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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, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-2979
NORWEST CORPORATION
A Delaware Corporation - I.R.S. No. 41-0449260
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota 55479
Telephone (612) 667-1234
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
-------------------- -----------------------
Common Stock ($1 2/3 par value) New York Stock Exchange
Chicago Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Chicago Stock Exchange
6 3/4% Convertible Subordinated New York Stock Exchange
Debentures Due 2003
No securities are registered pursuant to Section 12(g) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes x No __
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
On January 31, 1996, 359,079,058 shares of common stock were outstanding having
an aggregate market value, based upon a closing price of $34.375 per share, of
$12,343.3 million. At that date, the aggregate market value of the voting stock
held by non-affiliates was in excess of $11,160.2 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 23, 1996, are incorporated
by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Norwest Corporation (the corporation) is a diversified financial services
company organized under the laws of Delaware in 1929 and registered under the
Bank Holding Company Act of 1956, as amended (the BHC Act). As a diversified
financial services organization, the corporation owns subsidiaries engaged in
banking and in a variety of related businesses. Subsidiaries of the corporation
provide retail, commercial, and corporate banking services to customers through
banks located in Arizona, Colorado, Illinois, Indiana, Iowa, Minnesota, Montana,
Nebraska, Nevada, New Mexico, North Dakota, Ohio, South Dakota, Texas, Wisconsin
and Wyoming. Additional financial services are provided to customers by
subsidiaries engaged in various businesses, principally mortgage banking,
consumer finance, equipment leasing, agricultural finance, commercial finance,
securities brokerage and investment banking, insurance agency services, computer
and data processing services, trust services, mortgage-backed securities
servicing and venture capital investment.
At December 31, 1995, the corporation and its subsidiaries employed 45,404
persons, had consolidated total assets of $72.1 billion, total deposits of $42.0
billion, and total stockholders' equity of $5.3 billion. Based on total assets
at December 31, 1995, the corporation was the 13th largest bank holding company
in the United States.
The corporation provides to its subsidiaries various services, including
strategic planning, asset and liability management, investment administration
and portfolio planning, tax planning, new product and business development,
advertising, administrative and audit, employee benefits and payroll management.
In addition, the corporation provides funds to its subsidiaries. The
corporation derives substantially all its income from investments in and
advances to its subsidiaries and service fees received from its subsidiaries.
The Financial Review, which begins on page 17 in the Appendix, discusses
developments in the corporation's businesses during 1995 and provides financial
and statistical data relative to the business and operations of the corporation.
A brief description of the primary business lines of the corporation follows.
Refer to Note 16 of the corporation's consolidated financial statements for
additional information about the corporation's business segments.
Banking
As of February 1, 1996, the corporation's 40 subsidiary banks, located in 16
states with 734 locations, offer diversified financial services including
retail, commercial and corporate banking, equipment leasing, and trust services;
and through their affiliates offer insurance, securities brokerage, investment
banking and venture capital investment. Investment services are provided to
customers by Norwest Investment Services, Inc., a registered broker/dealer and a
registered investment adviser, which operates in 15 states with 161 offices,
primarily in banking locations. Norwest Insurance, Inc. and its subsidiaries
operate insurance agencies in seven states with 87 offices offering complete
lines of commercial and personal coverages to customers. A subsidiary of the
corporation operates one of the nation's top two crop insurance managing general
agencies. There are also three insurance companies that are owned by bank
affiliates and three other insurance companies that are owned directly or
indirectly by the corporation that reinsure credit-related insurance products
for banking affiliates.
Norwest Bank Minnesota, N.A. is the largest bank in the group with total assets
of $18.2 billion at December 31, 1995. Eight other banks in the group exceeded
$2.0 billion in total assets: Norwest Bank Iowa, N.A. ($6.7 billion), Norwest
Bank Colorado, N.A. ($6.6 billion), Norwest Bank South Dakota, N.A. ($5.2
billion), Norwest Bank Arizona, N.A. ($3.6 billion), Norwest Bank Wyoming, N.A.
($3.2 billion), Norwest Bank Nebraska, N.A. ($2.2 billion), Norwest Bank New
Mexico, N.A. ($2.1 billion), and Norwest Bank Indiana, N.A. ($2.1 billion).
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 1995, Norwest Venture Capital made new investments of $116.5 million.
Norwest
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Venture Capital's investments typically range from $1,500,000 to
$15,000,000; however, larger sums may be invested in a single company, sometimes
through syndication with other venture capitalists. Most Norwest Venture
Capital emerging growth company clients are engaged in technology-related
businesses, such as computer software, telecommunications, medical products,
health care delivery, and industrial automation. Remaining clients are engaged
in 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
Subsidiaries of the corporation originate and purchase residential first
mortgage loans for sale to various investors and provide servicing of mortgage
loans for others. Income is primarily earned from origination fees, loan
servicing fees, interest on mortgages held for sale, and the sale of mortgages
and servicing rights. Norwest Mortgage offers a wide range of FHA, VA and
conventional loan programs through a network of 724 offices in all 50 states.
Approximately 42 percent of the mortgages are FHA and VA mortgages guaranteed by
the federal government and sold as GNMA securities. In 1995 the company funded
$33.9 billion of mortgages, with the average loan being approximately $105,200.
This compares with $24.9 billion of fundings in 1994 and $33.7 billion in 1993.
The five states with the highest originations in 1995 are: California $5,544.5
million; Minnesota $2,498.6 million; Illinois $1,946.0 million; Colorado
$1,806.7 million; and Washington $1,734.4 million. The originations in these
five states comprise approximately 40 percent of total originations in 1995.
The five highest states in servicing include: California $23.4 billion;
Minnesota $8.5 billion; Colorado $5.6 billion; Texas $4.9 billion; and Illinois
$4.7 billion. These five states comprise approximately 44 percent of the total
servicing portfolio at year-end 1995. As of December 31, 1995, the mortgage
servicing portfolio totaled $107.4 billion with a weighted average coupon of
7.76 percent, as compared with $71.5 billion and 7.53 percent, respectively, at
December 31, 1994. The increase in 1995 was due in part to acquisitions of
Directors Mortgage Loan Corporation and the servicing portfolio of
BarclaysAmerican/Mortgage Corporation.
Consumer Finance
Norwest Financial consists of Norwest Financial Services, Inc. and its
subsidiaries and Island Finance, a group of eight companies operating in the
Caribbean and Central America. Consumer finance activities include providing
direct installment loans to individuals, purchasing sales finance contracts,
providing private label and other lease and accounts receivables services and
providing other related products and services. Norwest Financial provides
consumer finance products and services through 1,199 stores in 47 states, Guam,
all ten Canadian provinces, the Caribbean and Central America. At December 31,
1995, consumer finance receivables accounted for 93 percent of Norwest
Financial's total receivables. Direct installment loans to individuals
constitute the largest portion of the consumer finance business and, in
addition, sales finance contracts are purchased from retailers. The five states
with the largest consumer finance receivables are: California $448 million;
Florida $224 million; Texas $222 million; Illinois $201 million; and Ohio $194
million. Consumer finance receivables in Puerto Rico and Canada totaled $1.0
billion and $489 million, respectively, at December 31, 1995. The consumer
finance receivables of Puerto Rico, Canada, and the five largest states listed
above comprise approximately 42 percent of total consumer finance receivables at
year-end 1995. The average installment loan made during 1995 was approximately
$2,400, while sales finance contracts purchased during the year averaged
approximately $1,100. Comparable amounts in both 1994 and 1993 were $2,800 and
$1,000, respectively.
Norwest Financial's insurance subsidiaries are primarily engaged in the business
of providing, directly or through reinsurance arrangements, credit life and
credit disability insurance as a part of Norwest Financial's consumer finance
business. Property, involuntary unemployment and non-filing insurance also are
sold as part of Norwest Financial's consumer finance business, either directly
or through a reinsurance arrangement with one of its insurance subsidiaries or
on an agency basis.
Norwest Financial Information Services Group, Inc.(NFISG) has developed and
installed an on-line, real-time information processing and communications system
which connects, over leased telecommunication facilities, equipment located in
branch offices to the computer center in Norwest Financial's home office.
Branch employees use the computer to process loans and payments, to write checks
and to perform bookkeeping functions. In addition, as of December 31, 1995,
NFISG had contracts to supply information services to 27 other finance
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companies. On that date, approximately 2,700 branch offices were being served
and 6.1 million accounts were being maintained on the system.
Acquisitions
The corporation expands its businesses in part by acquiring banking institutions
and other companies engaged in activities closely related to banking. See Note
2 of the corporation's consolidated financial statements beginning on page 38 in
the Appendix regarding acquisitions by the corporation since 1993.
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 Federal Reserve Board) and may be subject to the prior
approval of other federal and 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 is
permitted to acquire banks in any state subject to the prior approval of the
Federal Reserve Board, certain limited conditions that a state may impose and
deposit concentration limits of 10 percent nationwide and 30 percent in any one
state, unless it is the initial entry of a banking institution into that state.
Effective June 1, 1997, under the interstate branching provisions of the Reigle-
Neal Act, banking subsidiaries of the corporation will be permitted to acquire
directly a banking institution located in a state other than the state in which
the acquiring bank is located (interstate bank merger), through merger,
consolidation, or purchase of assets and assumption of liabilities, unless the
state in which either of the banks is located has enacted a law opting out of
the interstate branching provisions of the Reigle-Neal Act. An interstate bank
merger may occur before June 1, 1997, if the states in which the merging banks
are located have enacted a law authorizing interstate bank mergers. Interstate
bank mergers are subject to the prior approval of the applicable federal and
state regulatory authorities, and may be subject to certain limited conditions
that a state may impose and the concentration limits outlined above.
In determining whether to approve a proposed bank acquisition or merger, bank
regulatory authorities consider a number of factors including the effect of the
proposed acquisition on competition, the public benefits expected to be derived
from the consummation of the proposed transaction, the projected capital ratios
and levels on a post acquisition basis, and the acquiring institution's record
of addressing the credit needs of the communities it serves, including the needs
of low and moderate income neighborhoods, consistent with the safe and sound
operation of the bank, under the Community Reinvestment Act of 1977, as amended.
COMPETITION
Legislative and regulatory changes coupled with technological advances have
significantly increased competition in the financial services industry. The
corporation's 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 and
mutual funds. Competition has also increased from such non-banking institutions
as brokerage houses and insurance companies, as well as financial services
subsidiaries of commercial and manufacturing companies, that are not necessarily
subject to the same regulatory restrictions as banks and bank holding companies.
GOVERNMENT POLICIES, SUPERVISION AND REGULATION
General
As a bank holding company, the corporation is subject to the supervision and
examination by the Federal Reserve Board. The corporation's banking
subsidiaries are subject to supervision and examination by applicable federal
and state banking agencies. The deposits of the corporation's banking
subsidiaries are primarily insured by the Bank Insurance Fund (BIF); deposits
attributable to certain of the corporation's savings associations are insured by
the Savings Association Insurance Fund (SAIF). For that reason, such banking
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.
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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.
Refer to Note 19 of the corporation's consolidated financial statements for
additional information.
Holding Company Structure
The corporation is a legal entity separate and distinct from its banking and
nonbanking subsidiaries. Accordingly, the right of the corporation, and thus the
right of the corporation's creditors, to participate in any distribution of the
assets or earnings of any subsidiary, other than in its capacity as a creditor
of the subsidiary, is necessarily subject to the prior payment of claims of
creditors of such subsidiary. The principal sources of the corporation's
revenues are dividends and fees from its subsidiaries.
The corporation's banking subsidiaries are subject to restrictions under federal
law which limit the transfer of funds by the subsidiary banks to the corporation
and its non-bank subsidiaries, whether in the form of loans, extensions of
credit, investments, or asset purchases. Such transfers by any subsidiary bank
to the corporation or any non-bank subsidiary are limited in amount to 10
percent of the bank's capital and surplus and, with respect to the corporation
and all non-bank subsidiaries, to an aggregate of 20 percent of the bank's
capital and surplus. Further, such loans and extensions of credit are required
to be secured in specified amounts.
The Federal Reserve Board has a policy to the effect that a bank holding company
is expected to act as a source of financial and managerial strength to each of
its subsidiary banks and to commit resources to support each subsidiary bank.
This support may be required at times when the corporation may not have the
resources to provide 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 stockholder of
most of its subsidiary banks, is subject to such provisions.
Capital Requirements
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as stand-by letters of credit) is eight
percent. At least half of the total capital is to be comprised of common stock,
minority interests and noncumulative perpetual preferred stock (Tier 1 capital).
The remainder (Tier 2 capital) may consist of hybrid capital instruments,
perpetual stock, mandatory convertible debt securities, a limited amount of
subordinated debt, other preferred stock and a limited amount of the allowance
for credit losses. Additionally, the risk-based capital guidelines specify that
all intangibles, including core deposit intangibles, as well as mortgage
servicing rights (MSRs), and purchased credit card relationships (PCCRs) be
deducted from Tier 1 capital. The guidelines, however, grandfather identifiable
intangible assets (other than MSRs and PCCRs) acquired on or before February 19,
1992, and permit the inclusion of readily marketable PMSRs and PCCRs in Tier 1
capital to the extent that (i)
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MSRs and PCCRs do not exceed 50 percent of Tier 1 capital and (ii) PCCRs do not
exceed 25 percent of Tier 1 capital. For such purposes, MSRs and PCCRs each are
included in Tier 1 capital only up to the lesser of (a) 90 percent of their fair
market value (which must be determined quarterly) and (b) 100 percent of the
remaining unamortized book value of such assets. The 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 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, 1995, the corporation's Tier 1 and total capital (the sum of
Tier 1 and Tier 2 capital) to risk-adjusted assets ratios were 8.11 percent and
10.18 percent, respectively, and the corporation's leverage ratio was 5.65
percent. Neither the corporation nor any subsidiary bank has been advised by the
appropriate federal regulatory agency of any specific leverage ratio applicable
to it.
As a result of federal law enacted in 1991 that required each federal banking
agency to revise its risk-based capital standards to ensure that those standards
take adequate account of interest rate risk, concentration of credit risk and
the risks of nontraditional activities, each of the federal banking agencies has
revised the risk-based capital guidelines described above to take account of
concentration of credit risk and risk of nontraditional activities. In
addition, the Federal Reserve Board, the FDIC and the OCC recently adopted a new
rule that amends, effective September 1, 1995, the capital standards to include
explicitly a bank's exposure to declines in the economic value of its capital
due to changes in interest rates as a factor to be considered in evaluating a
bank's interest rate exposure. Such agencies have issued for comment a joint
policy statement that describes the process to be used to measure and assess the
exposure of a bank's net economic value to changes in interest rates. These
agencies have indicated that in the second step of this regulation process they
intend to issue a rule that would propose to establish an explicit minimum
capital charge for interest rate risk based on the level of a bank's measured
interest rate exposure. The agencies intend to implement the second step after
the agencies and the banking industry have had more experience with the proposed
supervisory and measurement process. The corporation does not believe that
these recent proposals and revisions to the capital guidelines will materially
impact its operations.
Federal Deposit Insurance Corporation Improvement Act of 1991
In December 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
revisions to several other federal banking statutes. Among other things, FDICIA
requires the federal banking regulators to take "prompt corrective action" in
respect of depository institutions insured by the FDIC that do not meet minimum
capital requirements. FDICIA establishes five capital tiers: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized".
Under applicable regulations, an FDIC-insured depository institution is defined
to be well capitalized if it maintains a leverage ratio of at least five
percent, a risk-adjusted Tier 1 capital ratio of at least six percent, and a
risk-adjusted total capital ratio of at least 10 percent, and is not subject to
a directive, order, or written agreement to meet and maintain specific capital
levels. An insured depository institution is defined to be adequately
capitalized if it meets all of its minimum capital requirements as described
above. An insured depository institution will be considered undercapitalized if
it fails to meet any minimum required measure, significantly undercapitalized if
it has a risk-adjusted total capital ratio of less than six percent, risk-
adjusted Tier 1 capital ratio of less than three percent, or a leverage ratio of
less than three percent, and critically undercapitalized if it fails to maintain
a level of tangible equity equal to at least two percent of total assets. An
insured depository institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it
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receives an unsatisfactory examination rating. As of December 31, 1995, 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. On July 10, 1995, the federal banking agencies
published the final rules implementing three of the safety and soundness
standards required by FDICIA, including operational and managerial standards,
asset quality and earnings standards, and compensation standards. The impact of
such standards on the corporation has not yet been fully determined, but
management does not believe it will be material.
FDICIA also contains a variety of other provisions that may affect the
operations of the corporation, including new reporting requirements, revised
regulatory standards for real estate lending, "truth in savings" provisions, and
the requirement that a depository institution give 90 days' notice to customers
and regulatory authorities before closing any branch.
Under other regulations promulgated under FDICIA a bank cannot accept brokered
deposits (that is, deposits obtained through a person engaged in the business of
placing deposits with insured depository institutions or with interest rates
significantly higher that prevailing market rates) unless (i) it is well
capitalized or (ii) it is adequately capitalized and receives a waiver from the
FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-
through" insurance on certain employee benefit accounts, unless it provides
certain notices to affected depositors. In addition, a bank that is adequately
capitalized and that has not received a waiver from the FDIC may not pay an
interest rate on any deposits in excess of 75 basis points over certain
prevailing market rates. There are no such restrictions on a bank that is well
capitalized. At December 31, 1995, all of the corporation's banking subsidiaries
were well capitalized and, therefore, were not subject to these restrictions.
FDIC Insurance
Each BIF member institution pays FDIC insurance premiums based on the
institution's annual assessment rate assigned to it by the FDIC. The assessment
rate is based on the institution's capitalization risk category and "supervisory
subgroup." An institution's capitalization risk category is based on the FDIC's
determination of
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whether the institution is well capitalized, adequately capitalized or less than
adequately capitalized. An institution's supervisory subgroup is based on the
FDIC's assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will be required.
Subgroup A institutions are financially sound institutions with few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weakness
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. In 1995, the FDIC
assessment rate ranged from 4 cents per $100 of domestic deposits (for well
capitalized Subgroup A institutions) to 31 cents (for undercapitalized Subgroup
C institutions). The FDIC has approved regulations that would substantially
eliminate deposit insurance premiums for the corporation's banking subsidiaries
in 1996. In 1995, the corporation incurred $69.9 million of FDIC assessment
expense, net of $20.6 million in insurance premium refunds, as compared with
$79.2 million in 1994.
Deposits insured by SAIF held by the corporation's bank subsidiaries as a result
of savings association acquisitions by the corporation and its subsidiaries
continue to be assessed at the applicable SAIF insurance premium rate. Current
federal law provides that the SAIF assessment rate may not be less than 0.18%
from January 1, 1994 through December 31, 1997. After December 31, 1997, the
SAIF assessment rate must be a rate determined by the FDIC to be appropriate to
increase the SAIF's reserve ratio to 1.25% of insured deposits or such higher
percentage as the FDIC determines to be appropriate, but the assessment rate may
not be less than 0.15%. In order to mitigate the potential effects of a
BIF/SAIF premium disparity, Congress recently proposed legislation in September
of 1995 that would, among other things, recapitalize the SAIF by imposing a
special one-time assessment on SAIF deposits. The proposed legislation also
contemplates the merger of the BIF and the SAIF into one insurance fund after
the SAIF is recapitalized. This legislation is included in the current balanced
budget legislation and as such, its approval has not yet been finalized. As a
result of such pending legislation and to provide for such special assessment
when and if imposed, the corporation has established a reserve of $23.5 million
based on an estimated insurance premium rate of 66 cents per $100 of insured
deposits, which reserve has been funded primarily by the refund of BIF insurance
premiums. The effect of this legislation, if adopted, is not anticipated to be
material to the corporation.
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ITEM 2. PROPERTIES
The corporation's bank subsidiaries operate out of 734 banking locations, of
which 505 are owned directly and 229 are leased from outside parties. The
mortgage banking operation leases its headquarters facilities and servicing
center in Des Moines, Iowa and leases servicing centers in Minneapolis,
Minnesota; Southfield, Michigan; Phoenix, Arizona; Riverside, California;
Charlotte, North Carolina; and leases all mortgage production offices
nationwide. In addition, the mortgage banking operation owns an additional
servicing center located in Springfield, Ohio. 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 45 and 59
in the Appendix contain additional information with respect to premises and
equipment and commitments under noncancellable leases for premises and
equipment.
ITEM 3. LEGAL PROCEEDINGS
The corporation and certain subsidiaries are defendants in various matters of
litigation generally incidental to their businesses. Although it is difficult
to predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability will not materially affect
the consolidated financial position and results of operations of the corporation
and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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 this Form 10-K. The high and low sales prices for the
corporation's common stock for each quarter during the past two years and
information regarding cash dividends is set forth on pages 50 through 52, 72,
and 81 in the Appendix. The number of holders of record of the common stock and
securities convertible into common stock of the corporation at January 31, 1996
were:
Title of Class Number of Holders
-------------- -----------------
6 3/4 % Convertible
Subordinated Debentures Due 2003.......................... 6
Common Stock, par value $1 2/3 per share.................. 32,445
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data begins on page 75 in the Appendix.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis is presented beginning on page 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 30 in the Appendix. The report of independent certified public
accountants on the corporation's consolidated financial statements is presented
on page 73 in the Appendix.
Selected quarterly financial data is presented on pages 81 and 82 in the
Appendix.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
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 October 4,
1995, filing certain documents in connection with the offering of
Medium-Term Notes, Series I; and November 1, 1995, filing certain
documents in connection with the offering of Medium-Term Notes, Series
H, and a Certificate Eliminating the Certificate of Designations with
respect to the Cumulative Convertible Preferred Stock, Series B.
(c) Exhibits
3(a). Restated Certificate of Incorporation, as amended, incorporated by
reference to Exhibit 3(b) to the corporation's Current Report on
Form 8-K dated June 28, 1993. Certificate of Amendment of
Certificate of Incorporation of the corporation authorizing
4,000,000 shares of Preference Stock, incorporated by reference to
Exhibit 3 to the corporation's Current Report on Form 8-K dated July
3, 1995.
3(b). Certificate of Designations of powers, preferences and rights
relating to the corporation's ESOP Cumulative Convertible Preferred
Stock incorporated by reference to Exhibit 4 to the corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
3(c). Certificate of Designations of powers, preferences and rights
relating to the corporation's Cumulative Tracking Preferred Stock
incorporated by reference to Exhibit 3 to the corporation's Current
Report on Form 8-K dated January 9, 1995.
3(d). Certificate of Designations of powers, preferences and rights
relating to the corporation's 1995 ESOP Cumulative Convertible
Preferred Stock incorporated by reference to Exhibit 4 to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
3(e). Certificate Eliminating the Certificate of Designations with respect
to the Cumulative Convertible Preferred Stock, Series B,
incorporated by reference to Exhibit 3(a) to the corporation's
Current Report on Form 8-K dated November 1, 1995.
3(f). Certificate Eliminating the Certificate of Designations with respect
to the 10.24% Cumulative Preferred Stock incorporated by reference
to Exhibit 3 to the corporation's Current Report on Form 8-K dated
February 20, 1996.
3(g). 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.
12
4(a). See 3(a) through 3(g) of Item 14(c) above.
4(b). Rights Agreement, dated as of November 22, 1988, between the
corporation and Citibank, N.A. incorporated by reference to Exhibit
1 to the corporation's Form 8-A, dated December 6, 1988, and
Certificates of Adjustment pursuant to Section 12 of the Rights
Agreement incorporated by reference to Exhibit 3 to the
corporation's Form 8, dated July 21, 1989, and to Exhibit 4 to the
corporation's Form 8-A/A dated June 29, 1993.
4(c). Copies of instruments with respect to long-term debt will be
furnished to the Commission upon request.
*10(a). 1985 Long-Term Incentive Compensation Plan, as amended, incorporated
by reference to Exhibit 99(a) to the corporation'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, as amended.
*10(d). Executive Incentive Compensation Plan incorporated by reference to
Exhibit 19(a) to the corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1988. Amendment to Executive Incentive
Compensation Plan incorporated by reference to Exhibit 19(b) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989.
*10(e). Performance-Based Compensation Policy for Covered Executive Officers
incorporated by reference to Exhibit 10(a) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
*10(f). Supplemental Savings Investment Plan, as amended.
*10(g). Executive Financial Counseling Plan incorporated by reference to
Exhibit 10(f) to the corporation's Annual Report on Form 10-K for
the year ended December 31, 1987.
*10(h). Supplemental Long Term Disability Plan incorporated by reference to
Exhibit 10(f) to the corporation's Annual Report on Form 10-K for
the year ended December 31, 1990. Amendment to Supplemental Long
Term Disability Plan, incorporated by reference to Exhibit 10(g) to
the corporation's Annual Report on Form 10-K for the year ended
December 31, 1992.
*10(i). Deferred Compensation Plan for Non-Employee Directors, as amended.
*10(j). Retirement Plan for Non-Employee Directors incorporated by reference
to Exhibit 10(h) to the corporation's Annual Report 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 corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990.
*10(k). Directors' Formula Stock Award Plan, as amended, incorporated by
reference to Exhibit 10(a) to the corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995.
*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.
13
*10(n). Agreement between the corporation and Richard M. Kovacevich dated
March 18, 1991, incorporated by reference to Exhibit 19(e) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1991. Amendment effective January 1, 1995 to the March 18,
1991 agreement between the corporation and Richard M. Kovacevich,
incorporated by reference to Exhibit 10(c) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
*10(o). Form of agreement between the corporation and 13 executive officers,
including one director, incorporated by reference to Exhibit 19(f)
to the corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1991. Amendment effective January 1, 1995, to the
March 11, 1991 agreement between the corporation and Richard M.
Kovacevich incorporated by reference to Exhibit 10(b) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
*10(p). Consulting Agreement between the corporation and Gerald J. Ford
dated January 19, 1994, incorporated by reference to Exhibit 10(q)
to the corporation's Annual Report on Form 10-K for the year ended
December 31, 1993.
11. Computation of Earnings Per Share.
12(a). Computation of Ratio of Earnings to Fixed Charges.
12(b). Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends.
21. Subsidiaries of the Corporation
23. Consent of Experts.
24. Powers of Attorney.
___________________
* Management contract or compensatory plan or arrangement.
Stockholders may obtain a copy of any Exhibit, Item 14(c), none of which are
contained herein, upon payment of a reasonable fee, by writing Norwest
Corporation, Office of the Secretary, Norwest Center, Sixth and Marquette,
Minneapolis, Minnesota 55479-1026.
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 26th day of
February, 1996.
Norwest Corporation
(Registrant)
By /s/ RICHARD M. KOVACEVICH
-----------------------------
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 26th day of February, 1996, by the following persons on
behalf of the registrant and in the capacities indicated.
By /s/ JOHN T. THORNTON
------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By /s/ MICHAEL A. GRAF
-----------------------
Michael A. Graf
Senior Vice President and Controller
(Principal Accounting Officer)
The Directors of Norwest Corporation listed below have duly executed powers of
attorney empowering Richard S. Levitt to sign this document on their behalf.
David A. Christensen Richard M. Kovacevich
Gerald J. Ford Richard D. McCormick
Pierson M. Grieve Cynthia H. Milligan
Charles M. Harper Benjamin F. Montoya
William A. Hodder Ian M. Rolland
Lloyd P. Johnson Stephen E. Watson
Reatha Clark King Michael W. Wright
By /s/ RICHARD S. LEVITT
---------------------
Richard S. Levitt
Director and Attorney-in-Fact
February 26, 1996
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, 1995
Contents
--------
Page
----
Financial Review........................................ 17
Financial Statements.................................... 30
Independent Auditors' Report............................ 73
Management's Report..................................... 74
Six-Year Consolidated Financial Summary................. 75
Consolidated Average Balance Sheets
and Related Yields and Rates............................ 77
Quarterly Condensed Consolidated Financial Information.. 81
16
FINANCIAL REVIEW
This financial review should be read with the consolidated financial statements
and accompanying notes presented on pages 30 through 72 and other information
presented on pages 75 through 82.
Earnings Performance
Norwest Corporation (the corporation) reported record net income of $956.0
million in 1995, an increase of 19.4 percent over earnings of $800.4 million in
1994, which were up 30.6 percent over the $613.1 million earned in 1993. Net
income per fully diluted common share was $2.73 in 1995, compared with $2.41 in
1994 and $1.86 in 1993, an increase of 13.3 percent and 29.6 percent,
respectively. Return on realized common equity was 22.3 percent and return on
assets was 1.44 percent for 1995, compared with 21.4 percent and 1.45 percent,
respectively, in 1994, and 18.2 percent and 1.20 percent, respectively, in 1993.
The corporation's results for periods prior to 1994 were previously restated to
include the results of First United Bank Group, Inc. (First United), which was
acquired by the corporation effective January 14, 1994 and was accounted for
using the pooling of interests method of accounting. Included in 1993 earnings
were 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.
Norwest Corporation and Subsidiaries
Consolidated Income Summary
5 Year
Growth
In millions 1995 Change 1994 Change 1993 1992 1991 Rate
-------- ------ ------- ------ -------- -------- -------- -----
Interest income
(tax-equivalent basis).... $5,750.8 30.0% $4,422.7 11.1% $3,979.6 $3,844.3 $4,073.7 7.8%
Interest expense........... 2,448.0 54.0 1,590.1 10.2 1,442.9 1,610.6 2,150.3 1.1
-------- -------- -------- -------- --------
Net interest income....... 3,302.8 16.6 2,832.6 11.7 2,536.7 2,233.7 1,923.4 15.2
Provision for credit
losses.................... 312.4 89.4 164.9 4.2 158.2 270.8 406.4 (6.3)
-------- -------- -------- -------- --------
Net interest income after
provision for credit
losses................... 2,990.4 12.1 2,667.7 12.2 2,378.5 1,962.9 1,517.0 20.2
Non-interest income........ 1,865.0 13.8 1,638.3 3.4 1,585.0 1,273.7 1,064.0 15.8
Non-interest expenses...... 3,399.1 9.8 3,096.4 1.5 3,050.4 2,553.1 2,041.5 14.3
-------- -------- -------- -------- --------
Income before income
taxes.................... 1,456.3 20.4 1,209.6 32.5 913.1 683.5 539.5 33.5
Income tax expense......... 466.8 22.8 380.2 42.6 266.7 175.6 73.4 32.3
Tax-equivalent adjustment.. 33.5 15.5 29.0 (12.9) 33.3 37.9 47.8 (10.8)
-------- -------- -------- -------- --------
Income before cumulative
effect of a change in
accounting for
postretirement medical
benefits.................. 956.0 19.4 800.4 30.6 613.1 470.0 418.3 41.4
Cumulative effect on years
ended prior to December
31, 1992 of a change in
accounting for
postretirement medical
benefits.................. _ _ _ _ _ (76.0) _ _
-------- -------- -------- -------- --------
Net income................. $ 956.0 19.4% $ 800.4 30.6% $ 613.1 $ 394.0 $ 418.3 41.4%
======== ======== ======== ======== ========
Organizational Earnings
Banking The Banking Group reported record earnings of $602.2 million in 1995,
18.8 percent over 1994 earnings of $507.1 million, which increased 42.1 percent
over 1993 earnings of $356.7 million. 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 1995 and 1994 reflect a 17.4 percent and
17.1 percent growth in tax-equivalent net interest income, respectively,
primarily due to increases in average earning assets and net interest margin.
The Banking Group's provision for credit losses increased to $143.0 million in
1995, compared with $50.5 million for 1994, due to higher net charge-offs. In
1994, the provision for loan losses decreased from 1993 reflecting lower
17
levels of net credit losses and non-performing assets. Non-interest income in
the Banking Group increased 24.1 percent from 1994 and decreased 9.7 percent
from 1993 to 1994 due largely to investment securities losses in 1994. Non-
interest income in 1995 also benefited from growth in service charges and other
fees and higher venture capital gains. The Banking Group non-interest expenses
increased 14.9 percent in 1995 reflecting additional operating expenses related
to acquired companies, partially offset by reductions in FDIC insurance premiums
discussed below. The Banking Group non-interest expenses decreased 1.5 percent
in 1994.
The venture capital subsidiaries realized $102.1 million of net gains in 1995,
compared with net gains of $77.1 million in 1994 and net gains of $59.5 million
in 1993. Virtually all appreciated securities included in the $59.5 million of
net venture capital gains in 1993 were contributed to the Norwest Foundation,
compared with $19.6 million in 1994 and none in 1995, due to the funding status
of the Foundation. 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 $169.3
million at December 31, 1995 and $61.3 million at December 31, 1994.
In September 1995, the Banking Group received refunds of $20.6 million due to
the FDIC premium reduction. Effective with the fourth quarter of 1995, the
Banking Group is currently assessed insurance premiums at the reduced rate of
approximately 4 cents per $100 of insured deposits, down from 23 cents per $100
of insured deposits. The FDIC has approved regulations that will substantially
eliminate deposit insurance premiums for Banking Group deposits in 1996.
Legislation also has been introduced in Congress that would impose a one-time
charge on deposits insured by the Savings Association Insurance Fund (SAIF) to
recapitalize the SAIF deposit insurance fund for savings and loan associations.
In the past five years, the corporation has acquired savings and loan
associations and would be subject to such a charge. Consequently, a $23.5
million accrual for such an assessment was established when the FDIC premium
refund was received.
Mortgage Banking Mortgage Banking earned a record $104.9 million in 1995, $70.8
million in 1994 and $56.3 million in 1993. The 48.0 percent increase in 1995
earnings was principally due to increases in mortgage loan fundings and the
servicing portfolio. Sales of servicing rights and growth in the servicing
portfolio contributed to the 25.9 percent increase in 1994 earnings. Fundings
were $33.9 billion in 1995, compared with $24.9 billion in 1994 and $33.7
billion in 1993. Approximately 19.6 percent of 1995 fundings were attributed to
mortgage loan refinancings, compared with 16.0 percent in 1994 and 45.6 percent
in 1993. Net servicing retained during 1995 totalled $35.9 billion, compared
with $25.8 billion in 1994 and $24.1 billion in 1993. The servicing portfolio
increased to $107.4 billion at December 31, 1995, compared with $71.5 billion at
December 31, 1994. The increase in 1995 was due in part to acquisitions of
Directors Mortgage Loan Corporation and the servicing portfolio of
BarclaysAmerican/Mortgage Corporation. In January 1996, Norwest Mortgage, Inc.
also signed a definitive agreement to acquire substantially all the assets of
Prudential Home Mortgage Company, Inc., including $40 billion of its servicing
portfolio. Mortgage Banking earnings were also positively impacted by the
corporation's adoption of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No.
65" (FAS 122) in 1995. FAS 122 sets standards related to capitalizing values for
mortgage servicing and recognition of impairment valuations for amounts
previously capitalized. Under FAS 122 the corporation recognizes as separate
assets the rights to service mortgage loans for others whether the servicing
rights are acquired through purchase transactions or through loan originations.
Approximately 125 basis points of originated mortgage loans, or $233.1 million,
were capitalized as mortgage servicing rights in 1995. Mortgage servicing
impairment valuation provisions, including writedowns of excess servicing
rights, totaled $70.5 million in 1995. Amortization of capitalized mortgage
servicing rights, including excess servicing rights, was $139.6 million in 1995,
compared with $64.1 million and $66.6 million in 1994 and 1993, respectively.
The additional amortization in 1995 principally reflects increased prepayments
due to lower interest rates. Combined gains on sales of mortgages and servicing
rights were $57.1 million in 1995, compared with $204.5 million in 1994 and
$202.2 million in 1993.
Norwest Financial Norwest Financial (including Norwest Financial Services, Inc.
and Island Finance) reported record earnings of $248.9 million in 1995, an 11.8
percent increase over the $222.5 million earned in 1994, which was an increase
of 11.2 percent over the $200.1 million earned in 1993. The increases were
primarily due to increases in tax-equivalent net interest income of 21.4 percent
and 12.5 percent, respectively, for 1995 and 1994. The increase in tax-
equivalent net interest income was due to 28.4 percent and 14.4 percent
increases in average finance receivables in 1995 and 1994, respectively. The
1995 increase in tax-equivalent net interest income and average receivables was
also due in part to the acquisition of ITT Financial Corporation's Island
Finance business, with $1 billion in receivables in Puerto Rico, the Virgin
Islands and elsewhere in the Caribbean. Net interest margin decreased 66 basis
points in 1995 and decreased 29 basis points in 1994, reflecting a narrowing of
the yield spread on earning assets. Norwest Financial's non-interest expenses
increased 22.9 percent
18
and 10.0 percent in 1995 and 1994, respectively, primarily due to the
acquisition of Island Finance and the March 1994 acquisition of the consumer
finance business of Community Credit Co.
Norwest Corporation and Subsidiaries
Organizational Earnings*
In millions 1995 1994 1993 1992 1991
------- ------ ------ ------ ------
Years Ended December 31,
- ------------------------
Banking................................. $602.2 507.1 356.7 257.6 263.4
Mortgage Banking........................ 104.9 70.8 56.3 53.4 31.4
Norwest Financial....................... 248.9 222.5 200.1 159.0 123.5
------ ----- ----- ----- -----
Consolidated income before cumulative
effect of a change in accounting
for postretirement medical benefits.... 956.0 800.4 613.1 470.0 418.3
Cumulative effect on years ended prior
to December 31, 1992 of a change in
accounting for postretirement medical
benefits .............................. -- -- -- (76.0) --
------ ----- ----- ----- -----
Net income.............................. $956.0 800.4 613.1 394.0 418.3
====== ===== ===== ===== =====
*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 1995, tax-equivalent net interest income provided
63.9 percent of the corporation's net revenues, compared with 63.4 percent in
1994 and 61.5 percent in 1993.
Total tax-equivalent net interest income was $3,302.8 million in 1995, a 16.6
percent increase over the $2,832.6 million reported in 1994. Growth in tax-
equivalent net interest income over 1994 was primarily due to an 18.7 percent
increase in average earning assets, partially offset by an eight basis point
decrease in net interest margin. The increase in average earning assets was
primarily due to a 17.6 percent increase in average loans and leases and a 16.5
percent increase in investment securities. The 1994 increase in tax-equivalent
net interest income of 11.7 percent over the $2,536.7 million reported in 1993
was due to an 8.2 percent increase in average earning assets and a 16 basis
point increase in net interest margin. Non-accrual and restructured loans
reduced net interest income by $11.7 million in 1995, $12.3 million in 1994 and
$13.9 million in 1993. Detailed analyses of net interest income appear on pages
76, 77 and 78 and a discussion of the corporation's asset and liability
management process begins on page 26.
Net interest margin, the ratio of tax-equivalent net interest income divided by
average earning assets, was 5.58 percent in 1995, 5.66 percent in 1994 and 5.50
percent in 1993. The decrease in margin in 1995 was due to a narrowing of the
yield spread on earning assets and a change in funding mix due to increases in
long-term debt. 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 60.0 percent of average earning assets in 1995,
compared with 60.6 percent in 1994 and 57.6 percent in 1993.
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
$312.4 million in 1995, $164.9 million in 1994 and $158.2 million in 1993. The
provision for credit losses was 0.88 percent of average loans and leases in
1995, compared with 0.55 percent in 1994 and 0.60 percent in 1993. The provision
for credit losses was higher in 1995 compared with 1994 as well as in 1994
compared with 1993 due to higher net charge-offs and loan growth. As a
percentage of average loans, both net charge-offs and provision increased in
1995 compared with 1994. However, these ratios declined in 1994 compared with
1993. Also, as previously discussed, the 1993 provision for credit losses
includes additional provisions for credit losses taken by First United of $16.5
million.
Net credit losses were $304.2 million in 1995, $193.2 million in 1994 and $178.3
million in 1993. Net credit losses as a percent of average loans and leases were
0.86 percent in 1995, compared with 0.64 percent in 1994 and 0.67 percent in
1993.
19
The increase in net credit losses in 1995 over 1994 was due principally to
increases in consumer and credit card net charge-offs of $108.2 million. The
increase in net credit losses in 1994 over 1993 was due to increases in consumer
and credit card net charge-offs of $35.1 million, partially offset by a $17.0
million reduction in commercial loan net charge-offs. The net charge-off ratio,
the ratio of net credit losses to average loans and leases, for Norwest
Financial was 2.52 percent in 1995, compared with 2.00 percent in 1994 and 2.16
percent in 1993. Norwest Card Services' net charge-off ratio was 4.77 percent in
1995 compared with 3.07 percent in 1994 and 3.54 percent in 1993. The higher
consumer loan net credit losses reflect, in part, growth in the overall
portfolio, including the acquisition of Island Finance in 1995. Norwest
Financial's net charge-offs in 1995 increased $60.7 million over 1994, of which
$23.6 million related to Island Finance. Further, $49.2 million of 1995 net
credit card charge-offs relate to receivables from the corporation's direct mail
programs which were suspended in 1995.
Non-interest Income Non-interest income is a significant source of the
corporation's revenue, representing 36.1 percent of tax-equivalent net revenues
in 1995, compared with 36.6 percent in 1994 and 38.5 percent in 1993.
Consolidated non-interest income increased 13.8 percent in 1995 to $1,865.0
million, compared with $1,638.3 million in 1994. Non-interest income includes
net investment securities losses of $35.6 million and $79.2 million in 1995 and
1994, which provided opportunities to reinvest at higher yields. Excluding
investment securities gains (losses) and venture capital gains, non-interest
income increased 9.6 percent in 1995 and 11.1 percent in 1994 over the
respective preceding year. Primary contributors to the increase in non-interest
income in 1995 were higher fees and service charges including trust fees and
service charges on deposit accounts, credit card and insurance fees, and trading
revenues, partially offset by lower mortgage banking revenues from reduced sales
of servicing rights.
The increases in trust fees and deposit service charges are evidence of
increased business activity and marketing efforts. Mortgage banking revenues
decreased $48.2 million in 1995 from reduced gains on sales of mortgages and
servicing rights. Total combined gains of $57.1 million were recorded on sales
in 1995 compared with $204.5 million in 1994. This decrease was offset by a
$99.2 million increase in origination, servicing and other fee revenue. Such fee
increases resulted from growth in the corporation's servicing portfolio and
higher mortgage loan funding levels. Servicing fees are expected to increase as
the servicing portfolio grows through retention of servicing generated and
through acquisitions. Sales of servicing reflect consideration of the portfolio
mix and opportunistic pricing spreads. Future sales of servicing rights are
largely dependent upon portfolio characteristics and prevailing market
conditions. Credit card fees were $132.8 million in 1995, up from $116.5 million
in 1994, due to marketing activities, partially offset by repurchases of credit
card receivables from securitized credit card receivable trusts which were
completed in the second quarter of 1994. Revenues on securitized credit card
receivables are recorded in non-interest income rather than net interest income.
The increase in insurance fees is attributed largely to commissions on credit
life insurance, related to the growth in the consumer loan portfolio. Other non-
interest income increased $29.6 million from 1994 primarily due to trading
account revenues as discussed below. Net venture capital gains were $102.1
million in 1995 compared with $77.1 million in 1994. Sales of venture capital
securities generally relate to timing of holdings becoming publicly traded and
subsequent market conditions, causing venture capital gains to be unpredictable
in nature.
Consolidated non-interest income increased 3.4 percent in 1994 from $1,585.0
million in 1993, primarily due to increased mortgage banking revenues, venture
capital gains and growth in insurance fees, trust fees and deposit service
charges, offset by net losses on investment securities. The growth in mortgage
banking revenues principally reflected growth in the servicing portfolio. The
increases in various fee based services related to growth in consumer-related
lending and other marketing initiatives. Other non-interest income decreased
$38.8 million from 1993 primarily due to trading account losses.
Trading Revenues The corporation conducts trading of debt and equity
securities, money market instruments, derivative products and foreign exchange
contracts to satisfy the investment and risk management needs of its customers
and those of the corporation. Trading activities are conducted within risk
limits established and monitored by the Asset and Liability Management Committee
as further discussed in the Interest Rate Sensitivity and Liquidity Management
section of the Financial Review on page 26.
Interest income derived from trading account securities was $14.8 million, $24.6
million and $28.9 million for the three years ended December 31, 1995, 1994 and
1993, respectively. Non-interest trading revenues (losses) during 1995, 1994 and
1993, were $39.9 million, $(18.1) million and $41.7 million, respectively. The
table in Note 14 to the consolidated financial statements on page 60 provides a
summary of the corporation's trading revenues in the principal markets in which
the corporation participates.
20
Non-interest Expenses Consolidated non-interest expenses increased 9.8 percent
in 1995 to $3,399.1 million, reflecting higher salary and benefit costs,
additional intangible asset amortization and higher operating expenses
associated with acquisitions, and growth in Mortgage Banking.
Changes in personnel expenses by business segment for 1995 include an increase
of 8.6 percent for the Banking Group, an increase of 21.1 percent for Mortgage
Banking, and an increase of 19.2 percent for Norwest Financial. Normalized for
acquisitions, personnel expense increased 1.9 percent for the Banking Group, 2.8
percent for Mortgage Banking and 8.9 percent for Norwest Financial.
Of the 1995 increases of $40.2 million in communication expenses, $37.3 million
in equipment rentals, depreciation and maintenance, and $27.1 million in net
occupancy expenses, the Banking Group contributed $16.9 million, $24.8 million
and $12.3 million, respectively, and Mortgage Banking contributed $16.1 million,
$10.7 million and $8.3 million, respectively. Other non-interest expense
decreased principally due to mortgage origination cost deferrals related to
increased fundings.
Consolidated non-interest expenses increased 1.5 percent in 1994 from $3,050.4
million in 1993 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 of $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.
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 included an increase of 6.9 percent for the Banking
Group normalized for acquisitions, a decrease of 8.5 percent for Mortgage
Banking reflecting lower levels of originations and fundings, and an increase of
14.6 percent for Norwest Financial.
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 non-interest expenses decreased by $195.7 million to $406.7 million in
1994. Charitable contributions decreased $47.9 million due to the funding status
of the Norwest Foundation. Included in 1993 were the merger and transition
expenses related to the First United acquisition previously discussed.
Additionally, other one-time special charges were recorded in 1993 as
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 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 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.
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.
The effective income tax rate was 32.8 percent in 1995, up slightly from 32.2
percent in 1994. The effective tax rate was 30.3 percent in 1993. The increase
in the effective tax rate in 1994 from 1993 was primarily due to reduced
charitable contributions of appreciated assets. For more information on income
taxes, see Note 12 to the consolidated financial statements on page 57.
Consolidated Balance Sheet Analysis
Earning Assets At December 31, 1995, earning assets were $62.8 billion,
compared with $53.3 billion at December 31, 1994. This increase is primarily due
to a $1.2 billion increase in total investment securities and an $8.3 billion
increase in loans and leases, and mortgages and loans held for sale, including
$4.4 billion of loans and leases acquired in acquisitions completed during 1995.
21
Average earning assets were $59.3 billion in 1995, an increase of 18.7 percent
over 1994. This increase is primarily due to a 17.6 percent increase in average
loans and leases, a 16.5 percent increase in average total investment
securities, and a 27.9 percent increase in average mortgages held for sale due
to increases in residential mortgage fundings.
Leverage, the ratio of average assets to average total stockholders' equity, was
14.3 times during 1995, unchanged from 1994. A 20.3 percent increase in average
assets was offset by a 20.7 percent increase in average stockholders' equity.
The corporation adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," 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. In November 1995,
the Financial Accounting Standards Board announced it would permit companies to
make a one-time reclassification of their investment securities in conjunction
with the issuance of a Special Report entitled "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." The corporation transferred the remaining federal agency and state,
municipal and housing tax exempt securities with amortized costs of $27.4
million and $665.2 million, respectively, from held for investment to available
for sale as of December 31, 1995. Unrealized gains related to such securities
transferred amounted to $25.3 million. As of December 31, 1995 and 1994, net
unrealized gains (losses) before income taxes related to investment securities
available for sale were $510.6 million and $(559.9) million, respectively. The
improvement generally reflects overall lower interest rate levels over the prior
year and the reclassification discussed above.
In Note 18 to the consolidated financial statements on page 67 the corporation
has disclosed the estimated fair values of all on- and off-balance sheet
financial instruments and certain non-financial instruments in accordance with
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments."
As of December 31, 1995, the fair value of net financial instruments totaled
$2.7 billion, a decrease of $0.8 billion from December 31, 1994. The decrease
was primarily due to higher borrowing levels, partially offset by growth in
loans and leases and investment securities. During the same period, the net fair
value of certain non-financial instruments increased $3.3 billion to $13.0
billion as of December 31, 1995. The fair value of the consumer finance network
increased $0.5 billion due to a lower interest rate environment and the
integration of Island Finance. The fair value of the asset-based lending
businesses increased $0.4 billion due to a greater market presence resulting
from the acquisition of The Foothill Group, Inc. The fair value of the mortgage
loan origination/wholesale network increased $1.3 billion due to higher levels
of earnings and mortgage loan originations. The fair value of non-maturity
deposits decreased $0.6 billion as lower market interest rates reduced the
benefit of these fund sources.
At 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 investment
securities. During the same period, the net fair value of certain non-financial
instruments increased $2.4 billion to $9.7 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.
Credit Risk Management Credit risk management includes pricing loans to cover
anticipated future credit losses, funding and servicing costs and to allow for a
profit margin. Loans and leases by type appear in Note 5 to the consolidated
financial statements on page 44. 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,
Southwest, and Rocky Mountain regions of the country. Distribution of average
loans by region in 1995 was approximately 49 percent in the north central
Midwest, 20 percent in the south central Midwest and 31 percent in the Rocky
Mountain/Southwest region. Norwest Card Services, Norwest Mortgage and Norwest
Financial operate on a nationwide basis. With respect to credit card
receivables, approximately 45 percent of the credit card portfolio is within the
15-state Norwest 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 Texas. No one state
accounts for more than 10 percent of the total credit card portfolio. Norwest
Mortgage operates in all 50 states, and is the largest retail mortgage network
in the country. Norwest Financial engages in consumer finance activities in 47
states, all 10 Canadian provinces, the Caribbean, Central America and Guam.
22
In general, the economy in regions of the U.S. where the corporation primarily
conducts operations continues to reflect growth, although consumer-related loan
delinquencies and charge-offs have increased moderately. See Provision for
Credit Losses on page 19 for a further discussion of consumer-related net
charge-offs. The average consumer installment loan made during 1995 at Norwest
Financial was approximately $2,400 while sales finance contracts purchased
averaged approximately $1,100. This compares with $2,800 and $1,000,
respectively, in 1994. The average credit card receivable balance at Norwest
Card Services was $1,200 in 1995, unchanged from a year earlier. During the
fourth quarter of 1995, $1.0 billion of credit card receivables, comprised of
approximately $750 million in balances added through national direct mail
campaigns and approximately $250 million required to be sold under a contractual
agreement, were transferred to the loans held for sale category pending their
sale. A net charge of $11.0 million was taken in the fourth quarter of 1995 on
the transfer to the held for sale category.
As of December 31, 1995 the corporation's commercial real estate portfolio of
loans to investors, developers and builders, including construction and land
development loans (development loans), was $2,475.6 million, of which $18.1
million, or 0.7 percent, were non-performing, compared with $2,082.0 million at
December 31, 1994, of which $27.9 million, or 1.3 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 6.8 percent of the corporation's total loan
portfolio at December 31, 1995, compared with 6.4 percent at December 31, 1994.
The total number of development loans is approximately 9,000 with an average
loan size of approximately $0.3 million. The largest development loan is $10.0
million. The industry composition of development loans consists of
office/warehouse (24 percent), retail (20 percent), residential (28 percent) and
other (28 percent).
Geographically, over 97 percent of the development loan portfolio is within the
15 state area where the corporation has its principal banking franchise.
Approximately 56 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 commercial
real estate loan losses is limited.
The corporation is not aware of any loans classified for regulatory purposes at
December 31, 1995, 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, 1995.
Allowance for Credit Losses At December 31, 1995, the allowance for credit
losses was $917.2 million, or 2.54 percent of loans and leases outstanding,
compared with $789.9 million, or 2.42 percent, at December 31, 1994. The ratio
of the allowance for credit losses to the total non-performing assets and 90-day
past due loans and leases was 307.9 percent at December 31, 1995, compared with
361.8 percent at December 31, 1994.
Although it is impossible for any lender to predict future credit losses with
complete accuracy, management monitors the allowance for credit losses with the
intent to provide for all losses that can reasonably be anticipated based on
current conditions. The corporation maintains the allowance for credit losses as
a general allowance available to cover future credit losses within the entire
loan and lease portfolio and other credit-related risks. However, management has
prepared an allocation of the allowance based on its views of risk
characteristics of the portfolio. This allocation of the allowance for credit
losses does not represent the total amount available for actual future credit
losses in any single category, nor does it prohibit future credit losses from
being absorbed by portions of the allowance allocated to other categories or by
the unallocated portion. The table on page 79 presents the allocation of the
allowance for credit losses to major categories of loans.
Non-performing Assets and Past Due Loans and Leases The table on page 24
presents data on the corporation's non-performing assets and 90-day past due
loans and leases. Generally, the accrual of interest on a loan or lease is
suspended when the credit becomes 90 days past due unless fully secured and in
the process of collection. A restructured loan is generally a loan that is
accruing interest, but on which concessions in terms have been made as a result
of deterioration in the borrower's financial condition.
Effective January 1, 1995, the corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures" (FAS
114 and 118). Under the corporation's credit policies and
23
practices, all non-accrual and restructured commercial, agricultural,
construction, and commercial real estate loans meet the definition of impaired
loans under FAS 114 and 118. Impaired loans as defined by FAS 114 and 118
exclude certain consumer loans, residential real estate loans and lease
financing classified as non-accrual. Loan impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the observable market price of
the loan or the fair value of the collateral if the loan is collateral-
dependent. The adoption of FAS 114 and 118 did not have a material effect on the
corporation's financial position or results of operations.
Non-performing assets, including non-accrual, restructured and other real estate
owned, and 90-day past due loans and leases, totaled $297.9 million, or 0.4
percent of total assets, at December 31, 1995, compared with $218.3 million, or
0.4 percent of total assets, at December 31, 1994. The increase in non-
performing assets was principally due to recent bank acquisitions in Texas,
including El Paso. The reduction in primary earnings per share due to total non-
accrual and restructured loans was two cents in 1995, compared with three cents
in 1994 and 1993.
Norwest Corporation and Subsidiaries
Non-performing Assets and 90-Day Past Due Loans and Leases
In millions, except per share amounts 1995 1994 1993 1992 1991 1990
----- ----- ----- ----- ----- -----
At December 31,
- ---------------
Non-accrual loans and leases............ $166.9 128.5 195.7 257.6 355.5 396.6
Restructured loans and leases........... 2.0 1.8 10.3 5.4 18.0 18.5
------ ----- ----- ----- ----- -----
Total non-accrual and restructured
loans and leases*..................... 168.9 130.3 206.0 263.0 373.5 415.1
Other real estate owned................. 37.1 29.6 63.0 113.7 151.2 182.2
------ ----- ----- ----- ----- -----
Total non-performing assets............ 206.0 159.9 269.0 376.7 524.7 597.3
Loans and leases past due 90-days or
more**................................. 91.9 58.4 50.8 51.9 82.4 88.3
------ ----- ----- ----- ----- -----
Total non-performing assets and 90-day
past due loans and leases............. $297.9 218.3 319.8 428.6 607.1 685.6
====== ===== ===== ===== ===== =====
Interest income as originally
contracted on non-accrual and
restructured loans and leases.......... $ 15.3 15.4 19.4 26.5 41.6 51.9
Interest income recognized on
non-accrual and restructured
loans and leases....................... (3.6) (3.1) (5.5) (8.1) (14.2) (19.5)
------ ----- ----- ----- ----- -----
Reduction of interest income due to
non-accrual and restructured
loans and leases....................... $ 11.7 12.3 13.9 18.4 27.4 32.4
====== ===== ===== ===== ===== =====
Reduction in primary earnings per share
due to non-accrual
and restructured loans and leases...... $ .02 .03 .03 .04 .06 .08
*Total impaired loans included in total non-accrual and restructured loans and
leases amounted to $102.1 million and $98.6 million at December 31, 1995 and
1994, respectively.
**Excludes non-accrual and restructured loans and leases.
Other Assets At December 31, 1995, interest receivable and other assets totaled
$4.9 billion, an increase of $2.5 billion over 1994. The increase is principally
due to goodwill and other intangibles from acquisitions and increases in
capitalized mortgage servicing rights, in part from adoption of FAS 122.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
(FAS 121) was issued in March 1995 and requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset is not
recoverable. Adoption of FAS 121 is required for fiscal years beginning after
December 15, 1995. The adoption of FAS 121 is not expected to have a material
effect on the corporation's consolidated financial statements.
24
Funding Sources
Interest-Bearing Liabilities At December 31, 1995, interest-bearing liabilities
totaled $52.6 billion, an increase of $8.4 billion over December 31, 1994. The
increase was principally due to a $4.5 billion increase in long-term debt and a
$3.3 billion increase in interest-bearing deposits.
Average interest-bearing liabilities were $49.5 billion in 1995, compared with
$40.9 billion in 1994, primarily due to a 7.8 percent increase in average
interest-bearing deposits, a 31.8 percent increase in average short-term
borrowings and a 58.7 percent increase in long-term debt. Increases in short-
term borrowings and long-term debt relate to acquisitions and increases in
residential mortgage loan fundings.
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 57 percent of the corporation's total funding
sources during 1995 and approximately 63 percent in 1994. 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 70 percent of total funding sources during 1995, compared with 76
percent in 1994.
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 four percent of the corporation's total funding sources in 1995
and 1994. There were no brokered certificates of deposit at December 31, 1995
and 1994.
Short-term Borrowings Short-term borrowings include federal funds purchased,
securities sold under agreements to repurchase, master note agreements,
privately negotiated financing agreements and commercial paper issued by the
corporation and Norwest Financial. Commercial paper is used by the corporation
to fund the short-term needs of its subsidiaries, consisting primarily of
funding of Norwest Mortgage's inventory of mortgages held for sale which are
typically held for 60 to 90 days. Norwest Financial utilized funds generated
through its own commercial paper sales program to fund approximately 26 percent
of its average earning assets in 1995, compared with 22 percent in 1994.
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 13.6
percent of the corporation's total funding sources during 1995 and approximately
12.4 percent during 1994.
At December 31, 1995, the corporation had available lines of credit totaling
$2,356.6 million, including lines of credit totaling $2,056.6 million at Norwest
Financial. 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 18.6 percent of the corporation's consolidated average funding
sources during 1995, compared with approximately 14.0 percent in 1994. The
corporation utilizes long-term debt primarily to meet the long-term funding
requirements of its subsidiaries, with outstandings of $5,840.9 million as of
December 31, 1995, compared with $2,745.2 million as of December 31, 1994.
Further, 23 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, 1995, these banking subsidiaries had advances
outstanding totaling $3,667.7 million, an increase of $955.4 million from
December 31, 1994. Long-term debt also plays a significant role at Norwest
Financial, Inc. which utilizes this source of financing to fund approximately 55
percent of its average earning assets. At December 31, 1995, Norwest Financial,
Inc.'s long-term debt outstanding was $4,081.5 million. Note 9 to the
consolidated financial statements on page 47 presents the corporation's
outstanding consolidated long-term debt as of December 31, 1995 and 1994.
Thomson BankWatch has assigned its highest issuer rating, an A rating, to both
the corporation and Norwest Financial, Inc. The corporation's senior debt is
currently rated AA+ by Thomson BankWatch, 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.
25
Interest Rate Sensitivity and Liquidity Management
Asset and Liability Management The goal of the asset and liability management
process is to manage the structure of the balance sheet to provide the maximum
level of net interest income while maintaining acceptable levels of interest
sensitivity risk (as defined below) and liquidity. The focal point of this
process is the corporate Asset and Liability Management Committee (ALCO). This
committee forms and monitors policies governing investments, funding sources,
off-balance sheet commitments, overall interest sensitivity risk and liquidity.
These policies form the framework for management of the asset and liability
process at the corporate and affiliate levels. The corporation's interest
sensitivity position is managed as a function of balance sheet trends, asset
opportunities and interest rate expectations, and the corporation is normally
well within policy risk limits at any given time.
Definition of Interest Sensitivity Risk Interest sensitivity risk is the risk
that future changes in interest rates will reduce net interest income or the net
market value of the corporation's balance sheet. Two basic ways of defining
interest rate risk in the financial services industry are commonly referred to
as the accounting perspective and the economic perspective. The corporation
draws upon aspects of each perspective to provide a more complete view of
interest rate risk than would be provided by either perspective alone.
The accounting perspective focuses on the risk to reported net income over a
particular time frame. Differences in the timing of interest rate repricing
(repricing or "gap" risk) and changing market rate relationships (basis risk)
determine the exposure of net income to changes in interest rates.
The economic perspective focuses on the risk to the market value of the
corporation's balance sheet, the net of which is referred to as the market value
of balance sheet equity. The sensitivity of the market value of balance sheet
equity to changes in interest rates is an indicator of the level of interest
rate risk inherent in an institution's current position and an indicator of
longer horizon earnings trends. Assessing interest rate risk from the economic
perspective focuses on the risk to net worth arising from all repricing
mismatches (gaps) across the full maturity spectrum.
Measurement of Interest Rate Risk Measurement of interest rate risk from the
accounting perspective has traditionally taken the form of the gap report, which
represents the difference between assets and liabilities that reprice in given
time periods. While providing a rough measure of rate risk, the gap report
provides only a static (i.e., point-in-time) measurement, and it does not
capture basis risk or risks that vary either asymmetrically or non-
proportionately with rate movements.
The corporation uses a simulation model as its primary method of measuring
earnings risk. The simulation model, because of its dynamic nature, can capture
the effects of future balance sheet trends, different patterns of rate
movements, and changing relationships between rates (basis risk). In addition,
it can capture the effects of embedded option risk by taking into account the
effects of interest rate caps and floors, and varying the level of prepayment
rates on assets as a function of interest rates. The simulation model is used to
determine the one and three year gap levels which correspond to the limits
within which the corporation has placed earnings at risk to interest rate
movements.
Measurement of interest rate risk from the economic perspective is accomplished
with a market valuation model. The market value of each asset and liability is
calculated by computing the present value of all cash flows generated. In each
case the cash flows are discounted by a market interest rate chosen to reflect
as closely as possible the characteristics of the given asset or liability.
Management of Interest Rate Risk In the most current simulation, net income was
forecasted using various interest rate scenarios. A most likely scenario, in
which short rates remain constant but long rates increase somewhat, was used as
the base case for comparison of other scenarios. If short rates increase 1.35
percent above the base case over the next twelve months, accompanied by a
smaller increase in long rates, the effect will be to decrease net income by
approximately $27 million relative to the base case. If short rates decrease
1.35 percent below the base case over the next twelve months, accompanied by a
lesser decrease in long rates, the effect will be to increase net income by
approximately $25 million. This analysis takes into account the effect of
derivative products that are used to hedge balance sheet instruments, as well as
the effect of interest rates on prepayment speeds of mortgages and mortgage-
backed securities. Under the rate scenarios considered, net income would not be
adversely affected by impairment of capitalized mortgage servicing rights.
The market valuation model is used to measure the sensitivity of the market
value of equity to a wide range of interest rate changes. The process of
modeling market valuation risk continues to evolve in the financial services
industry, including structuring the modeling process, defining policy limits and
interpreting the results.
26
Changes In Interest Sensitivity The table below presents the corporation's
interest sensitivity gaps for December 1995. The cumulative gap within one year
was $(3,043) million, or (4.2) percent of assets. This compares with a one year
gap of $(2,569) million, or (4.4) percent of assets, in December 1994. The
cumulative gap within three years was $(487) million, or (0.7) percent of
assets, in December 1995, compared to $243 million, or 0.4 percent of assets, in
December 1994. The relatively small changes in the gaps in percentage terms are
due to a number of offsetting changes in the balance sheet during the year.
These included an increase in the investment portfolio, as well as increases in
long-term debt and demand deposits. The effect of the current interest
sensitivity position is to make the corporation's earnings slightly vulnerable
to rising rates, while slightly benefiting from falling rates.
Norwest Corporation and Subsidiaries
Interest Rate Sensitivity
In millions, except ratios Repricing or Maturing
---------------------------------------------------
Within 6 Months 1 Year 3 Years After
6 Months - 1 Year - 3 Years -5 Years 5 Years
-------- -------- --------- -------- -------
Average Balances For December 1995
- ----------------------------------
Loans and leases...................... $15,923 3,937 6,771 4,133 5,791
Investment securities................. 2,983 2,672 2,500 1,813 6,479
Loans held for sale................... 3,217 -- -- -- --
Mortgages held for sale............... 6,653 -- -- -- --
Other earning assets.................. 1,115 -- -- -- --
Other assets.......................... -- -- -- -- 8,845
------- ------ ----- ----- ------
Total assets......................... $29,891 6,609 9,271 5,946 21,115
======= ====== ===== ===== ======
Noninterest-bearing deposits.......... $ 3,539 55 217 152 7,362
Interest-bearing deposits............. 14,170 3,896 4,222 1,156 6,801
Short-term borrowings................. 9,544 -- -- -- --
Long-term debt........................ 5,028 504 2,927 2,321 3,180
Other liabilities and equity.......... 112 -- 190 -- 7,456
------- ------ ----- ----- ------
Total liabilities and equity......... $32,393 4,455 7,556 3,629 24,799
======= ====== ===== ===== ======
Swaps and options..................... $(2,903) 208 841 575 1,279
Gap*.................................. (5,405) 2,362 2,556 2,892 (2,405)
Cumulative gap........................ (5,405) (3,043) (487) 2,405 --
Gap as a percent of total assets...... (7.5)% (4.2) (0.7) 3.3 --
*[assets - (liabilities + equity) + swaps and options] The gap includes the
effect of off-balance sheet instruments on the corporation's interest
sensitivity.
In addition to adjusting the pricing and levels of assets and liabilities, the
corporation utilizes off-balance sheet derivative financial instruments to
manage interest rate risk. The corporation primarily enters into interest rate
swaps and interest rate caps and floors as part of its overall risk management
activities. These derivative financial instruments synthetically change the
repricing or other characteristics of underlying assets and liabilities hedged.
The corporation principally utilizes interest rate swaps to hedge certain fixed-
rate debt and certain deposit liabilities and to convert these funding sources
to floating rates. Interest rate floors are principally used to hedge the
corporation's portfolio of mortgage servicing rights. The floors provide for the
receipt of payments when interest rates are below predetermined interest rate
levels. Unrealized gains on the floors are considered in determining the fair
value of mortgage servicing rights, offsetting lost future servicing revenue
related to increased levels of prepayments associated with lower interest rates.
In Notes 9 and 15 to the consolidated financial statements on pages 47 and 61,
respectively, the corporation has disclosed additional information with respect
to its use of derivative financial instruments.
The corporation's net cash flows from off-balance sheet derivative financial
instruments used to manage interest rate risk added approximately $7.1 million
to net interest income in 1995, compared with $12.3 million in 1994 and $22.6
million in 1993. This resulted in an impact on net interest margin of one basis
point in 1995, compared with two basis points in 1994 and five basis points in
1993. Based on interest rate levels at December 31, 1995, total estimated future
cash flows related to the corporation's derivative financial instruments,
including interest rate swaps and floors hedging capitalized mortgage
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servicing rights, are expected to approximate $87 million in 1996, $54 million
in 1997, $50 million in 1998, $49 million in 1999, $24 million in 2000, and
$16 million thereafter.
Liquidity Management Liquidity management involves planning to meet funding
needs and cash flow requirements of customers and the corporation at a
reasonable cost, and is governed by policies formulated and monitored by ALCO.
Each affiliate is responsible for managing its own liquidity position within
overall guidelines, which consider the marketability of assets, the sources and
stability of funding, and the level of unfunded commitments.
The corporation has a significant liquidity reserve in its investment securities
portfolio, as approximately 83 percent of the $16.0 billion portfolio consists
of highly marketable U.S. Treasury or federal agency securities. Several other
factors provide a favorable liquidity position for the corporation compared with
most large bank holding companies, including the large amount of funding that
comes from consumer deposits, which are a more stable source of funding than
purchased funds, 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 and total capital
(Tier 1 plus Tier 2) to risk-weighted assets and leverage ratios. The primary
source of equity capital available for the affiliates is earnings, with other
forms of capital available from the corporation as needed. Earnings above levels
required to meet capital policy requirements are paid to the corporation in the
form of dividends and are used to support capital needs of other affiliates, to
pay corporate dividends or to reduce the corporation's borrowings.
Various federal and state statutes and regulations limit the amount of dividends
the subsidiary banks can pay to the corporation without regulatory approval. The
approval of the Office of the Comptroller of the Currency is required for any
dividend by a national bank if the total of all dividends declared by the bank
in any calendar year would exceed the total of its net 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, 1995, aggregate dividends
of at least $274.1 million without obtaining prior regulatory approval and
without reducing the capital of the respective banks below regulatory minimums.
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 $217.6 million at December 31, 1995.
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, 1995 was 8.11 percent and its total capital ratio was 10.18 percent,
compared with 9.89 percent and 12.23 percent, respectively, at December 31,
1994. The corporation's leverage ratio was 5.65 percent at December 31, 1995,
compared with 6.94 percent at December 31, 1994. These ratios compare favorably
to the regulatory minimums of 4.0 percent for the Tier 1 capital ratio, 8.0
percent for the total capital ratio, and 3.0 percent for the leverage ratio. The
decrease in capital ratios from year-end 1994 reflects intangibles arising from
purchase acquisitions completed in 1995.
Common stockholders' equity was $5,009.8 million at December 31, 1995, compared
with $3,334.4 million at December 31, 1994. The corporation's internal capital
growth rate (ICGR) in 1995 was 14.8 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. As of December
31, 1995, the corporation's board of directors had authorized future purchases
of up to 6,326,000 shares of the corporation's common stock.
During 1995, the corporation repurchased 1,295,000 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, 1995. In
addition, approximately 6,804,000 shares were repurchased during
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1995 for benefit plans, preferred stock conversions and other ongoing needs.
During 1994, 5,668,000 shares were repurchased for acquisition purposes and
13,250,000 shares were repurchased for benefit plans and other ongoing needs.
All shares of the corporation's Cumulative Convertible Preferred Stock, Series
B, in the form of depositary shares, were called for redemption on September 1,
1995. Each depositary share, which represented one-quarter of a share of the
preferred stock, was convertible at the option of the stockholder into
approximately 2.74 shares of the corporation's common stock or redeemable at a
price of $52.10 per depositary share plus accrued dividends. During 1995,
1,141,891 preferred shares were converted into 12,531,003 shares of common stock
and 1,784 shares were redeemed.
All shares of the corporation's 10.24% Cumulative Preferred Stock, in the form
of depositary shares, were redeemed on January 2, 1996. The redemption price for
each depositary share, representing one-quarter of a share of preferred stock,
was the $25 stated value. No shares of the 10.24% Cumulative Preferred Stock
were repurchased in 1995.
On December 30, 1994, the corporation issued 980,000 shares of Cumulative
Tracking Preferred Stock, $200 stated value per share, of which 25,000 shares
were held by a subsidiary at December 31, 1995.
The corporation increased its quarterly dividend rate 14.3 percent to 24 cents
per common share on September 1, 1995. The dividend increase reflects the
corporation's continuing record of strong earnings performance and the
corporat