIC
have issued policy statements which provide that FDIC insured banks and bank
holding companies should generally pay dividends only out of current operating
earnings.
HOLDING COMPANY STRUCTURE
The corporation is a legal entity separate and distinct from its banking and
nonbanking subsidiaries. Accordingly, the right of the corporation, and thus
the right of the corporation's creditors, to participate in any distribution of
the assets or earnings of any subsidiary is necessarily subject to the prior
claims of creditors
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of such subsidiary, except to the extent that the corporation may be a
creditor. The principal sources of the corporation's revenues are dividends and
service fees from its subsidiaries.
The corporation's banking subsidiaries are subject to restrictions under
federal law which limit the transfer of funds by the subsidiary banks to the
corporation and its non-bank subsidiaries, whether in the form of loans,
extensions of credit, investments, or asset purchases. Such transfers by any
subsidiary bank to the corporation or any non-bank subsidiary are limited in
amount to 10% of the bank's capital and surplus and, with respect to the
corporation and all non-bank subsidiaries, to an aggregate of 20% of the bank's
capital and surplus. Further, such loans and extensions of credit are required
to be secured in specified amounts.
The Federal Reserve Board has a policy to the effect that a bank holding
company is expected to act as a source of financial and managerial strength to
each of its subsidiary banks and to commit resources to support each subsidiary
bank. This support may be required at times when the corporation may not have
the resources to provide it. Any capital loans by the corporation to any of the
subsidiary banks are subordinate in right of payment to deposits and to certain
other indebtedness of the subsidiary bank. In addition, the Crime Control Act
of 1990 provides that in the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
A depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC after August 9,
1989, in connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository institution in danger of default.
"Default" is defined generally as the appointment of a conservator or receiver
and "in danger of default" is defined generally as the existence of certain
conditions indicating that a "default" is likely to occur in the absence of
regulatory assistance.
Federal law (12 U.S.C. Section 55) permits the OCC to order the pro rata
assessment of shareholders of a national bank whose capital stock has become
impaired, by losses or otherwise, to relieve a deficiency in such national
bank's capital stock. This statute also provides for the enforcement of any
such pro rata assessment of shareholders of such national bank to cover such
impairment of capital stock by sale, to the extent necessary, of the capital
stock of any assessed shareholder failing to pay the assessment. Similarly, the
laws of certain states provide for such assessment and sale with respect to
banks chartered by such states. The corporation, as the sole shareholder of all
but two of its subsidiary banks, is subject to such provisions.
ACQUISITIONS
The corporation expands its businesses in part by acquiring banking
institutions and other companies engaged in activities closely related to
banking. See Note 2 of the corporation's consolidated financial statements
beginning on page 43 in the Appendix regarding acquisitions by the corporation
since 1992.
The acquisition of banking institutions and other companies by the
corporation is subject to the prior approval of the Board of Governors of the
Federal Reserve System (the "Board") and may be subject to the prior approval
of other federal and state regulatory authorities. The Board may not approve
the acquisition of a bank located outside of the state of Minnesota unless the
acquisition is authorized by the law of the state where the bank to be acquired
is located. State law may also impose conditions and limitations on such
acquisitions, including prior approval of state regulatory authorities.
Effective September 29, 1995, under the interstate banking provisions of the
Reigle-Neal Interstate Banking and Branching Act of 1994, (the "Reigle-Neal
Act") the corporation will be permitted to acquire banks in any state subject
to the prior approval of the Board, certain limited conditions that a state may
impose and deposit concentration limits of 30% in any one state, unless it is
the initial entry of a banking institution into that state, and 10% nationwide.
Effective June 1, 1997, under the interstate branching provisions of the
Reigle-Neal Act, banking subsidiaries of the corporation will be permitted to
acquire directly a banking institution located in a state other than the state
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in which the acquiring bank is located, through merger, consolidation, or
purchase of assets and assumption of liabilities, ("interstate bank merger")
unless the state in which either of the banks is located has enacted a law
opting out of the interstate branching provisions of the Reigle-Neal Act. An
interstate bank merger may occur before June 1, 1997, if each of the states in
which the merging banks is located has enacted a law authorizing interstate
bank mergers. Interstate bank mergers are subject to the prior approval of the
applicable federal and state regulatory authority, and may be subject to
certain limited conditions that a state may impose and the concentration limits
outlined above.
In determining whether to approve a proposed bank acquisition or merger, bank
regulatory authorities consider a number of factors including the effect of the
proposed acquisition on competition, the public benefits expected to be derived
from the consummation of the proposed transaction, the projected capital ratios
and levels on a post acquisition basis, and the acquiring institution's record
of addressing the credit needs of the communities it serves, including the
needs of low and moderate income neighborhoods, consistent with the safe and
sound operation of the bank, under the Community Reinvestment Act of 1977, as
amended.
CAPITAL REQUIREMENTS
The Federal Reserve Board has issued risk-based capital guidelines for bank
holding companies, such as the corporation, that specify a minimum ratio of
total capital to risk-adjusted assets (including certain off-balance sheet
items, such as stand-by letters of credit) of eight percent. At least half of
the total capital is to be composed of common equity, retained earnings, and a
limited amount of noncumulative perpetual preferred stock ("Tier 1 capital").
The remainder ("Tier 2 capital") may consist of hybrid capital instruments,
perpetual debt, mandatory convertible debt securities, a limited amount of
subordinated debt, other preferred stock, and a limited amount of allowance for
credit losses. Additionally, the risk-based capital guidelines specify that all
intangibles, including core deposit intangibles, purchased mortgage servicing
rights ("PMSRs"), and purchased credit card relationships ("PCCRs") be deducted
from Tier 1 capital. The guidelines, however, grandfather identifiable assets
(other than PMSRs and PCCRs) acquired on or before February 19, 1992, and
permit the inclusion of readily marketable PMSRs and PCCRs in Tier 1 capital to
the extent that (i) PMSRs and PCCRs do not exceed 50 percent of Tier 1 capital
and (ii) PCCRs do not exceed 25 percent of Tier 1 capital. For such purposes,
PMSRs and PCCRs each are included in Tier 1 capital only up to the lesser of
(a) 90 percent of their fair market value (which must be determined quarterly)
and (b) 100 percent of the remaining unamortized book value of such assets. The
OCC has adopted substantially similar regulations. In addition, the Federal
Reserve Board has specified minimum "leverage ratio" (the ratio of Tier 1
capital to quarterly average total assets) guidelines for bank holding
companies and state member banks. These guidelines provide for a minimum
leverage ratio of three percent for bank holding companies and state member
banks that meet certain specified criteria, including that they have the
highest regulatory rating. All other bank holding companies and state member
banks are required to maintain a leverage ratio of three percent plus an
additional cushion of one percent to two percent. The guidelines also provide
that banking organizations experiencing internal growth or making acquisitions
are expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier 1 leverage ratio" in evaluating proposals
for expansion or new activities. The tangible Tier 1 leverage ratio is the
ratio of a banking organization's Tier 1 capital, less all intangibles, to
total assets, less all intangibles. Each of the corporation's banking
subsidiaries is also subject to capital requirements adopted by applicable
regulatory agencies which are substantially similar to the foregoing. At
December 31, 1994, the corporation's Tier 1 and total capital (the sum of Tier
1 and Tier 2 capital) to risk-adjusted assets ratios were 9.89 percent and
12.23 percent, respectively, and the corporation's leverage ratio was 6.94
percent. Neither the corporation nor any subsidiary bank has been advised by
the appropriate federal regulatory agency of any specific leverage ratio
applicable to it.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revises the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and
makes revisions to several other federal banking statutes.
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Among other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. FDICIA establishes five capital tiers: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized", and "critically undercapitalized".
A depository institution's capital tier will depend upon where its capital
levels are in relation to various relevant capital measures, which will include
a risk-based capital measure and a leverage ratio capital measure, and certain
other factors.
Under applicable regulations, an FDIC-insured depository institution is
defined to be well capitalized if it maintains a leverage ratio of at least
five percent, a risk-adjusted Tier 1 capital ratio of at least six percent, and
a risk-adjusted total capital ratio of at least 10 percent, and is not subject
to a directive, order, or written agreement to meet and maintain specific
capital levels. An insured depository institution is defined to be adequately
capitalized if it meets all of its minimum capital requirements as described
above. An insured depository institution will be considered undercapitalized if
it fails to meet any minimum required measure, significantly undercapitalized
if it has a risk-adjusted total capital ratio of less than six percent, risk-
adjusted Tier 1 capital ratio of less than three percent, or a leverage ratio
of less than three percent, and critically undercapitalized if it fails to
maintain a level of tangible equity equal to at least two percent of total
assets. An insured depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating. As of December
31, 1994, all of the corporation's banking subsidiaries were well capitalized.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to a
wide range of limitations on operations and activities, including growth
limitations, and are required to submit a capital restoration plan. The federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to
succeed in restoring the depository institution's capital. In addition, for a
capital restoration plan to be acceptable, the depository institution's parent
holding company must guarantee that the institution will comply with such
capital restoration plan. The aggregate liability of the parent holding company
is limited to the lesser of (i) an amount equal to five percent of the
depository institution's total assets at the time it became undercapitalized
and (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards applicable with
respect to such institution as of the time it fails to comply with the plan. If
a depository institution fails to submit an acceptable plan, it is treated as
if it were significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
FDICIA, as amended by the Reigle Community Development and Regulatory
Improvement Act of 1994 enacted on August 22, 1994, directs that each federal
banking agency prescribe standards, by regulation or guideline, for depository
institutions relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, asset quality, earnings, stock valuation, and such other
operational and managerial standards as the agency deems appropriate. The FDIC,
in consultation with the other federal banking agencies, has adopted a final
rule and guidelines with respect to internal and external audit procedures and
internal controls in order to implement those provisions of FDICIA intended to
facilitate the early identification of problems in financial management of
depository institutions. Regulations or guidelines relating to the other
management and operational standards have not been issued. The impact of such
regulations or guidelines on the corporation cannot be ascertained.
7
FDICIA also contains a variety of other provisions that may affect the
operations of the corporation, including new reporting requirements, revised
regulatory standards for real estate lending, "truth in savings" provisions,
and the requirement that a depository institution give 90 days' notice to
customers and regulatory authorities before closing any branch.
Under other regulations promulgated under FDICIA a bank cannot accept
brokered deposits (that is, deposits obtained through a person engaged in the
business of placing deposits with insured depository institutions or with
interest rates significantly higher than prevailing market rates) unless (i) it
is well capitalized or (ii) it is adequately capitalized and receives a waiver
from the FDIC. A bank that cannot receive brokered deposits also cannot offer
"pass-through" insurance on certain employee benefit accounts, unless it
provides certain notices to affected depositors. In addition, a bank that is
adequately capitalized and that has not received a waiver from the FDIC may not
pay an interest rate on any deposits in excess of 75 basis points over certain
prevailing market rates. There are no such restrictions on a bank that is well
capitalized. At December 31, 1994, all of the corporation's banking
subsidiaries were well capitalized and, therefore, were not subject to these
restrictions.
FDIC INSURANCE
Effective January 1, 1993, the deposit insurance assessment rate for the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF")
increased as part of the adoption by the FDIC of a transitional risk-based
assessment system. In June 1993, the FDIC published final regulations making
the transitional system permanent effective January 1, 1994, but left open the
possibility that it may consider expanding the range between the highest and
lowest assessment rates at a later date. An institution's risk category is
based upon whether the institution is well capitalized, adequately capitalized,
or less than adequately capitalized. Each insured depository institution is
also to be assigned to one of the following "supervisory subgroups": Subgroup
A, B, or C. Subgroup A institutions are financially sound institutions with few
minor weaknesses; Subgroup B institutions are institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration;
and Subgroup C institutions are institutions for which there is a substantial
probability that the FDIC will suffer a loss in connection with the institution
unless effective action is taken to correct the areas of weakness. Based on its
capital and supervisory subgroups, each BIF or SAIF member institution is
assigned an annual FDIC assessment rate ranging from 23 cents per $100 of
domestic deposits (for well capitalized Subgroup A institutions) to 31 cents
(for undercapitalized Subgroup C institutions). Adequately capitalized
institutions are assigned assessment rates ranging from 26 cents to 30 cents.
The FDIC has proposed regulations that would assign an annual FDIC assessment
rate for BIF member institutions ranging from 4 cents per $100 of domestic
deposits (for well capitalized Subgroup A institutions) to 31 cents (for
undercapitalized Subgroup C institutions). The corporation incurred $79.2
million of FDIC assessment expense in 1994 as compared with $72.4 million in
1993.
ITEM 2. PROPERTIES
The corporation operates 619 banking locations, of which 429 are owned
directly by subsidiary banks and 190 are leased from outside parties. The
mortgage banking operation leases its headquarters facilities and servicing
center in Des Moines, Iowa, leases a servicing center in Minneapolis,
Minnesota, owns an additional servicing center located in Springfield, Ohio,
and leases all mortgage production offices nationwide. Norwest Financial owns
its headquarters in Des Moines, Iowa, and leases all consumer finance branch
locations. The corporation and Norwest Bank Minnesota, N.A. lease their offices
in Minneapolis, Minnesota.
The accompanying notes to consolidated financial statements on pages 51 and
67 in the Appendix contain additional information with respect to premises and
equipment and commitments under noncancellable leases for premises and
equipment.
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ITEM 3. LEGAL PROCEEDINGS
The corporation and certain subsidiaries are defendants in various matters of
litigation generally incidental to their business. Although it is difficult to
predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability will not materially
affect the consolidated financial position of the corporation and its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal trading markets for the corporation's common equity are
presented on the cover page of the Form 10-K. The high and low sales prices for
the corporation's common stock for each quarter during the past two years and
information regarding cash dividends is set forth on pages 56 through 58, 81,
and 90 in the Appendix. The number of holders of record of the common stock and
securities convertible into common stock of the corporation at January 31, 1995
were:
TITLE OF CLASS NUMBER OF HOLDERS
-------------- -----------------
6 3/4% Convertible Subordinated Debentures Due 2003.... 8
Depositary Shares Representing Cumulative Convertible
Preferred Stock, Series B............................. 91
Common Stock, par value $1 2/3 per share............... 30,035
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data begins on page 84 in the Appendix.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis is presented beginning on page 17 in the Appendix
and should be read in conjunction with the related financial statements and
notes thereto included under Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the corporation and its subsidiaries
begin on page 33 in the Appendix. The report of independent certified public
accountants on the corporation's consolidated financial statements is presented
on page 82 in the Appendix.
Selected quarterly financial data is presented on pages 90 and 91 in the
Appendix.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A and such
information is expressly incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A and such
information is expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A and such
information is expressly incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A and such
information is expressly incorporated herein by reference.
11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS--SEE ITEM 8 ABOVE.
(2) FINANCIAL STATEMENT SCHEDULES
All schedules to the consolidated financial statements normally
required by Form 10-K are omitted since they are either not
applicable or the required information is shown in the financial
statements or the notes thereto.
(b)REPORTS ON FORM 8-K
The corporation filed Current Reports on Form 8-K dated November 1,
1994, reporting consolidated operating results of the corporation
for the quarter and nine months ended September 30, 1994; and dated
November 15, 1994, filing certain documents in connection with the
offering of Medium-Term Notes, Series E.
(c)EXHIBITS
3(a). Restated Certificate of Incorporation, as amended, incor-
porated by reference to Exhibit 3(b) to the corporation's
Current Report on Form 8-K dated June 28, 1993.
3(b). Certificate of Designations of powers, preferences and
rights relating to the corporation's ESOP Cumulative Con-
vertible Preferred Stock incorporated by reference to Ex-
hibit 4 to the corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994.
3(c). Certificate of Designations of powers, preferences and
rights relating to the corporation's Cumulative Tracking
Preferred Stock incorporated by reference to Exhibit 3 to
the corporation's Current Report on Form 8-K dated January
9, 1995.
3(d). By-Laws, as amended, incorporated by reference to Exhibit
4(c) to the corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1991.
4(a). See 3(a), 3(b), 3(c), and 3(d) of Item 14(c), above.
4(b). Rights Agreement, dated as of November 22, 1988, between
the corporation and Citibank, N.A. incorporated by refer-
ence to Exhibit 1 to the corporation's Form 8-A, dated De-
cember 6, 1988, and Certificates of Adjustment pursuant to
Section 12 of the Rights Agreement incorporated by refer-
ence to Exhibit 3 to the corporation's Form 8, dated July
21, 1989, and to Exhibit 4 to the corporation's Form 8-A/A
dated June 29, 1993.
4(c). Copies of instruments with respect to long-term debt will
be furnished to the Commission upon request.
*10(a). 1985 Long-Term Incentive Compensation Plan, as amended,
incorporated by reference to Exhibit 99(a) to the corpora-
tion's Registration Statement No. 033-50309.
*10(b). Employees' Stock Deferral Plan incorporated by reference
to Exhibit 10(c) to the corporation's Annual Report on
Form 10-K for the year ended December 31, 1992.
*10(c). Employees' Deferred Compensation Plan incorporated by ref-
erence to Exhibit 10 to the corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994.
*10(d). Executive Incentive Compensation Plan incorporated by ref-
erence to Exhibit 19(a) to the corporation's Quarterly Re-
port on Form 10-Q for the quarter ended June 30, 1988.
Amendment to Executive Incentive Compensation Plan incor-
porated by reference to Exhibit 19(b) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1989.
12
*10(e). Performance-Based Compensation Policy for Covered Execu-
tive Officers incorporated by reference to Exhibit 10(a)
to the corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
*10(f). Supplemental Savings-Investment Plan, as amended, incorpo-
rated by reference to Exhibit 10(e) to the corporation's
Annual Report on Form 10-K for the year ended December 31,
1992.
*10(g). Executive Financial Counseling Plan incorporated by refer-
ence to Exhibit 10(f) to the corporation's Annual Report
on Form 10-K for the year ended December 31, 1987.
*10(h). Supplemental Long Term Disability Plan incorporated by
reference to Exhibit 10(f) to the corporation's Annual Re-
port on Form 10-K for the year ended December 31, 1990.
Amendment to Supplemental Long Term Disability Plan, in-
corporated by reference to Exhibit 10(g) to the corpora-
tion's Annual Report on Form 10-K for the year ended De-
cember 31, 1992.
*10(i). Deferred Compensation Plan for Non-Employee Directors in-
corporated by reference to Exhibit 10(g) to the corpora-
tion's Annual Report on Form 10-K for the year ended De-
cember 31, 1987.
*10(j). Retirement Plan for Non-Employee Directors incorporated by
reference to Exhibit 10(h) to the corporation's Annual Re-
port on Form 10-K for the year ended December 31, 1987.
Amendment to Retirement Plan for Non-Employee Directors
incorporated by reference to Exhibit 19 to the corpora-
tion's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990.
*10(k). Directors' Formula Stock Award Plan, as amended, incorpo-
rated by reference to Exhibit 10(c) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1994.
*10(l). Directors' Stock Deferral Plan incorporated by reference
to Exhibit 19 to the corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.
*10(m). Agreement between the corporation and Lloyd P. Johnson
dated March 11, 1991, incorporated by reference to Exhibit
19(c) to the corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1991.
*10(n). Agreement between the corporation and Richard M.
Kovacevich dated March 18, 1991, incorporated by reference
to Exhibit 19(e) to the corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1991.
*10(o). Form of agreement executed in March 1991, between the cor-
poration and 13 executive officers, including two direc-
tors, incorporated by reference to Exhibit 19(f) to the
corporation's Quarterly Report on Form 10-Q for the quar-
ter ended March 31, 1991. Amendments dated March 16, 1992
to the agreements between the corporation and Lloyd P.
Johnson and Richard M. Kovacevich incorporated by refer-
ence to Exhibit 19(a) to the corporation's Quarterly Re-
port on Form 10-Q for the quarter ended March 31, 1992.
*10(p). Consulting Agreement between the corporation and Gerald J.
Ford dated January 19, 1994 incorporated by reference to
Exhibit 10(q) to the corporation's Annual Report on Form
10-K for the year ended December 31, 1993.
11. Computation of Earnings Per Share.
12(a). Computation of Ratio of Earnings to Fixed Charges.
12(b). Computation of Ratio of Earnings to Fixed Charges and Pre-
ferred Stock Dividends.
21. Subsidiaries of the Corporation
23. Consent of Experts.
24. Powers of Attorney.
27. Financial Data Schedule Article 9.
13
- --------
* Management contract or compensatory plan or arrangement.
Stockholders may obtain a copy of any Exhibit, Item 14(c), none of which are
contained herein, upon payment of a reasonable fee, by writing Norwest
Corporation, Office of the Secretary, Norwest Center, Sixth and Marquette,
Minneapolis, Minnesota 55479-1026.
14
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 28TH DAY OF
FEBRUARY, 1995.
Norwest Corporation
(Registrant)
/s/ Richard M. Kovacevich
By __________________________________
Richard M. Kovacevich
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON THE 28TH DAY OF FEBRUARY, 1995, BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
/s/ John T. Thornton
By __________________________________
John T. Thornton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Michael A. Graf
By __________________________________
Michael A. Graf
Senior Vice President and
Controller
(Principal Accounting Officer)
The Directors of Norwest Corporation listed below have duly executed powers
of attorney empowering William A. Hodder to sign this document on their behalf.
David A. Christensen Richard M. Kovacevich
Gerald J. Ford Richard S. Levitt
Pierson M. Grieve Cynthia H. Milligan
Charles M. Harper John E. Pearson
N. Berne Hart Ian M. Rolland
George C. Howe Stephen E. Watson
Lloyd P. Johnson Michael W. Wright
Reatha Clark King
/s/ William A. Hodder
By __________________________________
William A. Hodder
Director and Attorney-in-Fact
February 28, 1995
15
APPENDIX
NORWEST CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, FINANCIAL
STATEMENTS, REPORT OF INDEPENDENT AUDITORS
AND SELECTED FINANCIAL DATA
FORMING A PART OF THE ANNUAL REPORT
ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1994
CONTENTS
PAGE
----
Financial Review .......................................................... 17
Financial Statements ...................................................... 33
Independent Auditors' Report .............................................. 82
Management's Report ....................................................... 83
Six-Year Consolidated Financial Summary ................................... 84
Consolidated Average Balance Sheets and Related Yields and Rates .......... 86
Quarterly Condensed Consolidated Financial Information..................... 90
16
FINANCIAL REVIEW
This financial review should be read with the consolidated financial
statements and accompanying notes presented on pages 33 through 81 and other
information presented on pages 84 through 91.
EARNINGS PERFORMANCE
Norwest Corporation (the "corporation") reported record net income of $800.4
million in 1994, a 30.6 percent increase over 1993 earnings of $613.1 million,
which were up 55.6 percent over the $394.0 million earned in 1992. Net income
per common share was $2.45 in 1994, compared with $1.89 in 1993 and $1.19 in
1992, an increase of 29.6 percent and 58.8 percent, respectively. Return on
realized common equity was 21.4 percent and return on assets was 1.45 percent
for 1994, compared with 18.2 percent and 1.20 percent, respectively, in 1993,
and 11.7 percent and 0.85 percent, respectively, in 1992.
The corporation's results for periods prior to 1994 have been restated to
include the results of First United Bank Group, Inc. (First United) which was
acquired by the corporation effective January 14, 1994 and has been accounted
for using the pooling of interests method of accounting. Included in 1993
earnings are First United's $16.5 million of additional provision for credit
losses for the purpose of conforming First United's credit loss practices and
policies to those of the corporation and $83.2 million of merger and transition
related expenses.
The corporation's results for periods prior to 1993 were previously restated
to include the results of Lincoln Financial Corporation (Lincoln), which was
acquired by the corporation effective February 9, 1993 and was accounted for
using the pooling of interests method of accounting. Included in 1992 earnings
were Lincoln's $60.0 million of additional provision for credit losses for the
purpose of conforming Lincoln's credit loss practices and policies to those of
the corporation and $33.5 million of merger and transition related expenses and
restructuring costs.
Net income per common share amounts for periods prior to 1993 have been
restated to reflect the two-for-one split of the outstanding shares of common
stock of the corporation effected in the form of a 100 percent stock dividend
distributed on June 28, 1993.
The 1992 results include a one-time special charge of $76.0 million after
tax, or 25 cents per common share, related to the corporation's early adoption
of Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" (FAS 106). Excluding the
cumulative effect of the change in accounting for postretirement medical
benefits, 1992 net income was $470.0 million, or $1.44 per common share, return
on common equity was 14.2 percent and return on assets was 1.01 percent.
17
NORWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME SUMMARY
IN MILLIONS
5 YEAR
GROWTH
1994 CHANGE 1993 CHANGE 1992 1991 1990 RATE
-------- ------ -------- ------ -------- -------- -------- ------
Interest income (tax-
equivalent basis)...... $4,422.7 11.1% $3,979.6 3.5% $3,844.3 $4,073.7 $3,945.0 3.7%
Interest expense........ 1,590.1 10.2 1,442.9 (10.4) 1,610.6 2,150.3 2,320.1 (6.4)
-------- -------- -------- -------- --------
Net interest income.. 2,832.6 11.7 2,536.7 13.6 2,233.7 1,923.4 1,624.9 13.9
Provision for credit
losses................. 164.9 4.2 158.2 (41.6) 270.8 406.4 433.0 (6.7)
-------- -------- -------- -------- --------
Net interest income
after provision for
credit losses....... 2,667.7 12.2 2,378.5 21.2 1,962.9 1,517.0 1,191.9 16.5
Non-interest income..... 1,638.3 3.4 1,585.0 24.4 1,273.7 1,064.0 896.3 17.6
Non-interest expenses... 3,096.4 1.5 3,050.4 19.5 2,553.1 2,041.5 1,744.5 15.2
-------- -------- -------- -------- --------
Income before income
taxes................. 1,209.6 32.5 913.1 33.6 683.5 539.5 343.7 22.1
Income tax expense...... 380.2 42.6 266.7 51.9 175.6 73.4 115.1 30.9
Tax-equivalent
adjustment............. 29.0 (12.9) 33.3 (12.1) 37.9 47.8 59.2 (14.4)
-------- -------- -------- -------- --------
Income before cumulative
effect of a change in
accounting for
postretirement medical
benefits............... 800.4 30.6 613.1 30.5 470.0 418.3 169.4 23.0
Cumulative effect on
years ended prior to
December 31, 1992 of a
change in accounting
for postretirement
medical benefits....... -- -- -- NM (76.0) -- -- --
-------- -------- -------- -------- --------
Net income.............. $ 800.4 30.6% $ 613.1 55.6% $ 394.0 $ 418.3 $ 169.4 23.0%
======== ===== ======== ===== ======== ======== ======== =====
- --------
NM--Not meaningful
ORGANIZATIONAL EARNINGS
Banking. The Banking Group reported record earnings of $507.1 million in
1994, a 42.1 percent increase over 1993 earnings of $356.7 million, which
increased 38.5 percent over the $257.6 million earned in 1992. Included in the
1993 Banking Group results are First United's additional provision for credit
losses and merger and transition related expenses totaling $99.7 million before
income taxes. The Banking Group earnings increases in 1994 and 1993 reflect a
17.1 percent and 7.0 percent growth in tax-equivalent net interest income,
respectively, primarily due to increases in average earning assets and net
interest margin, and 10.3 percent and 71.8 percent decreases in the provision
for credit losses, respectively, reflecting continued decreases in net credit
losses and non-performing assets. Non-interest income in the Banking Group
decreased 9.7 percent from 1993 due largely to securities losses in 1994. Non-
interest income in 1993 increased 10.5 percent over 1992 primarily due to
continued increases in trust fee income, service charges on deposits and
insurance revenues. The Banking Group non-interest expenses decreased 1.5
percent in 1994. In 1993, non-interest expenses increased 10.2 percent over
1992 primarily as a result of acquisition-related charges, writedowns of excess
facilities and other assets, and increased charitable contributions.
The venture capital subsidiaries realized $77.1 million of net gains in 1994,
compared with net gains of $59.5 million in 1993 and net gains of $29.7 million
in 1992. Virtually all appreciated securities included in the $59.5 million
venture capital gains in 1993 were contributed to the Norwest Foundation,
compared with $19.6 million in 1994. Contribution amounts of these appreciated
securities, which included cost basis, were $69.8 million in 1993 and $21.8
million in 1994. Net unrealized appreciation in the venture capital investment
portfolio was $61.3 million at December 31, 1994 and $118.3 million at December
31, 1993.
Mortgage Banking. Mortgage banking operations earned $70.8 million in 1994,
$56.3 million in 1993, and $53.4 million in 1992. The 25.9 percent increase in
1994 earnings was principally due to growth in the
18
servicing portfolio. A 60.2 percent increase in residential mortgage fundings
over 1992 contributed to the increase in 1993 earnings. Fundings were $24.9
billion in 1994, compared with $33.7 billion in 1993 and $21.0 billion in 1992.
Approximately 16.0 percent of the 1994 fundings were due to refinancings,
compared with 45.6 percent in 1993. Net gains on the sale of mortgages were
$74.5 million in 1994, compared with $140.5 million in 1993 and $19.8 million
in 1992. Net servicing retained during 1994 was $25.8 billion, compared with
$24.1 billion in 1993 and $13.0 billion in 1992. The servicing portfolio
increased to $71.5 billion at December 31, 1994, compared with $45.7 billion at
December 31, 1993. In 1994, sales of servicing rights were $11.7 billion with
gains on sales of $130.0 million, compared with $2.9 billion and $61.7 million,
respectively, during 1993 and $7.2 billion and $62.4 million, respectively, in
1992.
Norwest Financial Services, Inc. Norwest Financial Services, Inc. (Norwest
Financial) reported record earnings of $222.5 million in 1994, an 11.2 percent
increase over 1993 earnings of $200.1 million, which were 25.9 percent over the
$159.0 million earned in 1992. The increases were primarily due to increases in
tax-equivalent net interest income of 12.5 percent and 27.1 percent,
respectively, for 1994 and 1993. The increase in tax-equivalent net interest
income was due to 14.4 percent and 18.1 percent increases in average finance
receivables in 1994 and 1993, respectively. Net interest margin decreased 29
basis points in 1994, reflecting higher funding costs. The margin improved 107
basis points in 1993 over 1992 due primarily to lower short-term borrowing
rates and benefits from refinancing long-term debt at lower interest rates.
Norwest Financial's non-interest expenses increased 10.0 percent and 21.5
percent in 1994 and 1993, respectively, primarily due to the acquisitions of
Community Credit Co. in March 1994 and the consumer finance business of Trans
Canada Credit Corporation Limited during the fourth quarter of 1992.
NORWEST CORPORATION AND SUBSIDIARIES
ORGANIZATIONAL EARNINGS*
IN MILLIONS
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992 1991 1990
------ ----- ----- ----- -----
Banking........................................ $507.1 356.7 257.6 263.4 46.1
Mortgage banking............................... 70.8 56.3 53.4 31.4 17.0
Norwest Financial Services, Inc. and
subsidiaries.................................. 222.5 200.1 159.0 123.5 106.3
------ ----- ----- ----- -----
Consolidated income before cumulative effect of
a change in accounting for postretirement
medical benefits.............................. 800.4 613.1 470.0 418.3 169.4
Cumulative effect on years ended prior to
December 31, 1992 of a change in accounting
for postretirement medical benefits........... -- -- (76.0) -- --
------ ----- ----- ----- -----
Net income..................................... $800.4 613.1 394.0 418.3 169.4
====== ===== ===== ===== =====
- --------
*Earnings of the entities listed are impacted by intercompany revenues and
expenses, such as interest on borrowings from the parent company, corporate
service fees and allocations of federal income taxes.
CONSOLIDATED INCOME STATEMENT ANALYSIS
Net Interest Income. Net interest income on a tax-equivalent basis is the
difference between interest earned on assets and interest paid on liabilities,
with adjustments made to present yields on tax-exempt assets as if such income
was fully taxable. Changes in the mix and volume of earning assets and
interest-bearing liabilities, their related yields and overall interest rates
have a major impact on earnings. In 1994, tax-equivalent net interest income
provided 63.4 percent of the corporation's net revenues, compared with 61.5
percent in 1993 and 63.7 percent in 1992.
Total tax-equivalent net interest income was $2,832.6 million in 1994, an
11.7 percent increase over the $2,536.7 million reported in 1993. Growth in
tax-equivalent net interest income over 1993 was primarily due
19
to an 8.2 percent increase in average earning assets and a 16 basis point
increase in net interest margin. The increase in average earning assets was
primarily due to a 13.8 percent increase in average loans and leases,
principally consumer-related loans, and a 9.2 percent increase in investment
securities. The 1993 increase of 13.6 percent over the $2,233.7 million
reported in 1992 was due to a 10.8 percent increase in average earning assets
and a 14 basis point increase in net interest margin. Non-accrual and
restructured loans reduced net interest income by $12.3 million in 1994, $13.9
million in 1993 and $18.4 million in 1992. Detailed analyses of net interest
income appear on pages 85, 86 and 87.
Net interest margin, the ratio of tax-equivalent net interest income divided
by average earning assets, was 5.66 percent in 1994, 5.50 percent in 1993 and
5.36 percent in 1992. The increase in margin in 1994 was due to an improvement
in the yield spread of nine basis points, from 4.85 percent in 1993 to 4.94
percent in 1994, and a shift in the mix of earning assets to higher-yielding
loans. Average loans and leases comprised 60.6 percent of average earning
assets in 1994, compared with 57.6 percent in 1993. The increase in margin in
1993 over 1992 reflects the downward repricing of core deposits, refinancing of
long-term debt at lower interest rates and the repurchase of securitized credit
card receivables, partially offset by lower yields on earning assets.
Provision for Credit Losses. The provision for credit losses reflects
management's judgment of the cost associated with credit risk inherent in the
loan and lease portfolio. The consolidated provision for credit losses was
$164.9 million in 1994, $158.2 million in 1993 and $270.8 million in 1992. The
provision for credit losses was 0.55 percent of average loans and leases in
1994, compared with 0.60 percent in 1993 and 1.16 percent in 1992. The
provision for credit losses was higher in 1994, compared with 1993, due to
higher net charge-offs and additional provisioning related to loan growth.
However, as a percentage of average loans, both net charge-offs and provision
declined in 1994 compared with 1993. The decrease in the provision for credit
losses in 1993 over 1992 reflects the continued reduction in the corporation's
net credit losses and non-performing assets which were down $107.7 million from
December 31, 1992. Also, as previously discussed, the provision for credit
losses includes additional provisions for credit losses taken by First United
of $16.5 million in 1993 and $60.0 million taken by Lincoln in 1992.
Net credit losses were $193.2 million in 1994, $178.3 million in 1993 and
$225.4 million in 1992. Net credit losses as a percent of average loans and
leases were 0.64 percent in 1994, compared with 0.67 percent in 1993 and 0.97
percent in 1992. The increase in net credit losses in 1994 over 1993 was due to
increases in consumer and credit card net charge-offs totaling $35.1 million,
partially offset by a $17.0 million reduction in commercial loan net charge-
offs. The higher consumer-related net charge-offs reflect growth in the loan
portfolio rather than a deterioration in credit quality. The net charge-off
ratio for Norwest Financial was 2.00 percent in 1994 compared with 2.16 percent
in 1993; Norwest Card Services' net charge-off ratio was 3.07 percent in 1994
compared with 3.54 percent in 1993. The decrease in net credit losses in 1993
from 1992 reflects significantly lower commercial, consumer, construction and
land development and real estate loan charge-offs resulting from lower levels
of non-performing loans. These decreases were partially offset by higher
foreign loan charge-offs as a result of Norwest Financial's fourth quarter 1992
acquisition of the consumer finance business of Trans Canada Credit Corporation
Limited and higher credit card charge-offs.
Non-Interest Income. Non-interest income is a significant source of the
corporation's revenue, representing 36.6 percent of tax-equivalent net revenues
in 1994, compared with 38.5 percent in 1993 and 36.3 percent in 1992.
Consolidated non-interest income increased 3.4 percent in 1994 to $1,638.3
million, compared with $1,585.0 million in 1993. This increase was after net
investment securities losses of $79.2 million in 1994, which provided an
opportunity to reinvest at higher yields. In 1993 and 1992, net investment
securities gains were realized of $48.8 million and $66.2 million,
respectively. Excluding gains (losses) on investment/mortgage-backed securities
and investment/mortgage-backed securities available for sale and venture
capital gains, non-interest income increased 11.1 percent in 1994 and 25.4
percent in 1993 over the respective preceding year. Contributing to the
increase in non-interest income in 1994 were higher mortgage banking revenues,
insurance fees, trust fees and deposit service charges, partially offset by a
decrease in other non-interest income.
20
The growth in mortgage banking revenues principally reflects increased
servicing fees resulting from growth in the corporation's servicing portfolio.
The higher servicing fees, coupled with an increase in gains on sales of
servicing rights, more than offset decreases in origination fees and gains on
sales of mortgages that resulted from higher market interest rates. Servicing
fees are expected to increase as the servicing portfolio grows through
retention of servicing generated and through future acquisitions, including the
acquisition of Directors Mortgage Loan Corporation (Directors Mortgage), with a
servicing portfolio of approximately $13 billion, expected to close in the
first quarter of 1995 and the purchase of the $15 billion servicing portfolio
of BarclaysAmerican/Mortgage Corporation, expected to close in the second
quarter of 1995. Sales of servicing rights of $11.7 billion were recorded in
1994 in consideration of the portfolio mix and opportunistic pricing spreads.
In 1993, there were sales of servicing rights of $2.9 billion under an
obligation in a long-term contract. Future sales of such rights are largely
dependent upon portfolio characteristics and prevailing market conditions.
The increase in insurance fees is attributed largely to commissions on credit
life insurance, related to the growth in the consumer loan portfolio. The
increases in trust fees and deposit service charges are evidence of increased
business activity and marketing efforts. Credit card fees were $116.5 million
in 1994, up slightly from $114.3 million in 1993 as revenues from higher
activity levels were partially offset by the repurchase of $858 million of
credit card receivables from the securitized credit card receivable trusts
during 1993 and 1994. The repurchase program was completed during the second
quarter of 1994. Revenues on securitized credit card receivables are recorded
in non-interest income rather than net interest income, where revenues are
recorded after the repurchases. Other non-interest income decreased $38.8
million from 1993 primarily due to lower trading revenues, as discussed below.
Net venture capital gains were $77.1 million in 1994 compared with $59.5
million in 1993. Sales of venture capital securities generally relate to
holdings becoming publicly traded and subsequent market conditions, causing
venture capital gains to be unpredictable in nature.
Consolidated non-interest income increased 24.4 percent in 1993 to $1,585.0
million, primarily due to increased mortgage banking revenues, venture capital
gains and growth in various fee-based services, partially offset by decreases
in credit card fees and net gains on investment/mortgage-backed securities. The
growth in mortgage banking revenues reflected growth in mortgage loan fundings
and the servicing portfolio. Credit card revenues decreased $19.9 million from
1992 primarily due to the repurchase of $525 million of credit card receivables
from the securitized credit card receivable trusts during 1993. Other non-
interest income increased $43.8 million from 1992 primarily due to increases of
$20.8 million in trading revenues and $9.9 million in gains on sales of student
loans available for sale.
Trading Revenues. The corporation conducts trading of debt and equity
securities, money market instruments, derivative products and foreign exchange
contracts to satisfy the investment and risk management needs of its customers
and those of the corporation. Trading activities are conducted within risk
limits established and monitored by the Asset and Liability Management
Committee as further discussed in the Asset and Liability Management section of
the Financial Review.
Interest income derived from trading account securities was $24.6 million,
$28.9 million and $22.9 million for the three years ended December 31, 1994,
1993 and 1992, respectively. Non-interest trading revenues (losses) during
1994, 1993 and 1992, were $(18.1) million, $41.7 million and $20.9 million,
respectively. The table on trading revenues in Note 14 to the consolidated
financial statements on page 70 provides a summary of the corporation's trading
results in the principal markets in which the corporation participates.
Non-Interest Expenses. Consolidated non-interest expenses increased 1.5
percent in 1994 to $3,096.4 million reflecting higher salaries and benefits
costs, occupancy charges and equipment expenses, primarily due to acquisitions
and an increased number of stores at Norwest Financial. Offsetting these
increases were lower charitable contributions, as well as First United's non-
recurring 1993 charges totaling $81.3 million, which included systems and
operations costs of $39.8 million, severance and transitional benefits of $9.3
million, other real estate write-downs of $7.1 million and other asset write-
downs of $25.1 million.
21
Of the $99.4 million increase in personnel expense in 1994, $50.1 million is
attributable to salaries expense and $49.3 million is due to benefits expense,
representing increases over 1993 of 4.1 percent and 18.7 percent, respectively.
Benefits expense was higher due to increases in pension and savings plan
expenses as well as higher medical costs. Changes in personnel expenses by
business segment for 1994 include an increase of 14.6 percent for Norwest
Financial, an increase of 6.9 percent for the Banking Group excluding
acquisitions, and a decrease of 8.5 percent for mortgage banking.
Of the 1994 increases of $38.1 million in net occupancy expenses and $33.4
million in equipment rentals, depreciation and maintenance, mortgage banking
contributed $13.8 million and $15.7 million, respectively.
Other noninterest expenses decreased by $195.7 million to $406.7 million in
1994. Charitable contributions decreased $48.0 million due to the funding
status of the Norwest Foundation. Included in 1993 were the $81.3 million of
merger and transition expenses related to the First United acquisition
previously discussed. Additionally, other one-time special charges were
recorded in 1993 and are explained in the following paragraph.
Consolidated non-interest expenses increased 19.5 percent in 1993 to $3,050.4
million. The increase was primarily due to increased salaries and benefits at
both the mortgage banking operations, to support large origination and
servicing increases in that business, and at Norwest Financial due to its
fourth quarter 1992 acquisition of the consumer finance business of Trans
Canada Credit Corporation Limited, as well as increased salaries and benefits
due to numerous acquisitions completed by the corporation during 1993. The
increase in non-interest expenses also reflects a $47.1 million increase in
charitable contributions and certain non-recurring items. Depreciable lives on
mainframe computers were shortened, due to changing technology, with increased
depreciation recorded of $7.0 million. The amortizable life of goodwill was
capped at 15 years, the current maximum life allowed by the Office of the
Comptroller of the Currency, with increased amortization recorded of $11.3
million. A cumulative adjustment of $9.4 million and increased 1993
amortization of $5.6 million was recorded in conjunction with accelerating the
amortization for other intangibles. Losses on excess facilities of $55.5
million were recorded, based on the present value of future lease payments or
on market values of owned facilities. Other asset write-downs amounted to $24.0
million.
In 1992, the corporation recorded certain non-recurring charges including
$52.2 million for write-downs of, or losses on disposal of, excess facilities,
$10.1 million for write-downs of obsolete equipment, miscellaneous receivable
adjustments of $8.3 million and other asset write-downs of $11.7 million.
Income Taxes. The corporation's income tax planning is based upon the goal of
maximizing long-term, after-tax profitability. Income tax expense is
significantly impacted by the mix of taxable versus tax-exempt revenues from
investment securities and the loan and lease portfolio and the utilization of
net operating loss carryforwards. The effective income tax rate was 32.2
percent in 1994, compared with 30.3 percent in 1993 and 24.9 percent in 1992.
The higher effective tax rate in 1994 was primarily due to lower charitable
contributions. The increase in the effective tax rate in 1993 from 1992 was
primarily due to the utilization in 1992 of net operating loss tax benefits of
$31.2 million related to United Banks of Colorado, Inc.'s 1990 net operating
loss. For more information on income taxes, see Note 12 to the consolidated
financial statements on page 65.
CONSOLIDATED BALANCE SHEET ANALYSIS
Earning Assets. At December 31, 1994, earning assets were $53.3 billion,
compared with $50.0 billion at December 31, 1993. This increase was primarily
due to a $2.1 billion increase in total investment securities and a $4.5
billion increase in loans and leases, and student loans held for sale,
including $1.2 billion of loans and leases acquired in acquisitions completed
during 1994. These increases were partially offset by a $3.0 billion decrease
in mortgages held for sale.
Average earning assets were $49.9 billion in 1994, an increase of 8.2 percent
over 1993. This increase was primarily due to a 13.8 percent increase in
average loans and leases, and a 9.2 percent increase in average
22
total investment securities, partially offset by a 23.8 percent decrease in
average mortgages held for sale due to decreased residential mortgage fundings.
Leverage, the ratio of average assets to average total stockholders' equity,
was 14.3 times during 1994 versus 14.2 times during 1993. This increase is due
to an 8.2 percent increase in average assets, partially offset by a 7.1 percent
increase in average stockholders' equity.
In 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which was adopted by the corporation as of January
1, 1994. The Statement requires that investments classified as available for
sale be reported at fair value with unrealized gains and losses reported, net
of tax, as a separate component of stockholders' equity. The corporation
previously accounted for investments classified as available for sale using the
lower of cost or market accounting method. As of December 31, 1994 and 1993,
net unrealized gains (losses) before income taxes related to investments and
mortgage-backed securities available for sale were $(559.9) million and $482.1
million, respectively.
In Note 17 to the consolidated financial statements on page 74 the
corporation has disclosed the estimated fair values of all on and off-balance
sheet financial instruments and certain non-financial instruments in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments."
As of December 31, 1994, the fair value of net financial instruments totaled
$3.5 billion, a decrease of $0.5 billion from December 31, 1993. This decrease
was primarily due to a reduction in mortgages held for sale and higher
borrowing levels, partially offset by growth in loans and leases as well as
mortgage-backed securities available for sale. During the same period, the net
fair value of certain non-financial instruments increased $2.4 billion to $9.6
billion as of December 31, 1994. The fair value of the mortgage servicing
portfolio increased $0.4 billion due to increases in the servicing portfolio.
The fair value of the consumer finance network increased $0.1 billion and the
fair value of the mortgage loan origination/wholesale network decreased $0.2
billion due to lower mortgage loan originations. The fair value of non-maturity
deposits increased $1.4 billion due to increased deposits.
As of December 31, 1993, the fair value of net financial instruments totaled
$4.0 billion, an increase of $1.0 billion from December 31, 1992. This increase
was primarily due to growth in mortgages held for sale and loans and leases,
which were partially offset by reductions in investment securities, including
securities available for sale. During the same period, the net fair value of
certain non-financial instruments increased $1.1 billion to $7.3 billion as of
December 31, 1993. The fair value of the consumer finance network increased
$0.8 billion. The fair value of the mortgage servicing portfolio and the
mortgage loan origination/wholesale network increased $0.4 billion in 1993 due
to increases in the servicing portfolio and growth in the origination and
wholesale network.
Credit Risk Management. The corporation manages exposure to credit risk
through loan portfolio diversification by customer, product, industry and
geography. As a result, there is no undue concentration in any single sector.
The corporation's Banking Group operates in 15 states, largely in the Midwest
and Rocky Mountain regions of the country. Distribution of average loans by
region in 1994 was approximately 57 percent in the north central Midwest, 16
percent in the south central Midwest and 27 percent in the Rocky
Mountain/Southwest region. In general, the economy in these regions is
noticeably stronger than last year. Norwest Card Services, Norwest Mortgage and
Norwest Financial operate on a nationwide basis. With respect to Norwest Card
Services, 43 percent of the credit card portfolio is within the 15-state
banking region. Approximately 56 percent of the portfolio is accounted for by
the states of Massachusetts, Minnesota, Iowa, New York, Connecticut, Colorado,
California, Illinois, Nebraska and Oklahoma. No one state accounts for more
than 10 percent of the total credit card portfolio. Norwest Mortgage operates
in all 50 states, representing the largest retail mortgage network in the
country. Norwest Financial engages in consumer
23
finance activities in 46 states and all 10 Canadian provinces. The general
strength of the consumer sector of the national economy and the extent of the
geographic diversification exercised by Norwest Mortgage and Norwest Financial
help to mitigate the credit risk in their loan portfolios.
Credit risk management also includes pricing loans to cover anticipated
future credit losses, funding and servicing costs and to allow for a profit
margin. Loans and leases by type appear in Note 5 to the consolidated financial
statements on page 50.
As of December 31, 1994 the corporation's commercial real estate portfolio of
loans to investors, developers and builders, including construction and land
development loans (development loans), was $2,082.0 million, of which $27.9
million, or 1.3 percent, were non-performing, compared with $1,632.3 million at
December 31, 1993, of which $40.0 million, or 2.5 percent, were non-performing.
These loans do not include loans on owner-occupied real estate which the
corporation views as having the same general credit risk as commercial loans.
Development loans represent 6.4 percent of the corporation's total loan
portfolio. The total number of development loans is approximately 7,750 with an
average loan size of approximately $0.3 million. The largest development loan
is $13.9 million. The industry composition of development loans consists of
office/warehouse (24 percent), retail (22 percent), residential (31 percent)
and other (23 percent).
Geographically, over 98 percent of the development loan portfolio is within
the 15 state area where the corporation has its principal banking franchise.
Approximately 55 percent of the total portfolio is secured by property located
in Minnesota, Colorado, New Mexico and Texas. Within the 15 state area, the
Minneapolis/St. Paul area has the largest concentration of developer activity.
As noted above, the corporation has spread its construction and commercial real
estate loans among numerous borrowers and has limited the size of loans
retained on its books. Accordingly, the corporation believes its exposure to
future commercial real estate loan losses is limited.
The corporation is not aware of any loans classified for regulatory purposes
at December 31, 1994, that are expected to have a material impact on the
corporation's future operating results, liquidity or capital resources. The
corporation is not aware of any material credits about which there is serious
doubt as to the ability of borrowers to comply with the loan repayment terms.
There are no material commitments to lend additional funds to customers whose
loans were classified as non-accrual or restructured at December 31, 1994.
Allowance for Credit Losses. At December 31, 1994, the allowance for credit
losses was $789.9 million, or 2.42 percent of loans and leases outstanding,
compared with $789.2 million, or 2.74 percent, at December 31, 1993. The ratio
of the allowance for credit losses to the total non-performing assets and 90-
day past due loans and leases was 361.8 percent at December 31, 1994, compared
with 246.8 percent at December 31, 1993.
Although it is impossible for any lender to predict future credit losses with
complete accuracy, management monitors the allowance for credit losses with the
intent to provide for all losses that can reasonably be anticipated based on
current conditions. The corporation maintains the allowance for credit losses
as a general allowance available to cover future credit losses within the
entire loan and lease portfolio and other credit-related risks. However,
management has prepared an allocation of the allowance based on its views of
risk characteristics of the portfolio. This allocation of the allowance for
credit losses does not represent the total amount available for actual future
credit losses in any single category nor does it prohibit future credit losses
from being absorbed by portions of the allowance allocated to other categories
or by the unallocated portion. The table on page 88 presents the allocation of
the allowance for credit losses to major categories of loans.
Non-accrual, Restructured and Past Due Loans and Other Real Estate Owned. The
table on page 25 presents data on the corporation's non-accrual, restructured
and 90-day past due loans and leases and other
24
real estate owned. Generally, the accrual of interest on a loan or lease is
suspended when the credit becomes 90 days past due unless fully secured and in
the process of collection. A restructured loan is generally a loan that is
accruing interest, but on which concessions in terms have been made as a result
of deterioration in the borrower's financial condition.
Non-performing assets, including non-accrual, restructured and other real
estate owned, and 90-day past due loans and leases, totaled $218.3 million, or
0.4 percent of total assets, at December 31, 1994, compared with $319.8
million, or 0.6 percent of total assets, at December 31, 1993. This decline is
principally due to decreases in real estate and commercial non-accrual loans of
$20.0 million and $21.2 million, respectively, and a $33.4 million decrease in
other real estate owned, partially offset by a $7.6 million increase in 90-day
past due loans. The reduction in primary earnings per share due to total non-
accrual and restructured loans was three cents in 1994 and 1993 and four cents
in 1992.
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan," (FAS 114) was issued by the Financial Accounting
Standards Board in May 1993 and subsequently amended by Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," (FAS 118) in October 1994. FAS 114,
as amended, requires a creditor to measure impairment of a loan based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the observable market price of
the loan or the fair value of the collateral if the loan is collateral
dependent. The corporation will adopt the provisions of FAS 114 and FAS 118 in
1995. The adoption of these Statements is not expected to have a material
effect on the corporation's consolidated financial statements.
NORWEST CORPORATION AND SUBSIDIARIES
NON-ACCRUAL, RESTRUCTURED AND PAST DUE LOANS AND LEASES AND OTHER REAL ESTATE
OWNED
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
AT DECEMBER 31,
-----------------------------------------
1994 1993 1992 1991 1990 1989
------ ----- ----- ----- ----- -----
Non-accrual loans and leases....... $128.5 195.7 257.6 355.5 396.6 281.0
Restructured loans and leases...... 1.8 10.3 5.4 18.0 18.5 28.9
------ ----- ----- ----- ----- -----
Total non-accrual and
restructured loans and leases. 130.3 206.0 263.0 373.5 415.1 309.9
Other real estate owned............ 29.6 63.0 113.7 151.2 182.2 139.4
------ ----- ----- ----- ----- -----
Total non-performing assets.... 159.9 269.0 376.7 524.7 597.3 449.3
Loans and leases past due 90-days
or more*.......................... 58.4 50.8 51.9 82.4 88.3 69.1
------ ----- ----- ----- ----- -----
Total non-performing assets and
90-day past due loans and
leases........................ $218.3 319.8 428.6 607.1 685.6 518.4
====== ===== ===== ===== ===== =====
Interest income as originally
contracted on non-accrual and
restructured loans and leases..... $ 15.4 19.4 26.5 41.6 51.9 33.6
Interest income recognized on non-
accrual and restructured loans and
leases............................ (3.1) (5.5) (8.1) (14.2) (19.5) (9.1)
------ ----- ----- ----- ----- -----
Reduction of interest income due to
non-accrual and restructured loans
and leases........................ $ 12.3 13.9 18.4 27.4 32.4 24.5
====== ===== ===== ===== ===== =====
Reduction in primary earnings per
share due to non-accrual and
restructured loans and leases..... $ .03 .03 .04 .06 .08 .06
- --------
* Excludes non-accrual and restructured loans and leases.
25
FUNDING SOURCES
Interest-bearing Liabilities. At December 31, 1994, interest-bearing
liabilities totaled $44.2 billion, an increase of $4.4 billion over December
31, 1993. The increase was principally due to a $1.9 billion increase in short-
term borrowings, largely from acquisitions, and a $2.3 billion increase in
long-term debt.
Average interest-bearing liabilities were $40.9 billion in 1994, compared
with $38.3 billion in 1993, primarily due to a 6.8 percent increase in average
interest-bearing deposits and a 27.9 percent increase in average long-term
debt, partially offset by a 9.4 percent decrease in short-term borrowings.
Core Deposits. In the corporation's banking subsidiaries, demand deposits,
regular savings and NOW accounts, money market checking and savings accounts
and consumer savings certificates provide a stable source of low-cost funding.
These funds accounted for approximately 63 percent of the corporation's total
funding sources during 1994 and approximately 62 percent in 1993. This is a
high level of core deposits by industry standards. In the corporation's Banking
Group, where these funds are utilized, average core deposits accounted for
approximately 69 percent of total funding sources during 1994, compared with 68
percent in 1993.
Purchased Deposits. In addition to core deposits, purchased deposits are an
important source of funding for the corporation's banking subsidiaries.
Purchased deposits include certificates of deposit with denominations of more
than $100,000 and foreign time deposits. Purchased deposits represented
approximately 4 percent of the corporation's total funding sources in 1994 and
1993. There were no brokered certificates of deposit at December 31, 1994 and
1993.
Short-term Borrowings. Short-term borrowings include federal funds purchased,
securities sold under agreements to repurchase, master note agreements,
privately negotiated financing agreements and commercial paper issued by the
corporation and Norwest Financial, Inc. Commercial paper is used by the
corporation to fund the short-term needs of its subsidiaries, consisting
primarily of funding of Norwest Mortgage's inventory of mortgages held for sale
which are typically held for 60 to 90 days. Norwest Financial, Inc. utilized
funds generated through its own commercial paper sales program to fund
approximately 22 percent of its average earning assets in 1994 compared with 23
percent in 1993.
The commercial paper/short-term debt of the corporation and Norwest
Financial, Inc. are currently rated TBW-1 by Thomson BankWatch, P1 by Moody's,
A1+ by Standard & Poor's, Duff-1+ by Duff & Phelps and F-1+ by Fitch Investors
Services, Inc. IBCA has also rated the corporation's commercial paper/short-
term debt A1+. On average, total short-term borrowings represented
approximately 12.4 percent of the corporation's total funding sources during
1994 and approximately 14.8 percent during 1993.
At December 31, 1994, the corporation had available lines of credit totaling
$1,282.7 million, including lines of credit totaling $1,082.7 million at
Norwest Financial, Inc. These financing arrangements require the maintenance of
compensating balances or payment of fees, which are not material.
Long-term Debt. Long-term debt represents an important funding source for the
corporation and for Norwest Financial, Inc. Total long-term debt represented
approximately 14.0 percent of the corporation's consolidated average funding
sources during 1994 compared with approximately 11.8 percent in 1993. The
corporation utilizes long-term debt primarily to meet the long-term funding
requirements of its subsidiaries, with outstandings of $6,093.7 million as of
December 31, 1994 compared with $4,109.2 million as of December 31, 1993.
Twenty-two banking subsidiaries are members of the Federal Home Loan Bank
allowing them to receive long-term advances secured by certain loans and
investment securities. As of December 31, 1994 these banking subsidiaries had
advances outstanding totaling $2,712.3 million, an increase of $265.7 million
from December 31, 1993. Long-term debt plays an even more significant role at
Norwest Financial, Inc. which utilizes this source of financing to fund
approximately 57 percent of its average earning assets. At December 31, 1994,
Norwest Financial, Inc.'s long-term debt outstanding was $3,092.6 million. Note
9 to the consolidated financial statements on page 53 presents the
corporation's outstanding consolidated long-term debt as of December 31, 1994
and 1993.
26
Thomson BankWatch has assigned their highest issuer rating, an A rating, to
both the corporation and Norwest Financial, Inc. The corporation's senior debt
is currently rated AA+ by Thomson BankWatch, AA by IBCA, Fitch Investors
Services, Inc. and Duff & Phelps, AA- by Standard & Poor's and Aa3 by Moody's.
Norwest Financial, Inc.'s senior debt is currently rated AA+ by Thomson
BankWatch and Fitch Investors Services, Inc., AA by Duff & Phelps, AA- by
Standard & Poor's and Aa3 by Moody's.
Asset and Liability Management. The goal of the asset and liability
management process is to manage the structure of the balance sheet to provide
the maximum level of net interest income while maintaining acceptable levels of
interest sensitivity risk (as defined below) and liquidity. The focal point of
this process is the corporate Asset and Liability Management Committee (ALCO).
This committee, which meets weekly, forms policies governing investments,
funding sources, off-balance sheet commitments, overall interest sensitivity
risk and liquidity. These policies form the framework for management of the
asset and liability process at the corporate, regional and affiliate levels,
and compliance with such policies is monitored at regular intervals by ALCO.
Definition of Interest Sensitivity Risk. Interest sensitivity risk is the
risk that future changes in interest rates will reduce net interest income or
the net market value of the corporation's balance sheet. There are two basic
ways of defining interest rate risk in the financial services industry: the
risk to reported earnings, sometimes referred to as the accounting perspective,
and the risk to the market value of the balance sheet, sometimes referred to as
the economic perspective.
The accounting perspective focuses on the risk to reported net income over a
particular time frame. Differences in the timing of interest rate repricing
(repricing or "gap" risk) and changing market rate relationships (basis risk)
determine the exposure of net income to changes in interest rates.
The economic perspective focuses on the market value of the corporation's
balance sheet, the net of which is referred to as the market value of balance
sheet equity. The sensitivity of the market value of balance sheet equity to
changes in interest rates is an indicator of the level of interest rate risk
inherent in an institution's current position and an indicator of longer
horizon earnings trends. Assessing interest rate risk from the economic
perspective focuses on the risk to net worth arising from all repricing
mismatches (gaps) across the full maturity spectrum.
Both perspectives have their advantages and disadvantages. The corporation
believes that the two perspectives are complementary, and should be used
together to provide a more complete picture of interest rate risk than would be
provided by either perspective alone.
Measurement of Interest Rate Risk. Measurement of interest rate risk from the
accounting perspective has traditionally taken the form of the gap report,
which represents the difference between assets and liabilities that reprice in
a given time period. While providing a rough measure of rate risk, the gap
report has a number of drawbacks, including the fact that it is a static (i.e.
point-in-time) measurement, it does not capture basis risk, and it does not
capture risk that varies either asymmetrically or non-proportionately with rate
movements.
Because of the drawbacks of gap reports, the corporation uses a simulation
model as its primary method of measuring earnings risk. The simulation model,
because of its dynamic nature, can capture the effects of future balance sheet
trends, different patterns of rate movements, and changing relationships
between rates (basis risk). In addition, it can capture the effects of embedded
option risk by taking into account the effects of interest rate caps and
floors, and varying the level of prepayment rates on assets as a function of
interest rates. An example of the difference between the two methods of
measurement is the tendency of consumer deposit rates to lag substantially
behind changes in market interest rates. The lag relationship may depend on a
number of factors, such as the direction and speed of rate movements and the
absolute level of rates. This relationship is difficult to show in a gap
report, but can be captured in a simulation model.
27
Measurement of interest rate risk from the economic perspective is
accomplished with a market valuation model. The market value of each asset and
liability is calculated by computing the present value of all cash flows
generated. In each case the cash flows are discounted by a market interest rate
chosen to reflect as closely as possible the characteristics of the given asset
or liability.
Management of Interest Rate Risk. The management of interest rate risk is
governed by an interest sensitivity policy. The policy places a limit on the
amount of earnings that may be put at risk to rate movements. While this
determines the limits of the corporation's sensitivity position, the position
that is maintained at any given time is a function of balance sheet trends,
asset opportunities, and interest rate expectations. The sensitivity position
at any given time is normally well within the policy limits, which is the case
with the current position.
The simulation model is used to determine the one year and three year gap
levels which correspond to the limit in which the corporation has placed
earnings at risk to interest rate movement, and these gap levels constitute the
limits within which the corporation will manage its interest sensitivity
position. Thus, gap reports are used, in conjunction with the simulation model,
to monitor rate risk, but gaps are not used as the primary measure of rate
risk.
With regard to market valuation risk, the market valuation model is used to
measure the sensitivity of the market value of equity to a wide range of
interest rate changes. These results are reviewed with ALCO on a quarterly
basis. No specific policy limits have yet been set on market valuation risk.
The process of modeling market valuation risk is new to the financial services
industry, and no standards exist within the industry for structuring the
modeling process or using the results to define policy limits. The process of
developing an understanding of all the issues raised in the measurement and
interpretation of this risk is still evolving.
Changes In Interest Sensitivity. The table below presents the corporation's
interest sensitivity gaps for December 1994. The cumulative gap within one year
was $(2,569) million, or 4.4 percent of assets. This compares with a one year
gap of $260 million, or 0.5 percent of assets, in December 1993. The cumulative
gap within three years was $243 million, or 0.4 percent of assets, in December
1994, compared to $3,053 million, or 6.0 percent of assets, in December 1993.
The 1993 gaps have been restated to reflect changes to sensitivity assumptions
made during the year. The movement of the gap in the negative direction during
the year reflects primarily changes in the investment portfolio. The volume of
fixed rate mortgage-backed securities increased during the year, and the
average lives of existing mortgage-backed securities increased as prepayment
rates on the underlying mortgages decreased. The effect of the current interest
sensitivity position is to make the corporation's earnings almost indifferent
to interest rate changes, while benefiting from the positive slope in the short
end of the yield curve. The current sensitivity position is well within the
risk limits set by the corporation's interest sensitivity policy.
28
NORWEST CORPORATION AND SUBSIDIARIES
INTEREST RATE SENSITIVITY
IN MILLIONS
REPRICING OR MATURING
---------------------------------------------
WITHIN AFTER
6 6 MONTHS- 1 YEAR 3 YEARS 5
MONTHS 1 YEAR -3 YEARS -5 YEARS YEARS
------- --------- -------- -------- ------
AVERAGE BALANCES FOR DECEMBER,
1994
Loans and leases................. $14,178 3,464 5,894 3,811 4,921
Investment securities............ 56 90 159 101 748
Investment securities available
for sale........................ 331 101 452 144 398
Mortgage-backed securities
available for sale.............. 2,529 2,507 1,467 1,185 4,546
Student loans available for sale. 1,872 -- -- -- --
Mortgages held for sale.......... 3,099 -- -- -- --
Other earning assets............. 590 3 1 -- 1
Other assets..................... -- -- -- -- 5,177
------- ------ ----- ----- ------
Total assets................. $22,655 6,165 7,973 5,241 15,791
======= ====== ===== ===== ======
Non-interest bearing deposits.... $ 3,151 45 166 128 5,774
Interest bearing deposits........ 12,331 3,123 3,672 1,250 6,284
Short-term borrowings............ 7,556 -- -- -- --
Long-term debt................... 4,053 263 1,385 1,106 2,073
Other liabilities and equity..... -- -- 377 -- 5,088
------- ------ ----- ----- ------
Total liabilities and equity. $27,091 3,431 5,600 2,484 19,219
======= ====== ===== ===== ======
Swaps and options................ $ (867) -- 439 271 157
Gap*............................. $(5,303) 2,734 2,812 3,028 (3,271)
Cumulative gap................... $(5,303) (2,569) 243 3,271 --
Gap as a percent of total assets. (9.2)% (4.4)% 0.4% 5.7% --
- --------
* [assets - (liabilities + equity) + swaps and options] The gap includes the
effect of off-balance sheet instruments on the corporation's interest
sensitivity, with the exception of purchased interest rate floors, whose
downside risk is limited.
Liquidity Management. Liquidity management involves planning to meet
anticipated funding needs at a reasonable cost, as well as contingency plans to
meet unanticipated funding needs or a loss of funding sources. Liquidity
management for the corporation is governed by policies formulated and monitored
by ALCO, which take into account the marketability of assets, the sources and
stability of funding, and the level of unfunded commitments. While each
affiliate is responsible for managing its own liquidity position within overall
guidelines, ALCO monitors the overall liquidity position.
The corporation has a significant liquidity reserve in its
investment/mortgage-backed securities portfolio: approximately 87 percent of
the $14.8 billion portfolio consists of Treasury or federal agency securities.
These securities are highly marketable. Several other factors provide a
favorable liquidity position for the corporation compared with most large bank
holding companies, including the large amount of funding that comes from
consumer deposits, which are a more stable source of funding than purchased
funds, as well as the geographic diversity of the customer base.
Capital Management. The corporation believes that a strong capital position
is vital to continued profitability and to promote depositor and investor
confidence. The corporation's consolidated capital levels are a result of its
capital policy which establishes guidelines for each subsidiary based on
industry standards, regulatory requirements, perceived risk of the various
businesses, and future growth opportunities. The corporation requires its bank
affiliates to maintain capital levels above regulatory minimums for Tier 1
capital,
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total capital (Tier 1 plus Tier 2) to risk-based assets and leverage ratios.
The primary source of equity capital available for the affiliates is earnings,
with other forms of capital available from the corporation as needed. Earnings
above levels required to meet capital policy requirements are paid to the
corporation in the form of dividends and are used to support capital needs of
other affiliates, to pay corporate dividends or to reduce the corporation's
borrowings.
Various federal and state statutes and regulations limit the amount of
dividends the subsidiary banks can pay to the corporation without regulatory
approval. The approval of the Office of the Comptroller of the Currency is
required for any dividend by a national bank if the total of all dividends
declared by the bank in any calendar year would exceed the total of its net
profits, as defined by regulation, for that year combined with its retained net
profits for the preceding two years. Under these provisions the corporation's
national bank subsidiaries could have declared, as of December 31, 1994,
aggregate dividends of at least $361.4 million without obtaining prior
regulatory approval and without reducing the capital of the respective banks
below minimum levels. The corporation also has several state bank subsidiaries
that are subject to state regulations limiting dividends; however, the amount
of dividends payable by the corporation's state bank subsidiaries, with or
without state regulatory approval, would represent an immaterial contribution
to the corporation's revenues. Additionally, the corporation's non-bank
subsidiaries could have declared dividends totaling $1,144.3 million at
December 31, 1994.
Through the implementation of its capital policies, the corporation has
achieved a strong capital position. The corporation's Tier 1 capital ratio at
December 31, 1994 was 9.89 percent and its total capital to risk-based assets
ratio was 12.23 percent, compared with 9.71 percent and 12.39 percent at
December 31, 1993, respectively. The corporation's leverage ratio was 6.94
percent at December 31, 1994, compared with 6.46 percent at December 31, 1993.
These ratios compare favorably to the regulatory minimums of 4.0 percent for
Tier 1, 8.0 percent for total capital to risk-based assets, and 3.0 percent for
the leverage ratio.
Common stockholders' equity was $3,334.4 million at December 31, 1994,
compared with $3,380.9 million at December 31, 1993. The corporation's internal
capital growth rate (ICGR) in 1994 was 15.2 percent. The ICGR represents the
rate at which the corporation's average common equity grew as a result of
earnings retained (net income less dividends paid).
Since 1986 the corporation has repurchased common stock in the open market in
a systematic pattern to meet the common stock issuance requirements of the
corporation's Dividend Reinvestment Plan, the Savings-Investment Plans, the
1985 Long-Term Incentive Compensation Plan, and other stock issuance
requirements other than acquisitions accounted for as pooling of interests. In
January 1995, the corporation's board of directors authorized additional
purchases, at management's discretion, of 10,000,000 shares of the
corporation's common stock.
During 1994, the corporation repurchased 5,668,000 shares of its common stock
for issuance in conjunction with specific purchase acquisitions that were
consummated during the year or for which a definitive agreement had been
executed, but the consummation remained pending at December 31, 1994. In
addition, approximately 13,250,000 shares were repurchased during 1994 for
benefit plans, preferred stock conversions and other ongoing needs. During
1993, 587,000 shares were repurchased for acquisition purposes and 4,203,000
shares were repurchased for benefit plans and other ongoing needs.
In 1992, the corporation stated its intention to engage in open market or
privately negotiated purchases of depositary shares representing its 10.24%
Cumulative Preferred Stock and its Cumulative Convertible Preferred Stock,
Series B. The corporation has not established any specific objectives for the
amount of the depositary shares that it may repurchase. In 1994, the
corporation repurchased 16,500 depositary shares (representing 4,125 shares of
stock), or 0.4 percent of total outstanding shares of the 10.24% Cumulative
Preferred Stock. Total depositary shares repurchased since 1992 include 91,500,
or 2.0 percent of total outstanding shares, and 25,000, or 0.5 percent of total
outstanding shares, of the 10.24% Cumulative Preferred Stock and Cumulative
Convertible Preferred Stock, Series B, respectively.
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On December 30, 1994, the corporation issued 980,000 shares of Cumulative
Tracking Preferred Stock, $200 stated value per share, of which 125,000 shares
were held by a subsidiary at December 31, 1994.
The corporation increased its quarterly dividend 12.1 percent to 18.5 cents
per common share on March 1, 1994 and again on December 1, 1994 to 21 cents per
common share, an increase of 13.5 percent. These dividend increases reflect the
corporation's continuing record of strong earnings performance and the
corporation's policy of maintaining the dividend payout ratio in a range of 30
to 35 percent. In the second quarter of 1993, the corporation increased the
quarterly cash dividend paid to common stockholders from 14.5 cents per share
to 16.5 cents per share. This represented a 13.8 percent increase in the
quarterly dividend rate. Also during the second quarter of 1993, the
corporation declared a two-for-one stock split in the form of a 100 percent
stock dividend payable June 28, 1993 to holders of record as of June 4, 1993.
Acquisitions. The corporation regularly explores opportunities for
acquisitions of financial institutions and related businesses. Generally,
management of the corporation does not make a public announcement about an
acquisition opportunity until a definitive agreement has been signed.
The corporation acquired Alexandria Securities and Investment Company, a $59
million bank holding company located in Alexandria, Minnesota, on December 9,
1994, and issued 341,039 common shares. Also on December 9, 1994, the
corporation acquired First National Bank of Kerrville, a $206 million bank
located in Kerrville, Texas, and issued 1,225,000 common shares. On December 2,
1994, the corporation acquired Texas National Bankshares, Inc., a $188 million
bank holding company located in Midland, Texas, for cash of $24.5 million. The
corporation acquired Bank of Scottsdale, a $93 million bank located in
Scottsdale, Arizona, on October 21, 1994, for cash of $13.6 million. On October
2, 1994, the corporation acquired Copper Bancshares, Inc., a $98 million bank
holding company located in Silver City, New Mexico, and issued 524,920 common
shares. On September 15, 1994, the corporation acquired LaPorte Bancorp., a
$137 million bank holding company located in Hammond, Indiana, and issued
564,553 common shares. On July 1, 1994, the corporation acquired American Land
Title Company of Kansas City, Inc. and issued 166,666 common shares. On May 1,
1994, the corporation completed its acquisition of Double Eagle Financial
Corporation, which owns a title insurance agency located in Phoenix, Arizona,
and issued 307,700 common shares. On April 28, 1994, the corporation completed
its acquisition of D.L. Bancshares, Inc., a $78 million bank holding company
located in Detroit Lakes, Minnesota, for cash of $11.9 million. On April 15,
1994, the corporation completed its acquisition of Bank of Montana System with
assets of $807 million, located in Great Falls, Montana, and issued 4,174,105
common shares. On March 15, 1994, the corporation completed its acquisition of
Community Credit Co., a $173 million consumer finance company located in
Minneapolis, Minnesota, and issued 3,726,871 common shares. On February 2,
1994, the corporation completed its acquisition of First National Bank of
Arapahoe County, First National Bank of Lakewood and First National Bank of
Southeast Denver, with assets of $36 million, $61 million and $134 million,
respectively, located in the Denver, Colorado metro area, and issued 260,896,
337,582 and 803,439 common shares, respectively. Also on February 2, 1994, the
corporation completed its acquisition of Lindeberg Financial Corporation, a $55
million bank holding company located in Forest Lake, Minnesota, and issued
413,599 common shares. On January 1, 1994, the corporation completed its
acquisition of St. Cloud National Bank & Trust Co., a $119 million bank, and on
January 6, 1994, acquired St. Cloud Metropolitan Agency, Inc., an insurance
agency, and issued 1,105,820 and 32,969 common shares, respectively.
The acquisitions of Bank of Montana System, Community Credit Co., First
National Bank of Arapahoe County, First National Bank of Lakewood, First
National Bank of Southeast Denver, Lindeberg Financial Corporation and St.
Cloud National Bank & Trust Co. were accounted for using the pooling of
interests method of accounting; however, the financial results of the
corporation for periods prior to these acquisitions have not been restated
because the effect of these acquisitions on the corporation's financial
statements was not material. The acquisitions of Alexandria Securities and
Investment Company, First National Bank of Kerrville, Texas National
Bankshares, Inc., Bank of Scottsdale, Copper Bancshares, Inc., LaPorte
Bancorp., American Land Title Company of Kansas City, Inc., D.L. Bancshares,
Inc., Double Eagle Financial Corporation and St. Cloud Metropolitan Age