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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-2979
NORWEST CORPORATION
A DELAWARE CORPORATION - I.R.S. NO. 41-0449260
NORWEST CENTER
SIXTH AND MARQUETTE
MINNEAPOLIS, MINNESOTA 55479
TELEPHONE (612) 667-1234
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock ($1 2/3 par value) New York Stock Exchange
Chicago Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Chicago Stock Exchange
6 3/4% Convertible Subordinated New York Stock Exchange
Debentures Due 2003
No securities are registered pursuant to Section 12(g) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No __
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On January 30, 1998, 758,022,040 shares of common stock were outstanding having
an aggregate market value, based upon a closing price of $38.75 per share, of
$29,373.4 million. At that date, the aggregate market value of the voting stock
held by non-affiliates was in excess of $26,508.9 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the corporation's Notice of Annual Meeting and Proxy Statement for
the annual meeting of stockholders to be held April 28, 1998, are incorporated
by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Norwest Corporation (the corporation) is a diversified financial services
company organized under the laws of Delaware in 1929 and registered under the
Bank Holding Company Act of 1956, as amended (the BHC Act). As a diversified
financial services organization, the corporation owns subsidiaries engaged in
banking and in a variety of related businesses. Subsidiaries of the corporation
provide retail, commercial, and corporate banking services to customers through
banks located in Arizona, Colorado, Illinois, Indiana, Iowa, Minnesota, Montana,
Nebraska, Nevada, New Mexico, North Dakota, Ohio, South Dakota, Texas, Wisconsin
and Wyoming. Additional financial services are provided to customers by
subsidiaries engaged in various businesses, principally mortgage banking,
consumer finance, equipment leasing, agricultural finance, commercial finance,
securities brokerage and investment banking, insurance agency services, computer
and data processing services, trust services, mortgage-backed securities
servicing and venture capital investment.
At December 31, 1997, the corporation and its subsidiaries employed 57,036
persons, and had consolidated total assets of $88.5 billion, total deposits of
$55.5 billion, and total stockholders' equity of $7.0 billion. Based on total
assets at December 31, 1997, the corporation was the 11th largest bank holding
company in the United States.
The corporation provides to its subsidiaries various services, including
strategic planning, asset and liability management, investment administration
and portfolio planning, tax planning, new product and business development,
advertising, administration and internal auditing, employee benefits and payroll
management. In addition, the corporation provides funds to its subsidiaries.
The corporation derives substantially all its income from investments in and
advances to its subsidiaries and service fees received from its subsidiaries.
The Financial Review, which begins on page 17 in the Appendix, discusses
developments in the corporation's businesses during 1997 and provides financial
and statistical data relative to the business and operations of the corporation.
A brief description of the primary business lines of the corporation follows.
Refer to Note 16 of the corporation's consolidated financial statements for
financial information about the corporation's business segments.
BANKING
As of February 1, 1998, the corporation's 37 subsidiary banks, located in 16
states with 930 locations, offer diversified financial services including
retail, commercial and corporate banking, equipment leasing, trust services and
mortgage-backed securities servicing; and their affiliates offer insurance,
securities brokerage, investment banking and venture capital investment.
Investment services are provided to customers by Norwest Investment Services,
Inc., a registered broker/dealer and a registered investment adviser, which
operates in 18 states with 366 offices, primarily in banking locations. Norwest
Insurance, Inc. and its subsidiaries operate insurance agencies in ten states
with 44 offices offering commercial and personal coverages to customers.
Norwest Insurance, Inc. is the 14th largest agency in the United States and the
largest agency owned by a bank holding company. A subsidiary of the
corporation operates one of the nation's top five crop insurance managing
general agencies. There are also three insurance companies that are owned by
bank affiliates and three other insurance companies that are owned directly or
indirectly by the corporation that reinsure credit-related insurance products
for the corporation's affiliates.
Norwest Bank Minnesota, N.A. is the largest bank in the group with total assets
of $20.4 billion at December 31, 1997. Ten other banks in the group exceeded
$2.0 billion in total assets: Norwest Bank Colorado, N.A. ($8.5 billion),
Norwest Bank Texas, N.A. ($8.3 billion); Norwest Bank Iowa, N.A. ($5.5 billion),
Norwest Bank Arizona, N.A. ($4.2 billion), Norwest Bank South Dakota, N.A. ($4.1
billion), Norwest Bank Nevada, N.A. ($3.4 billion), Norwest Bank Wyoming, N.A.
($2.9 billion), Norwest Bank Indiana, N.A. ($2.4 billion), Norwest Bank New
Mexico, N.A. ($2.4 billion) and Norwest Bank Nebraska, N.A. ($2.2 billion).
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Norwest Venture Capital consists of a group of five affiliated companies engaged
in making and managing investments in start-up businesses, emerging growth
companies, management buy-outs, acquisitions and corporate recapitalizations.
During 1997, Norwest Venture Capital made new investments of $172 million.
Norwest Venture Capital's investments typically range from $1,500,000 to
$15,000,000; however, larger sums may be invested in a single company, sometimes
through syndication with other venture capitalists. Most Norwest Venture
Capital emerging growth company clients are engaged in technology-related
businesses, such as computer software, telecommunications, medical products,
health care delivery and industrial automation. Remaining clients are engaged
in non-technology businesses, such as specialty retailing and consumer-related
businesses. Financing of management buy-outs is done for a variety of
businesses.
MORTGAGE BANKING
Norwest Mortgage is the largest mortgage banking enterprise in the United States
in terms of both originations and servicing. Subsidiaries of the corporation
originate and purchase residential first mortgage loans for sale to various
investors and provide servicing of mortgage loans for others. Income is
primarily earned from origination and other loan production fees, loan servicing
fees, interest on mortgages held for sale, and the sale of mortgages and
servicing rights. Through a network of 727 stores, Norwest Mortgage offers a
wide range of FHA, VA and conventional loan programs to customers in all 50
states. Approximately 28.5 percent of the mortgages are FHA and VA mortgages
guaranteed by the federal government and sold as GNMA securities. In 1997
Norwest Mortgage funded $55.3 billion of mortgages, with the average loan being
approximately $124,000. This compares with $51.5 billion of fundings in 1996
and $33.9 billion in 1995. The five states with the highest originations in
1997 were: California $10.1 billion; Minnesota $3.0 billion; Texas $2.7
billion; Illinois $2.6 billion; and New Jersey $2.5 billion. The originations
in these five states comprise approximately 37.9 percent of total originations
in 1997. As of December 31, 1997, the mortgage servicing portfolio totaled
$205.8 billion with a weighted average coupon of 7.75 percent, as compared with
$179.7 billion and 7.77 percent, respectively, at December 31, 1996. The five
highest states in servicing as of December 31, 1997 were: California $39.8
billion; Minnesota $11.8 billion; Texas $10.3 billion; New York $9.6 billion;
and New Jersey $8.9 billion. Loans from these five states comprise
approximately 39.0 percent of the total servicing portfolio at year-end 1997.
CONSUMER FINANCE
Norwest Financial consists of Norwest Financial Services, Inc. and its
subsidiaries and Island Finance, a group of eight companies operating in the
Caribbean and Central America. Norwest Financial provides consumer and
automobile finance products and services through 1,447 stores in 48 states,
Guam, Saipan, all ten Canadian provinces, the Caribbean and Latin America.
Consumer finance activities include providing direct installment loans to
individuals, purchasing open- or closed-end sales finance contracts, providing
private label and other lease and accounts receivables services and providing
other related products and services. Such products are generally repayable in
monthly installments for periods of 180 months or less. Automobile finance
activities generally include making loans to individuals secured by automobiles
and purchasing closed-end sales finance contracts from automobile dealers.
Automobile finance products are generally repayable in monthly installments for
periods of 60 months or less.
At December 31, 1997, consumer finance receivables accounted for 95 percent of
Norwest Financial's total receivables. Direct installment loans to individuals
constitute the largest portion of the consumer finance business and, in
addition, sales finance contracts are purchased from retailers. The five states
with the largest consumer finance receivables are: California $696.8 million;
Illinois $291.7 million; Ohio $253.9 million; Florida $237.6 million; and Texas
$224.5 million. Consumer finance receivables in Puerto Rico and Canada totaled
$1.4 billion and $617.8 million, respectively, at December 31, 1997. The
consumer finance receivables in Puerto Rico, Canada, and the five states listed
above comprise approximately 44.0 percent of total consumer finance receivables
at year-end 1997. The average installment loan made during 1997 was
approximately $3,000, while sales finance contracts purchased during the year
averaged approximately $1,600. Comparable amounts in 1996 were $2,700 and
$1,100, respectively.
Norwest Financial's insurance subsidiaries are primarily engaged in the business
of providing, directly or through reinsurance arrangements, credit life and
credit disability insurance as a part of Norwest Financial's consumer finance
business. Property, involuntary unemployment and non-filing insurance also are
sold as part of Norwest
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Financial's consumer finance business, either directly or through a reinsurance
arrangement with one of its insurance subsidiaries or on an agency basis.
Norwest Financial Information Services Group, Inc. (NFISG) operates an on-line,
real-time information processing and communications system which connects, over
leased telecommunication facilities, equipment located in branch offices to the
computer center in Norwest Financial's home office. Branch employees use the
computer to process loans and payments, to write checks and to perform
bookkeeping functions. In addition, as of December 31, 1997, NFISG had
contracts to supply information services to 26 non-affiliated finance companies.
On that date, approximately 3,000 offices were being served and 6.3 million
accounts were being maintained on the system.
ACQUISITIONS
The corporation expands its businesses in part by acquiring banking institutions
and other companies engaged in activities closely related to banking. See Note
2 of the corporation's consolidated financial statements beginning on page 38 in
the Appendix regarding acquisitions by the corporation since 1995.
The acquisition of banking institutions and other companies by the corporation
is generally subject to the prior approval of the Board of Governors of the
Federal Reserve System (the Federal Reserve Board) and may be subject to the
prior approval of other federal and state regulatory authorities. Under the
interstate banking provisions of the Reigle-Neal Interstate Banking and
Branching Act of 1994 (the Reigle-Neal Act), which became effective September
29, 1995, the corporation is permitted to acquire banks in any state subject to
the prior approval of the Federal Reserve Board, certain limited conditions that
a state may impose and deposit concentration limits of 10 percent nationwide and
30 percent in any one state, unless the acquisition is the initial entry of a
banking institution into that state. Effective June 1, 1997, under the
interstate branching provisions of the Reigle-Neal Act, banking subsidiaries of
the corporation were permitted to acquire directly a banking institution located
in a state other than the state in which the acquiring bank is located
(interstate bank merger) through merger, consolidation or purchase of assets and
assumption of liabilities, unless the state in which either of the banks is
located has enacted a law opting out of the interstate branching provisions of
the Reigle-Neal Act. The state of Texas has opted out of the Reigle-Neal Act
and the state of Montana has opted out until at least the year 2000. Interstate
bank mergers are subject to the prior approval of the applicable federal and
state regulatory authorities, and may be subject to certain limited conditions
that a state may impose and the deposit concentration limits outlined above.
In determining whether to approve a proposed bank acquisition or merger, bank
regulatory authorities consider a number of factors including the effect of the
proposed acquisition on competition, the public benefits expected to be derived
from the consummation of the proposed transaction, the projected capital ratios
and levels on a post-acquisition basis, and the acquiring institution's record
of addressing the credit needs of the communities it serves, including the needs
of low and moderate income neighborhoods, consistent with the safe and sound
operation of the bank, under the Community Reinvestment Act of 1977, as amended.
COMPETITION
Legislative and regulatory changes coupled with technological advances have
significantly increased competition in the financial services industry. The
corporation's banking and financial services subsidiaries compete with other
financial services providers, such as commercial banks and financial
institutions, including savings and loan associations, credit unions, finance
companies, mortgage banking companies and mutual funds. In addition, the
corporation's subsidiaries compete with non-banking institutions such as
brokerage houses and insurance companies, as well as financial services
subsidiaries of commercial and manufacturing companies. Many of these
competitors are not subject to the same regulatory restrictions as banks and
bank holding companies.
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GOVERNMENT POLICIES, SUPERVISION AND REGULATION
GENERAL
As a bank holding company, the corporation is subject to the supervision and
examination by the Federal Reserve Board under the BHC Act. The corporation's
national banking subsidiaries are regulated by the Office of the Comptroller of
the Currency (OCC) while its state-chartered banking subsidiaries are regulated
primarily by the Federal Deposit Insurance Corporation (FDIC) or the Federal
Reserve Board and applicable state banking agencies. The deposits of the
corporation's banking subsidiaries are primarily insured by the Bank Insurance
Fund (BIF), subjecting such subsidiaries to FDIC regulation. In addition to the
impact of regulation, commercial banks are affected significantly by the actions
of the Federal Reserve Board affecting the money supply and credit availability.
The corporation has other financial services subsidiaries that are subject to
regulation by the Federal Reserve Board and other applicable federal and state
agencies. For example, the corporation's brokerage subsidiary is subject to
regulation by the Securities and Exchange Commission, the National Association
of Securities Dealers, Inc. and state securities regulators. The corporation's
insurance subsidiaries are subject to regulation by applicable state insurance
regulatory agencies. Other non-bank subsidiaries of the corporation are subject
to the laws and regulations of both the federal government and the various
states in which they conduct business.
DIVIDEND RESTRICTIONS
Various federal and state statutes and regulations limit the amount of dividends
the banking and other subsidiaries may pay to the corporation without regulatory
approval. Refer to Note 19 of the corporation's consolidated financial
statements beginning on page 67 in the Appendix for additional information.
HOLDING COMPANY STRUCTURE
The corporation is a legal entity separate and distinct from its banking and
non-banking subsidiaries. Accordingly, the right of the corporation, and thus
the right of the corporation's creditors, to participate in any distribution of
the assets or earnings of any subsidiary, other than in its capacity as a
creditor of the subsidiary, is subject to the prior payment of claims of
creditors of such subsidiary. The principal sources of the corporation's
revenues are dividends and fees from its subsidiaries.
The corporation's banking subsidiaries are subject to restrictions under federal
law which limit the transfer of funds by the subsidiary banks to the corporation
and its non-bank subsidiaries, whether in the form of loans, extensions of
credit, investments or asset purchases. Such transfers by any subsidiary bank
to the corporation or any non-bank subsidiary are limited in amount to 10
percent of the bank's capital and surplus and, with respect to the corporation
and all non-bank subsidiaries, to an aggregate of 20 percent of the bank's
capital and surplus. Further, such loans and extensions of credit are required
to be secured in specified amounts.
The Federal Reserve Board has a policy to the effect that a bank holding company
is expected to act as a source of financial and managerial strength to each of
its subsidiary banks and to commit resources to support each subsidiary bank.
This support may be required at times when the corporation may not have the
resources to provide support. Any capital loans by the corporation to any of
the subsidiary banks are subordinate in right of payment to deposits and to
certain other indebtedness of the subsidiary bank. In addition, the Crime
Control Act of 1990 provides that in the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
A depository institution insured by the FDIC can be held liable for any loss
incurred, or reasonably expected to be incurred, by the FDIC after August 9,
1989, in connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance.
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Federal law (12 U.S.C. Section 55) permits the OCC to order the pro rata
assessment of shareholders of a national bank whose capital stock has become
impaired, by losses or otherwise, to relieve a deficiency in such national
bank's capital stock. This statute also provides for the enforcement of any
such pro rata assessment of shareholders of such national bank to cover such
impairment of capital stock by sale, to the extent necessary, of the capital
stock of any assessed shareholder failing to pay the assessment. Similarly, the
laws of certain states provide for such assessment and sale with respect to
banks chartered by such states. The corporation, as the sole stockholder of
most of its subsidiary banks, is subject to such provisions.
CAPITAL REQUIREMENTS
The Federal Reserve Board, the OCC and the FDIC have adopted substantially
similar risk-based and leverage capital guidelines for banking organizations.
Such guidelines are intended to ensure that banking organizations have adequate
capital given the risk levels of their assets and off-balance sheet commitments.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as stand-by letters of credit) is eight
percent. At least half of the total capital is to be comprised of common stock,
minority interests in subsidiaries and noncumulative perpetual preferred stock
(Tier 1 capital). The remainder (Tier 2 capital) may consist of hybrid capital
instruments, perpetual stock, mandatory convertible debt securities, a limited
amount of subordinated debt, other preferred stock and a limited amount of the
allowance for credit losses. Additionally, the risk-based capital guidelines
specify that all intangibles, including core deposit intangibles, as well as
mortgage servicing rights (MSRs) and purchased credit card relationships
(PCCRs), be deducted from Tier 1 capital. The guidelines, however, grandfather
identifiable intangible assets (other than MSRs and PCCRs) acquired on or before
February 19, 1992, and permit the inclusion of readily marketable MSRs and PCCRs
in Tier 1 capital to the extent that (i) MSRs and PCCRs do not exceed 50 percent
of Tier 1 capital and (ii) PCCRs do not exceed 25 percent of Tier 1 capital.
For such purposes, MSRs and PCCRs each are included in Tier 1 capital only up to
the lesser of (a) 90 percent of their fair market value (which must be
determined quarterly) and (b) 100 percent of the remaining unamortized book
value of such assets. The Federal Financial Institutions Examination Council,
which includes all federal banking regulators, is currently evaluating a
proposal which would permit inclusion of MSRs and PCCRs up to 100 percent of
Tier 1 capital, and the corporation has received permission from the Federal
Reserve System to determine its capital ratios under these proposed limitations.
In addition, the Federal Reserve Board has specified minimum "leverage ratio"
(the ratio of Tier 1 capital to quarterly average total assets) guidelines for
bank holding companies and state member banks. These guidelines provide for a
minimum leverage ratio of three percent for bank holding companies and state
member banks that meet certain specified criteria, including that they have the
highest regulatory rating. All other bank holding companies and state member
banks are required to maintain a leverage ratio of three percent plus an
additional cushion of one to two percent. The guidelines also provide that
banking organizations experiencing internal growth or making acquisitions are
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier 1 leverage ratio" in evaluating proposals
for expansion or new activities. The tangible Tier 1 leverage ratio is the
ratio of a banking organization's Tier 1 capital, less all intangibles, to total
assets, less all intangibles. Each of the corporation's banking subsidiaries is
also subject to capital requirements adopted by applicable regulatory agencies
which are substantially similar to the foregoing. At December 31, 1997, the
corporation's Tier 1 and total capital (the sum of Tier 1 and Tier 2 capital) to
risk-adjusted assets ratios were 9.09 percent and 11.01 percent, respectively,
and the corporation's leverage ratio was 6.63 percent. Neither the corporation
nor any subsidiary bank has been advised by the appropriate federal regulatory
agency of any specific leverage ratio applicable to it.
As a result of federal law enacted in 1991 that required each federal banking
agency to revise its risk-based capital standards to ensure that those standards
take adequate account of interest rate risk, concentration of credit risk and
the risks of nontraditional activities, each of the federal banking agencies has
revised the risk-based capital guidelines described above to take into account
the concentration of credit risk and risk of nontraditional activities. The
Federal Reserve Board, the FDIC and the OCC adopted a rule that amended the
capital standards to require
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banks to include changes in interest rates as a factor to be considered in
evaluating the economic value of its capital. The agencies issued for comment a
joint policy statement that described the process to be used to measure and
assess the exposure of a bank's net economic value to changes in interest rates.
In June 1996, these agencies elected not to pursue a standardized supervisory
measure and explicit capital charge for interest rate risk. In supervising
interest rate risk, the agencies intend to emphasize reliance on internal
measures of risk, promotion of sound risk management practices and other means
to identify those institutions that appear to be taking excessive risk. The
corporation does not believe these revisions to the capital guidelines will
materially impact its operations.
Effective January 1, 1998, federal bank regulatory agencies require banking
organizations that engage in significant trading activity to calculate a capital
charge for market risk. Significant trading activity is defined to include
trading activity of at least ten percent of total assets or $1 billion,
whichever is smaller, calculated on a consolidated basis for bank holding
companies. Trading activity is defined as the sum of a banking organization's
trading assets and trading liabilities as reported in the most recent financial
statements filed with the organization's primary federal bank regulator.
Federal bank regulators may apply the market risk measure to other banks and
bank holding companies if the agency deems necessary or appropriate for safe and
sound banking practices. Each agency may exclude organizations that it
supervises that otherwise meet the criteria under certain circumstances. The
market risk charge will be included in the calculation of applicable risk-based
capital ratios. The corporation has not historically engaged in significant
trading activity, as defined.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
revisions to several other federal banking statutes. Among other things, FDICIA
requires the federal banking regulators to take "prompt corrective action" in
respect of depository institutions insured by the FDIC that do not meet minimum
capital requirements. FDICIA establishes five capital tiers: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized".
Under applicable regulations, an FDIC-insured depository institution is defined
to be well capitalized if it maintains a leverage ratio of at least five
percent, a risk-adjusted Tier 1 capital ratio of at least six percent and a
risk-adjusted total capital ratio of at least 10 percent, and is not subject to
a directive, order or written agreement to meet and maintain specific capital
levels. An insured depository institution is defined to be adequately
capitalized if it meets all of its minimum capital requirements as described
above. An insured depository institution will be considered undercapitalized if
it fails to meet any minimum required measure, significantly undercapitalized if
it has a risk-adjusted total capital ratio of less than six percent, risk-
adjusted Tier 1 capital ratio of less than three percent or a leverage ratio of
less than three percent, and critically undercapitalized if it fails to maintain
a level of tangible equity equal to at least two percent of total assets. An
insured depository institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating. As of December 31, 1997, all of the
corporation's banking subsidiaries were classified as well capitalized.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to a
wide range of limitations on operations and activities, including growth
limitations, and are required to submit a capital restoration plan. The federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to succeed
in restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with such capital
restoration plan. The aggregate liability of the parent holding company is
limited to the lesser of (i) an amount equal to five percent of the depository
institution's total assets at the time it became undercapitalized and (ii) the
amount which is necessary (or would have been necessary) to bring the
institution into compliance with all capital standards applicable with respect
to such institution as of the time it fails to comply with the plan. If a
depository institution fails to submit an acceptable plan, it is treated as if
it were significantly undercapitalized.
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Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
FDICIA, as amended by the Reigle Community Development and Regulatory
Improvement Act of 1994 enacted on August 22, 1994, directs that each federal
banking agency prescribe standards, by regulation or guideline, for depository
institutions relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, asset quality, earnings, stock valuation, and such other
operational and managerial standards as the agency deems appropriate. The FDIC,
in consultation with the other federal banking agencies, has adopted a final
rule and guidelines with respect to internal and external audit procedures and
internal controls in order to implement those provisions of FDICIA intended to
facilitate the early identification of problems in financial management of
depository institutions. On July 10, 1995, the federal banking agencies
published the final rules implementing three of the safety and soundness
standards required by FDICIA, including operational and managerial standards,
asset quality and earnings standards, and compensation standards. The impact of
such standards on the corporation has not been material.
FDICIA also contains a variety of other provisions that may affect the
operations of the corporation, including new reporting requirements, revised
regulatory standards for real estate lending, "truth in savings" provisions and
the requirement that a depository institution give 90 days' notice to customers
and regulatory authorities before closing any branch.
Under other regulations promulgated under FDICIA, a bank cannot accept brokered
deposits (that is, deposits obtained through a person engaged in the business of
placing deposits with insured depository institutions or with interest rates
significantly higher than prevailing market rates) unless (i) it is well
capitalized or (ii) it is adequately capitalized and receives a waiver from the
FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-
through" insurance on certain employee benefit accounts, unless it provides
certain notices to affected depositors. In addition, a bank that is adequately
capitalized and that has not received a waiver from the FDIC may not pay an
interest rate on any deposits in excess of 75 basis points over certain
prevailing market rates. There are no such restrictions on a bank that is well
capitalized. At December 31, 1997, all of the corporation's banking subsidiaries
were not subject to these restrictions.
FDIC INSURANCE
The FDIC insures the deposits of the corporation's depository institution
subsidiaries up to prescribed per depositor limits through the BIF, and the
amount of FDIC assessments paid by each BIF member institution is based on its
relative risk of default as measured by regulatory capital ratios and other
factors. Specifically, the assessment rate is based on the institution's
capitalization risk category and supervisory subgroup category. An
institution's capitalization risk category is based on the FDIC's determination
of whether the institution is well capitalized, adequately capitalized or less
than adequately capitalized. An institution's supervisory subgroup is based on
the FDIC's assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will be required.
Subgroup A institutions are financially sound institutions with few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weakness
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness.
The BIF assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits, with Subgroup A institutions assessed at a rate of zero and
Subgroup C institutions assessed at a rate of 27 cents. The FDIC may increase
or decrease the assessment rate schedule on a semiannual basis. An increase in
the rate assessed one or more of the corporation's banking subsidiaries could
have a material effect on the corporation's earnings, depending upon the amount
of the increase. The FDIC is authorized to terminate a depository institution's
deposit insurance upon a finding by the FDIC that the institution's financial
condition is unsafe or unsound or that the institution has engaged in unsafe or
unsound practices or violated any applicable rule, regulation, order or
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condition enacted or imposed by the institution's regulatory agency. The
termination of deposit insurance with respect to one or more of the
corporation's subsidiary depository institutions could have a material adverse
effect on the corporation depending on the collective size of the particular
institutions involved.
Effective January 1, 1997, all FDIC-insured depository institutions are also
required to pay an assessment to provide funds for payment of interest on
Financing Corporation (FICO) bonds. Until December 31, 1999 or when the last
savings and loan association ceases to exist, whichever occurs first,
institutions will pay approximately 1.3 cents per $100 of BIF-assessable
deposits.
DEPOSITOR PREFERENCE
Under the Federal Deposit Insurance Act, claims of holders of domestic deposits
and certain claims of administrative expenses and employee compensation against
an FDIC-insured depository institution have priority over other general
unsecured claims against the institution in the "liquidation or other
resolution" of the institution by a receiver.
ITEM 2. PROPERTIES
The corporation's Banking Group subsidiaries operate out of 930 banking
locations, of which 593 are owned directly and 337 are leased from outside
parties. Norwest Mortgage leases its headquarters in Des Moines, Iowa,
servicing centers in Minneapolis, Minnesota; Phoenix, Arizona; Charlotte, North
Carolina; and Springfield, Illinois, operations centers in Frederick, Maryland
and St. Louis, Missouri and all mortgage production offices nationwide. In
addition, Norwest Mortgage owns servicing centers located in Springfield, Ohio
and Riverside, California. Norwest Financial owns its headquarters in Des
Moines, Iowa, and leases all consumer finance branch locations. The corporation
and Norwest Bank Minnesota, N.A. lease their offices in Minneapolis, Minnesota.
The accompanying Notes 6 and 13 to the corporation's consolidated financial
statements on pages 43 and 55 in the Appendix contain additional information
with respect to premises and equipment and commitments under non-cancelable
leases for premises and equipment.
ITEM 3. LEGAL PROCEEDINGS
The corporation and certain subsidiaries are defendants in various matters of
litigation generally incidental to their businesses. Although it is difficult
to predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability will not materially affect
the consolidated financial position and results of operations of the corporation
and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal trading markets for the corporation's common equity are presented
on the cover page of this Form 10-K. The high and low sales prices for the
corporation's common stock for each quarter during the past two years and
information regarding cash dividends is set forth on pages 46 through 48, 72,
and 78 in the Appendix. The number of holders of record of the common stock and
securities convertible into common stock of the corporation at January 30, 1998
were:
Title of Class Number of Holders
-------------- -----------------
6 3/4 % Convertible
Subordinated Debentures Due 2003............... 4
Common Stock, par value $1 2/3 per share....... 47,995
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data begins on page 72 in the Appendix.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis is presented beginning on page 17 in the Appendix
and should be read in conjunction with the related financial statements and
notes thereto included under Item 8.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The discussion and analysis presented beginning on page 17 of the Appendix
includes applicable disclosures pertaining to quantitative and qualitative
disclosures about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the corporation and its subsidiaries
begin on page 30 in the Appendix. The report of independent certified public
accountants on the corporation's consolidated financial statements is presented
on page 70 in the Appendix.
Selected quarterly financial data is presented on pages 78 and 79 in the
Appendix.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, and such
information is expressly incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, and such
information is expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, and such
information is expressly incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be submitted in response to this item is omitted
because a definitive proxy statement containing such information will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, and such
information is expressly incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS - See Item 8 above.
(2) FINANCIAL STATEMENT SCHEDULES
All schedules to the consolidated financial statements normally
required by Form 10-K are omitted since they are either not applicable
or the required information is shown in the financial statements or
the notes thereto.
(3) MANAGEMENT CONTRACTS OR COMPENSATORY PLAN ARRANGEMENTS - See exhibits
marked with an asterisk in Item 14(c) below.
(b) REPORTS ON FORM 8-K
The corporation filed a Current Report on Form 8-K, dated October 10,
1997, placing on file a description of its common stock reflecting the
corporation's two-for-one stock split distributed in the form of a 100
percent stock dividend, and adjustments to the preferred share
purchase rights as a result of the stock dividend. The corporation
also filed amendments to its by-laws, effective September 23, 1997, to
allow for the issuance and transfer of uncertificated shares of the
corporation's stock.
The corporation filed a Current Report on Form 8-K, dated October 13,
1997, reporting consolidated operating results of the corporation for
the quarter ended September 30, 1997.
11
(c) EXHIBITS
3(a). Restated Certificate of Incorporation, incorporated by reference to
Exhibit 3(b) to the corporation's Current Report on Form 8-K dated
June 28, 1993. Certificate of Amendment of Certificate of
Incorporation of the corporation authorizing 4,000,000 shares of
Preference Stock, incorporated by reference to Exhibit 3 to the
corporation's Current Report on Form 8-K dated July 3, 1995.
Certificate of Amendment of Certificate of Incorporation of the
corporation increasing the authorized number of common shares to one
billion shares, incorporated by reference to Exhibit 3 to the
corporation's Current Report on Form 8-K dated June 3, 1997.
3(b). Certificate of Designations of powers, preferences and rights
relating to the corporation's ESOP Cumulative Convertible Preferred
Stock incorporated by reference to Exhibit 4 to the corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
3(c). Certificate of Designations of powers, preferences and rights
relating to the corporation's Cumulative Tracking Preferred Stock
incorporated by reference to Exhibit 3 to the corporation's Current
Report on Form 8-K dated January 9, 1995.
3(d). Certificate of Designations of powers, preferences and rights
relating to the corporation's 1995 ESOP Cumulative Convertible
Preferred Stock incorporated by reference to Exhibit 4 to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
3(e). Certificate Eliminating the Certificate of Designations with respect
to the Cumulative Convertible Preferred Stock, Series B, incorporated
by reference to Exhibit 3(a) to the corporation's Current Report on
Form 8-K dated November 1, 1995.
3(f). Certificate Eliminating the Certificate of Designations with respect
to the 10.24% Cumulative Preferred Stock incorporated by reference to
Exhibit 3 to the corporation's Current Report on Form 8-K dated
February 20, 1996.
3(g). Certificate of Designations of powers, preferences and rights
relating to the corporation's 1996 ESOP Cumulative Convertible
Preferred Stock incorporated by reference to Exhibit 3 to the
corporation's Current Report on Form 8-K dated February 26, 1996.
3(h). Certificate of Designations of powers, preferences and rights
relating to the corporation's 1997 ESOP Cumulative Convertible
Preferred Stock incorporated by reference to Exhibit 3 to the
corporation's Current Report on Form 8-K dated April 14, 1997.
3(i). By-Laws, incorporated by reference to Exhibit 3 to the corporation's
Current Report on Form 8-K dated October 10, 1997.
4(a). See 3(a) through 3(i) of this Item.
4(b). Rights Agreement, dated as of November 22, 1988, between the
corporation and Citibank, N.A. incorporated by reference to Exhibit 1
to the corporation's Form 8-A, dated December 6, 1988, and
Certificate of Adjustment pursuant to Section 12 of the Rights
Agreement incorporated by reference to Exhibit 5 to the corporation's
Form 8-A/A dated October 14, 1997.
4(c). Copies of instruments with respect to long-term debt will be
furnished to the Commission upon request.
12
*10(a). Long-Term Incentive Compensation Plan (including Form of Non-
Qualified Stock Option Agreement and Form of Restricted Stock
Agreement) /(1)/
*10(b). Employees' Stock Deferral Plan /(1)/
*10(c). Employees' Deferred Compensation Plan /(1)/
*10(d). Elective Deferred Compensation Plan for Mortgage Banking Executives
incorporated by reference to Exhibit 10(c) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
*10(e). Performance Deferral Award Plan for Mortgage Banking Executives
incorporated by reference to Exhibit 10(b) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
*10(f). Executive Incentive Compensation Plan incorporated by reference to
Exhibit 19(a) to the corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1988. Amendment to Executive Incentive
Compensation Plan incorporated by reference to Exhibit 19(b) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989.
*10(g). Performance-Based Compensation Policy for Covered Executive Officers
incorporated by reference to Exhibit 10(a) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
*10(h). Supplemental Savings Investment Plan /(1)/
*10(i). Supplemental Pension Plan
*10(j). Supplemental Long Term Disability Plan incorporated by reference to
Exhibit 10(f) to the corporation's Annual Report on Form 10-K for the
year ended December 31, 1990. Amendment to Supplemental Long Term
Disability Plan incorporated by reference to Exhibit 10(g) to the
corporation's Annual Report on Form 10-K for the year ended December
31, 1992.
*10(k). Executive Financial Counseling Plan incorporated by reference to
Exhibit 10(f) to the corporation's Annual Report on Form 10-K for the
year ended December 31, 1987.
*10(l). Deferred Compensation Plan for Non-Employee Directors incorporated by
reference to Exhibit 10(i) to the corporation's Annual Report on Form
10-K for the year ended December 31, 1995.
*10(m). Directors' Stock Deferral Plan /(1)/
*10(n). Directors' Formula Stock Award Plan /(1)/
*10(o). Retirement Plan for Non-Employee Directors incorporated by reference
to Exhibit 10(j) to the corporation's Annual Report on Form 10-K for
the year ended December 31, 1996.
*10(p). Agreement between the corporation and Lloyd P. Johnson dated March
11, 1991, incorporated by reference to Exhibit 19(c) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1991.
13
*10(q). Agreement between the corporation and Richard M. Kovacevich dated
March 18, 1991, incorporated by reference to Exhibit 19(e) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1991. Amendment effective January 1, 1995, to the March 18,
1991 agreement between the corporation and Richard M. Kovacevich,
incorporated by reference to Exhibit 10(c) to the corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
*10(r). Form of agreement between the corporation and 13 executive officers,
including two directors, incorporated by reference to Exhibit 19(f)
to the corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1991. Amendment effective January 1, 1995, to the
March 11, 1991 agreement between the corporation and Richard M.
Kovacevich incorporated by reference to Exhibit 10(b) to the
corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
11. Computation of Earnings Per Share.
12(a). Computation of Ratio of Earnings to Fixed Charges.
12(b). Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
21. Subsidiaries of the Corporation.
23. Consent of Experts.
24. Powers of Attorney.
___________________
* Management contract or compensatory plan or arrangement.
(1) As restated to reflect the two-for-one stock split in the form of a 100
percent stock dividend distributed on October 10, 1997.
Stockholders may obtain a copy of any Exhibit, in Item 14(c), upon payment of a
reasonable fee, by writing Norwest Corporation, Office of the Secretary, Norwest
Center, Sixth and Marquette, Minneapolis, Minnesota 55479-1026.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 23rd day of
February, 1998.
Norwest Corporation
(Registrant)
By /s/ RICHARD M. KOVACEVICH
-------------------------
Richard M. Kovacevich
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 23rd day of February, 1998, by the following
persons on behalf of the registrant and in the capacities indicated.
By /s/ JOHN T. THORNTON
--------------------
John T. Thornton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By /s/ MICHAEL A. GRAF
-------------------
Michael A. Graf
Senior Vice President and Controller
(Principal Accounting Officer)
The Directors of Norwest Corporation listed below have duly executed powers of
attorney empowering Richard S. Levitt to sign this document on their behalf.
Leslie S. Biller Reatha Clark King
J. A. Blanchard III Richard M. Kovacevich
David A. Christensen Richard D. McCormick
Gerald J. Ford Cynthia H. Milligan
Pierson M. Grieve Benjamin F. Montoya
Charles M. Harper Ian M. Rolland
William A. Hodder Michael W. Wright
By /s/ RICHARD S. LEVITT
---------------------
Richard S. Levitt
Director and Attorney-in-Fact
February 23, 1998
15
Appendix
NORWEST CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Financial
Statements, Report of Independent Auditors
and Selected Financial Data
Forming a Part of the Annual Report
on Form 10-K for the
Year Ended December 31, 1997
Contents
--------
Page
----
Financial Review........................................ 17
Financial Statements.................................... 30
Independent Auditors' Report............................ 70
Management's Report..................................... 71
Six-Year Consolidated Financial Summary................. 72
Consolidated Average Balance Sheets
and Related Yields and Rates............................ 73
Quarterly Condensed Consolidated Financial Information.. 78
16
FINANCIAL REVIEW
This financial review should be read with the consolidated financial statements
and accompanying notes presented on pages 30 through 69 and other information
presented on pages 72 through 79.
EARNINGS PERFORMANCE
Norwest Corporation (the corporation) reported record net income of $1,351.0
million in 1997, an increase of 17.1 percent over earnings of $1,153.9 million
in 1996, which were up 20.7 percent over the $956.0 million earned in 1995. Net
income per diluted common share was $1.75 in 1997, compared with $1.54 in 1996
and $1.36 in 1995, an increase of 13.6 percent and 13.2 percent, respectively.
Net income per common share amounts for periods prior to 1997 have been restated
to reflect the two-for-one split of the corporation's common stock, effected in
the form of a 100 percent stock dividend, distributed on October 10, 1997.
Return on realized common equity was 22.1 percent and return on assets was 1.63
percent for 1997, compared with 21.9 percent and 1.51 percent, respectively, in
1996, and 22.3 percent and 1.44 percent, respectively, in 1995.
The 1996 results include a special pre-tax charge of $19.0 million on deposits
insured by the Savings Association Insurance Fund (SAIF). This charge, based on
legislation enacted by Congress to recapitalize SAIF, related to deposits of
thrift institutions acquired by the corporation during 1996. Excluding the $19.0
million pre-tax charge, net operating earnings in 1996 were $1,165.7 million, or
$1.55 per diluted common share. On an operating basis, return on realized common
equity was 22.1 percent and return on assets was 1.52 percent for the year ended
December 31, 1996.
The corporation previously included in its normal operating results a pre-tax
charge of $23.5 million for savings and loan association deposits insured under
SAIF which were acquired prior to 1996. Such charge was recorded in the third
quarter of 1995 when the SAIF recapitalization legislation was first introduced
in Congress.
Norwest Corporation and Subsidiaries
CONSOLIDATED INCOME SUMMARY
5 Year
Growth
In millions 1997 Change 1996 Change 1995 1994 1993 Rate
-------- ------ -------- ------ -------- -------- -------- -------
Interest income (tax-equivalent basis)....... $6,741.9 6.2% $6,350.5 10.4% $5,750.8 $4,422.7 $3,979.6 11.9%
Interest expense............................. 2,664.0 1.8 2,617.0 6.9 2,448.0 1,590.1 1,442.9 10.6
-------- -------- -------- -------- --------
Net interest income......................... 4,077.9 9.2 3,733.5 13.0 3,302.8 2,832.6 2,536.7 12.8
Provision for credit losses.................. 524.7 32.9 394.7 26.3 312.4 164.9 158.2 14.1
-------- -------- -------- -------- --------
Net interest income after provision
for credit losses......................... 3,553.2 6.4 3,338.8 11.7 2,990.4 2,667.7 2,378.5 12.6
Non-interest income.......................... 2,962.3 15.5 2,564.6 38.8 1,848.2 1,638.3 1,585.0 18.4
Non-interest expenses........................ 4,421.3 8.1 4,089.7 20.9 3,382.3 3,096.4 3,050.4 11.6
-------- -------- -------- -------- --------
Income before income taxes.................. 2,094.2 15.5 1,813.7 24.5 1,456.3 1,209.6 913.1 25.1
Income tax expense........................... 698.7 11.3 627.6 34.4 466.8 380.2 266.7 31.8
Tax-equivalent adjustment.................... 44.5 38.2 32.2 (3.9) 33.5 29.0 33.3 3.3
-------- -------- -------- -------- --------
Net income................................... $1,351.0 17.1% $1,153.9 20.7% $ 956.0 $ 800.4 $ 613.1 23.5%
======== ======== ======== ======== ========
ORGANIZATIONAL EARNINGS
Banking The Banking Group reported record earnings of $957.2 million in 1997,
23.3 percent over 1996 operating earnings of $776.4 million, which increased
28.9 percent over 1995 earnings of $602.2 million. The Banking Group earnings
increases in 1997 and 1996 reflect a 6.1 percent and 7.3 percent growth in tax-
equivalent net interest income, respectively, primarily due to increases in
average earning assets and in net interest margin. The Banking Group's provision
for credit losses was $176.2 million in 1997, compared with $146.7 million and
$143.0 million in 1996 and 1995, respectively. The 1997 and 1996 increases in
the provision for loan losses were due to higher net charge-offs. Non-interest
income in the Banking Group increased 20.4 percent from 1996 due primarily to
increases in fee-based revenue including trust, insurance, and other fees and
service charges, and gains on sales of securities. The Banking Group non-
interest income for 1996 increased 35.8 percent from 1995 due primarily to
increases in venture capital gains and gains on sale of credit card receivables.
Non-interest expenses for the Banking Group in 1997 were $2,889.4 million, or a
10.3 increase from 1996. This increase is due to increased operating expenses
related to acquisitions. Excluding the previously discussed SAIF
17
recapitalization charge, the Banking Group non-interest expenses increased 14.7
percent in 1996 from 1995 reflecting writedowns of goodwill and intangibles and
additional operating expenses related to acquired companies, partially offset by
reduced pension expense and FDIC insurance premiums.
The venture capital subsidiaries reported $190.9 million of net gains in 1997,
compared with net gains of $256.4 million in 1996 and net gains of $102.1
million in 1995. Certain appreciated securities which comprised $8.1 million of
the 1997 net venture gains were contributed to the Norwest Foundation. The
contribution amount of such securities, which included the cost basis, was $8.4
million in 1997. Sales of venture capital securities generally relate to the
timing of such holdings becoming publicly traded and subsequent market
conditions, causing venture capital gains to be unpredictable in nature. Net
unrealized appreciation in the venture capital investment portfolio was $166.2
million at December 31, 1997 and $237.7 million at December 31, 1996.
Mortgage Banking Mortgage Banking earned a record $151.0 million in 1997, a 20.8
percent increase over the $125.0 million earned in 1996, which was 19.2 percent
over the $104.9 million earned in 1995. The increases were principally due to
increases in mortgage loan fundings and the servicing portfolio. Fundings were a
record $55.3 billion in 1997, compared with $51.5 billion in 1996 and $33.9
billion in 1995. Increases in volume were attributable in part to the
acquisition of certain assets of The Prudential Home Mortgage Company, Inc. in
May 1996, including $47 billion of its mortgage servicing portfolio. The
percentage of fundings attributed to mortgage loan refinancings was
approximately 23.0 percent in 1997, compared with 22.0 percent in 1996 and 19.6
percent in 1995. The servicing portfolio increased to $205.8 billion at December
31, 1997, compared with $179.7 billion at December 31, 1996. The weighted
average coupon was 7.75 percent at December 31, 1997, compared with 7.77 percent
a year earlier. Total capitalized servicing amounted to $2.8 billion or 135
basis points of the mortgage servicing portfolio at December 31, 1997.
Amortization of capitalized mortgage servicing rights was $444.3 million in
1997, compared with $300.6 million in 1996 and $139.6 million in 1995. Higher
levels of amortization in 1997 and 1996 reflect increased balances of
capitalized servicing associated with a larger servicing portfolio and increased
assumed prepayments due to a lower interest rate environment. No mortgage
servicing impairment provisions were recorded in 1997 or 1996, while $64.2
million was recorded in 1995. Combined gains on sales of mortgages and servicing
rights were $89.8 million in 1997, compared with $70.5 million in 1996 and $57.1
million in 1995.
Norwest Financial Norwest Financial (including Norwest Financial Services, Inc.
and Island Finance) reported earnings of $242.8 million in 1997, which includes
$27.3 million in non-recurring pre-tax acquisition charges related to the
acquisition of Fidelity Acceptance Corporation, an automobile finance company
with $1.1 billion in receivables and 150 locations in 31 states and Guam. The
non-recurring charges include $16.0 million pre-tax to conform Fidelity's credit
policies with those of the corporation. Excluding the special acquisition
charges, Norwest Financial's operating earnings were $260.6 million, down
slightly from the $264.3 million earned in 1996 due to higher levels of
provisions related to higher levels of loan charge-offs. Norwest Financial's
earnings for 1996 increased 6.2 percent over the $248.9 million earned in 1995
primarily due to a 16.8 percent increase in tax-equivalent net interest income
related to a 14.9 percent increase in average finance receivables. Tax-
equivalent net interest income rose 9.4 percent in 1997, as average finance
receivables increased 10.0 percent. The 1997 and 1996 increases in tax-
equivalent net interest income and average receivables reflect internal growth
as well as the Fidelity Acceptance acquisition in August 1997, and the May 1995
acquisition of ITT Financial Corporation's Island Finance business, with $1
billion in receivables in Puerto Rico, the Virgin Islands and elsewhere in the
Caribbean. Net interest margin decreased 17 basis points in 1997, reflecting a
narrowing of the yield spread on earning assets. Net interest margin increased
22 basis points in 1996 over 1995 due to an improvement in funding costs. The
overall increases in net interest income were partially offset by higher
provisions for credit losses. Norwest Financial provided $330.7 million for
credit losses in 1997, compared with $247.1 million in 1996 and $170.8 million
in 1995. Norwest Financial's non-interest expenses increased 9.4 and 15.5
percent in 1997 and 1996, respectively, primarily due to higher operating costs
of acquired companies.
18
Norwest Corporation and Subsidiaries
Organizational Earnings*
In millions 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Years Ended December 31,
- -----------------------
Banking........................................................... $ 957.2 776.4 602.2 507.1 356.7
Mortgage Banking.................................................. 151.0 125.0 104.9 70.8 56.3
Norwest Financial+................................................ 242.8 264.3 248.9 222.5 200.1
-------- -------- -------- -------- --------
Consolidated operating earnings before SAIF recapitalization...... 1,351.0 1,165.7 956.0 800.4 613.1
SAIF recapitalization, net of income taxes........................ - (11.8) - - -
-------- -------- -------- -------- --------
Net income........................................................ $1,351.0 1,153.9 956.0 800.4 613.1
======== ======== ======== ======== ========
*Earnings of the entities listed are impacted by intercompany revenues and
expenses, such as interest on borrowings from the parent company,
corporate service fees and allocations of federal income taxes.
+Norwest Financial had net operating earnings of $260.6 million in 1997 before a
non-recurring acquisition charge of $17.8 million, net of income taxes.
CONSOLIDATED INCOME STATEMENT ANALYSIS
Net Interest Income Net interest income on a tax-equivalent basis is the
difference between interest earned on assets and interest paid on liabilities,
with adjustments made to present yields on tax-exempt assets as if such income
were fully taxable. Changes in the mix and volume of earning assets and
interest-bearing liabilities, their related yields and overall interest rates
have a major impact on earnings. In 1997, tax-equivalent net interest income
provided 57.9 percent of the corporation's tax-equivalent net revenues, compared
with 59.3 percent in 1996 and 64.1 percent in 1995.
Total tax-equivalent net interest income was $4,077.9 million in 1997, a 9.2
percent increase over the $3,733.5 million reported in 1996. Growth in tax-
equivalent net interest income over 1996 was primarily due to a 7.0 percent
increase in average earning assets and an 11 basis point increase in net
interest margin. The increase in average earning assets was primarily due to a
5.7 percent increase in average loans and leases and a 13.8 percent increase in
average investment securities. The 1996 increase in tax-equivalent net interest
income of 13.0 percent over the $3,302.8 million reported in 1995 was due to a
12.7 percent increase in average earning assets and a five basis point increase
in net interest margin. Non-accrual and restructured loans reduced net interest
income by $16.2 million in 1997, $17.8 million in 1996 and $11.7 million in
1995. Detailed analyses of net interest income appear on pages 73, 74 and 75 and
a discussion of the corporation's asset and liability management process begins
on page 25.
Net interest margin, the ratio of tax-equivalent net interest income divided by
average earning assets, was 5.74 percent in 1997, 5.63 percent in 1996 and 5.58
percent in 1995. The increases in 1997 and 1996 were primarily due to
improvements in funding costs, partially offset by a lower yield on average
earning assets. Average loans and leases comprised 57.0 percent of average
earning assets in 1997, compared with 57.7 percent in 1996 and 60.0 percent in
1995.
Provision for Credit Losses The provision for credit losses reflects
management's judgment of the cost associated with credit risk inherent in the
loan and lease portfolio. The consolidated provision for credit losses was
$524.7 million in 1997, $394.7 million in 1996 and $312.4 million in 1995. The
provision for credit losses was 1.29 percent of average loans and leases in
1997, compared with 1.02 percent in 1996 and 0.88 percent in 1995. The 1997
provision for credit losses includes $16.0 million, or 0.04 percent, of one-time
provision related to the acquisition of Fidelity Acceptance Corporation.
Excluding the special acquisition charge, the provision for credit losses was
higher in 1997 compared with 1996 as well as in 1996 compared with 1995 due to
higher net charge-offs and loan growth.
Net charge-offs were $499.7 million in 1997, $382.4 million in 1996 and $304.2
million in 1995. The net charge-off ratio, the ratio of net charge-offs as a
percent of average loans and leases, was 1.23 percent in 1997, compared with
0.99 percent in 1996 and 0.86 percent in 1995. The increases in net charge-offs
in 1997 and 1996 were due principally to higher levels of charge-offs in regions
which have had acquisitions and higher consumer credit charge-offs. Excluding
net charge-offs relating to Fidelity Acceptance, the corporation's total net
charge-offs as a percent of average loans and leases was 1.15 percent.
The net charge-off ratio for Norwest Financial was 3.72 percent in 1997,
compared with 3.24 percent in 1996 and 2.52 percent in 1995. Norwest Card
Services' net charge-off ratio was 5.23 percent in 1997 compared with 4.23
percent in 1996 and 4.77 percent in 1995 (excluding credit card portfolios
classified as held for sale in 1995). The higher consumer loan net
19
credit losses reflect, in part, growth in the overall portfolio, including the
acquisition of Fidelity Acceptance in 1997. Fidelity Acceptance, as a subprime
automobile lender, originates loans and purchases sales finance contracts
secured by automobiles which generally have higher charge-off rates.
Non-interest Income Non-interest income is a significant source of the
corporation's revenue, representing 42.1 percent of tax-equivalent net revenues
in 1997, compared with 40.7 percent in 1996 and 35.9 percent in 1995.
Consolidated non-interest income was $2,962.3 million in 1997, an increase of
15.5 percent over $2,564.6 million recorded in 1996. Non-interest income
includes net investment securities gains of $37.9 million in 1997 and losses of
$46.8 million in 1996. Proceeds from sales of securities in 1996 provided
opportunities for the corporation to reinvest at more attractive yields.
Contributing to the 1997 increase in non-interest income was growth in fee-based
revenues, including trust, mortgage banking, insurance and other fees and
service charges.
The increases in trust fees and service charges reflect overall increases in
business activity, including acquisitions, and marketing efforts. Mortgage
banking revenues increased $54.0 million from 1996 due to increased levels of
origination and other closing fees resulting from higher mortgage loan funding
levels. Servicing fees, essentially unchanged from 1996, are expected to
increase as the servicing portfolio grows through retention of servicing and
through acquisitions. Mortgage banking revenue derived from sales of servicing
and future sales of servicing rights are largely dependent upon portfolio
characteristics and prevailing market conditions. The increase in insurance fees
is attributed to a higher volume of commissions on sales of crop and credit life
insurance.
The corporation's trading revenue totaled $78.6 million in 1997, compared with
$35.3 million in 1996 and $39.9 million in 1995. Trading activities are
conducted within the risk limits established by the Asset and Liability
Management Committee to satisfy the investment and risk management needs of
customers and those of the corporation. The table in Note 14 to the consolidated
financial statements on page 57 provides a summary of the corporation's trading
revenues in the principal markets in which the corporation participates.
Consolidated non-interest income increased 38.8 percent in 1996 from $1,848.2
million in 1995, primarily due to higher trust fees, service charges on deposit
accounts, insurance, mortgage banking revenues, net venture capital gains and
gains on the disposition of credit card receivables held for sale. The increases
in various fee-based services related to growth in consumer-related lending
activities and other marketing initiatives.
Non-interest Expenses Consolidated non-interest expenses increased 8.1 percent
in 1997 to $4,421.3 million. The change in non-interest expenses reflects
increased operating expenses associated with acquisitions and certain one-time
acquisition charges related to completed 1997 transactions.
Personnel expenses increased $263.8 million in 1997, primarily attributable to
salaries expense. Changes in personnel expenses by business segment for 1997
included an increase of 14.8 percent for the Banking Group, an increase of 6.0
percent for Mortgage Banking, and an increase of 16.2 percent for Norwest
Financial. Normalized for acquisitions, personnel expenses increased 7.6 percent
for the Banking Group and 10.7 percent for Norwest Financial and remained
essentially unchanged for Mortgage Banking.
Of the 1997 increases of $9.9 million in communication expenses, $13.7 million
in equipment rentals, depreciation and maintenance, and $10.0 million in net
occupancy expenses, the Banking Group contributed $9.8 million, $13.8 million
and $10.2 million, respectively, and Norwest Financial contributed $7.3 million,
$6.2 million and $5.9 million, respectively; Mortgage Banking incurred lower
expenses of $7.2 million, $6.3 million and $6.1 million, respectively, in each
expense category. Increases in the Banking Group and Norwest Financial are
attributable in part to acquisition activity; Mortgage Banking decreases are
primarily related to the consolidation of certain operations acquired from
Prudential Home Mortgage.
Consolidated non-interest expenses increased 20.9 percent in 1996 to $4,089.7
million from 1995, reflecting increased operating expenses associated with
acquisitions and certain one-time acquisition charges related to completed 1996
transactions, the non-recurring charge related to recapitalization of SAIF and
writedowns of goodwill and other intangibles of $151.0 million before taxes,
partially offset by reduced pension benefits expense of $53.2 million due to
changes in pension assumptions.
Changes in personnel expenses by business segment for 1996 include an increase
of 14.0 percent for the Banking Group, an increase of 37.5 percent for Mortgage
Banking, and an increase of 15.9 percent for Norwest Financial. Normalized for
acquisitions, personnel expenses increased 8.0 percent for the Banking Group,
23.6 percent for Mortgage Banking and 10.2 percent for Norwest Financial.
20
Of the 1996 increases of $60.2 million in communication expenses, $55.0 million
in equipment rentals, depreciation and maintenance, and $61.9 million in net
occupancy expenses, the Banking Group contributed $33.3 million, $36.9 million
and $40.8 million, respectively, and Mortgage Banking contributed $20.7 million,
$15.8 million and $16.1 million, respectively. In addition to the Prudential
Home Mortgage acquisition, increases in Mortgage Banking reflect higher levels
of origination and servicing volume.
Income Taxes The corporation's income tax planning is based upon the goal of
maximizing long-term, after-tax profitability. The effective income tax rate was
34.1 percent in 1997, compared with 35.2 percent in 1996 and 32.8 percent in
1995. For more information on income taxes, see Note 12 to the consolidated
financial statements on page 54.
CONSOLIDATED BALANCE SHEET ANALYSIS
Earning Assets At December 31, 1997, earning assets were $75.0 billion,
compared with $68.2 billion at December 31, 1996. This increase was primarily
due to a $1.8 billion increase in total investment securities, a $3.1 billion
increase in loans and leases and a $2.5 billion increase in mortgages held for
sale.
Average earning assets were $71.5 billion in 1997, an increase of 7.0 percent
over 1996. This increase is primarily due to a 5.7 percent increase in average
loans and leases and a 13.8 percent increase in average total investment
securities.
Leverage, the ratio of average assets to average total stockholders' equity, was
12.7 times during 1997, compared with 13.5 times during 1996. The change from
1996 is due to a 15.6 percent increase in average stockholders' equity,
partially offset by an 8.0 percent increase in average assets.
In Note 18 to the consolidated financial statements beginning on page 65, the
corporation has disclosed the estimated fair values of all on- and off-balance
sheet financial instruments and certain non-financial instruments in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments." At December 31, 1997, the excess of fair
value of net financial instruments over the carrying value of such instruments
was $993.5 million, compared with $489.5 million at December 31, 1996.
Credit Risk Management Credit risk management includes pricing loans to cover
anticipated future credit losses, funding and servicing costs and to allow for a
profit margin. Loans and leases by type appear in Note 5 to the consolidated
financial statements on page 42. The corporation manages exposure to credit risk
through loan portfolio diversification by customer, product, industry and
geography in order to minimize concentrations in any single sector. The
corporation's credit risk management policies and activities as well as the
geographical diversification of the corporation's Banking Group (including
Norwest Card Services), Mortgage Banking, and Norwest Financial help mitigate
the credit risk in their respective portfolios. The corporation's Banking Group
operates in 16 states, largely in the Midwest, Southwest, and Western/Rocky
Mountain regions of the country. Distribution of average loans by region in 1997
was approximately 50.1 percent in the Midwest, 28.0 percent in the Western/Rocky
Mountain region and 21.9 percent in the Southwest region. Norwest Mortgage,
Norwest Financial and Norwest Card Services operate on a nationwide basis.
Mortgage Banking includes the largest retail mortgage origination network and
the largest servicing portfolio in the United States. The five states with the
highest originations in 1997 are: California, $10.1 billion; Minnesota, $3.0
billion; Texas, $2.7 billion; Illinois, $2.6 billion; and New Jersey, $2.5
billion. The originations in these five states comprise approximately 37.9
percent of total originations in 1997. The five states representing the highest
level of servicing include: California, $39.8 billion; Minnesota, $11.8 billion;
Texas, $10.3 billion; New York, $9.6 billion; and New Jersey, $8.9 billion.
These five states comprise approximately 39.0 percent of the total servicing
portfolio at December 31, 1997.
Norwest Financial engages in consumer finance activities in 48 states, all 10
Canadian provinces, the Caribbean, Central America, Saipan and Guam. The five
states with the largest consumer finance receivables are: California, $696.8
million; Illinois, $291.7 million; Ohio, $253.9 million; Florida, $237.6
million; and Texas, $224.5 million. Consumer finance receivables in Puerto Rico
and Canada totaled $1.4 billion and $617.8 million, respectively, at December
31, 1997. The consumer finance receivables in the five states listed above,
Puerto Rico and Canada comprise approximately 44.0 percent of total consumer
finance receivables at December 31, 1997.
With respect to credit card receivables, approximately 63.4 percent of the
portfolio is within the corporation's 16-state banking region. Minnesota
represents approximately 12.7 percent of the total outstanding credit card
portfolio. No other state accounts for more than 10 percent of the portfolio.
21
In general, the U.S. economy continues to experience moderate growth, although
consumer-related loan delinquencies and charge-offs have increased moderately
over recent years. Consumer past due delinquencies at December 31 were as
follows:
1997 1996 1995
---- ---- ----
Banking Group 30 days past due....................... 2.02% 2.05 1.75
Norwest Financial 60 days past due................... 3.58 3.89 3.41
Credit Card 30 days past due......................... 3.92 4.09 3.88
See Provision for Credit Losses on page 19 for a further discussion of consumer-
related net charge-offs. The average consumer installment loan made during 1997
at Norwest Financial was approximately $3,000 while sales finance contracts
purchased averaged approximately $1,600. This compares with $2,700 and $1,100,
respectively, in 1996. The average credit card receivable balance at Norwest
Card Services was $1,428 in 1997, compared with $1,465 in 1996.
The corporation is not aware of any loans classified for regulatory purposes at
December 31, 1997, that are expected to have a material impact on the
corporation's future operating results, liquidity or capital resources. The
corporation is not aware of any material credits about which there is serious
doubt as to the ability of borrowers to comply with the loan repayment terms.
There are no material commitments to lend additional funds to customers whose
loans were classified as non-accrual or restructured at December 31, 1997.
Allowance for Credit Losses At December 31, 1997, the allowance for credit
losses was $1,233.9 million, or 2.90 percent of loans and leases outstanding,
compared with $1,040.8 million, or 2.64 percent, at December 31, 1996. The ratio
of the allowance for credit losses to the total non-performing assets and 90-day
past due loans and leases was 322.7 percent at December 31, 1997, compared with
335.0 percent at December 31, 1996.
Although it is impossible for any lender to predict future credit losses with
complete accuracy, management monitors the allowance for credit losses with the
intent to provide for all losses that can reasonably be anticipated based on
current conditions. The corporation maintains the allowance for credit losses as
a general allowance available to cover future credit losses within the entire
loan and lease portfolio and other credit-related risks. However, management has
prepared an allocation of the allowance based on its views of risk
characteristics of the portfolio. This allocation of the allowance for credit
losses does not represent the total amount available for actual future credit
losses in any single category, nor does it prohibit future credit losses from
being absorbed by portions of the allowance allocated to other categories or by
the unallocated portion. The table on page 76 presents the allocation of the
allowance for credit losses to major categories of loans.
Non-performing Assets and Past Due Loans and Leases The table on page 23
presents data on the corporation's non-performing assets and 90-day past due
loans and leases. Generally, the accrual of interest on a loan or lease in the
Banking Group is suspended when the credit becomes 90 days past due unless fully
secured and in the process of collection. A restructured loan is generally a
loan that is accruing interest, but on which concessions in terms have been made
as a result of deterioration in the borrower's financial condition. Under the
corporation's credit policies and practices, all non-accrual and restructured
commercial, agricultural, construction, and commercial real estate loans are
included in impaired loans. Loan impairment is measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the observable market price of the loan or
the fair value of the collateral if the loan is collateral-dependent.
Non-performing assets, including non-accrual, restructured and other real estate
owned, and 90-day past due loans and leases totaled $382.3 million, or 0.4
percent of total assets, at December 31, 1997, compared with $310.7 million, or
0.4 percent of total assets, at December 31, 1996. Total 90-day past due loans
and leases rose $43.1 million from the end of 1996. Non-performing loans
increased by $36.4 million from December 31, 1996 because of acquisitions.
22
Norwest Corporation and Subsidiaries
Non-performing Assets and 90-day Past Due Loans and Leases
In millions, except per share amounts 1997 1996 1995 1994 1993 1992
------ ----- ----- ----- ----- -----
At December 31,
- ---------------
NON-ACCRUAL LOANS AND LEASES............................................ $178.1 156.5 166.9 128.5 195.7 257.6
RESTRUCTURED LOANS AND LEASES........................................... 0.1 0.2 2.0 1.8 10.3 5.4
------ ----- ----- ----- ----- -----
Total non-accrual and restructured loans and leases*................... 178.2 156.7 168.9 130.3 206.0 263.0
OTHER REAL ESTATE OWNED................................................. 50.3 43.3 37.1 29.6 63.0 113.7
------ ----- ----- ----- ----- -----
Total non-performing assets............................................ 228.5 200.0 206.0 159.9 269.0 376.7
LOANS AND LEASES PAST DUE 90-DAYS OR MORE**............................. 153.8 110.7 91.9 58.4 50.8 51.9
------ ----- ----- ----- ----- -----
Total non-performing assets and 90-day past due loans and leases....... $382.3 310.7 297.9 218.3 319.8 428.6
====== ===== ===== ===== ===== =====
Interest income as originally contracted on non-accrual and restructured
loans and leases....................................................... $ 20.6 25.1 15.3 15.4 19.4 26.5
Interest income recognized on non-accrual and restructured
loans and leases....................................................... (4.4) (7.3) (3.6) (3.1) (5.5) (8.1)
------ ----- ----- ----- ----- -----
Reduction of interest income due to non-accrual and restructured
loans and leases....................................................... $ 16.2 17.8 11.7 12.3 13.9 18.4
====== ===== ===== ===== ===== =====
Reduction in basic earnings per share due to non-accrual
and restructured loans and leases...................................... $ .01 .02 .01 .01 .01 .02
* Total impaired loans included in total non-accrual and restructured loans and
leases amounted to $89.5 million, $94.2 million, $102.1 million and $98.6
million at December 31, 1997, 1996, 1995 and 1994, respectively.
** Excludes non-accrual and restructured loans and leases.
Mortgage Servicing Rights and Other Assets At December 31, 1997, mortgage
servicing rights totaled $2.8 billion, an increase of $0.1 billion from year-end
1996. The increase in mortgage servicing rights is due to higher levels of
originations. Other assets increased slightly due to the timing of receivables
associated with sales of securities and increases in mortgage-related
receivables.
Effective January 1, 1997, the corporation adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125 sets
forth the criteria for determining whether a transfer of financial assets should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
FAS 125 requires that after a transfer of financial assets, a company must
recognize the financial and servicing assets controlled and liabilities
incurred, and derecognize financial assets and liabilities in which control is
surrendered or debt is extinguished. FAS 125 also eliminates the distinction
between normal and excess servicing to the extent that such fees do not exceed
the rate specified in the servicing contract. Application of FAS 125 for certain
repurchase agreements, dollar-rolls, securities lending and similar transactions
is effective for 1998. The adoption of FAS 125 has not had a material effect on
the corporation's consolidated financial statements.
23
FUNDING SOURCES
Interest-bearing Liabilities At December 31, 1997, interest-bearing liabilities
totaled $61.5 billion, an increase of $5.0 billion over December 31, 1996. The
increase was principally due to a $3.4 billion increase in interest-bearing
deposits and a $2.0 billion increase in short-term borrowings.
Average interest-bearing liabilities were $58.2 billion in 1997, compared with
$56.0 billion in 1996, primarily due to an 11.2 percent increase in average
interest-bearing deposits, partially offset by an 8.8 percent decrease in long-
term debt. Increases in interest-bearing deposits are principally from
acquisitions.
Core Deposits In the corporation's banking subsidiaries, demand deposits,
regular savings and NOW accounts, money market checking and savings accounts and
consumer savings certificates provide a stable source of low-cost funding. These
funds accounted for approximately 60 percent of the corporation's total funding
sources during 1997 and approximately 58 percent in 1996. This is a high level
of core deposits by industry standards. In the corporation's Banking Group,
where these funds are utilized, average core deposits accounted for
approximately 76 percent of total funding sources during 1997, compared with 73
percent in 1996.
Purchased Deposits In addition to core deposits, purchased deposits are another
source of funding for the corporation's banking subsidiaries. Purchased deposits
include certificates of deposit with denominations of more than $100,000 and
foreign time deposits. Purchased deposits represented approximately 5 percent
and 4 percent of the corporation's total funding sources in 1997 and 1996,
respectively. There were no brokered certificates of deposit at December 31,
1997 and 1996.
Short-term Borrowings Short-term borrowings include federal funds purchased,
securities sold under agreements to repurchase, master note agreements,
privately negotiated financing agreements and commercial paper issued by the
corporation and Norwest Financial. Commercial paper is used by the corporation
to fund the short-term needs of its subsidiaries, consisting primarily of
funding of the inventory of mortgages held for sale which are typically held for
30 to 60 days. Norwest Financial used funds generated through its own commercial
paper sales program to fund approximately 29 percent of its average earning
assets in 1997, compared with 30 percent in 1996.
The commercial paper/short-term debt of the corporation and Norwest Financial,
Inc. are currently rated TBW-1 by Thomson BankWatch, P-1 by Moody's, A1+ by
Standard & Poor's, Duff-1+ by Duff & Phelps and F-1+ by Fitch IBCA, Inc. On
average, total short-term borrowings represented approximately 10.4 percent of
the corporation's total funding sources during 1997 and approximately 11.6
percent during 1996.
Long-term Debt Long-term debt represents an important funding source for the
corporation and for Norwest Financial, Inc. Total long-term debt represented
approximately 15.8 percent of the corporation's consolidated average funding
sources during 1997, compared with approximately 18.5 percent in 1996. The
corporation utilizes long-term debt primarily to meet the long-term funding
requirements of its subsidiaries, and had outstandings of $5,804.9 million as of
December 31, 1997, compared with $6,384.0 million as of December 31, 1996. In
addition, 22 subsidiaries are members of the Federal Home Loan Bank, allowing
them to receive long-term advances secured by certain loans and investment
securities. As of December 31, 1997, these Banking Group subsidiaries had
advances outstanding totaling $1,702.0 million, a decrease of $825.2 million
from December 31, 1996. Long-term debt also plays a significant role at Norwest
Financial, Inc., which uses this source of financing to fund approximately 50
percent of its average earning assets. At December 31, 1997, Norwest Financial,
Inc.'s long-term debt outstanding was $5,221.4 million. Note 9 to the
consolidated financial statements on page 45 presents the corporation's
outstanding consolidated long-term debt as of December 31, 1997 and 1996.
Fitch IBCA, Inc. has assigned its highest individual rating of A to the
corporation. Both the corporation and Norwest Financial, Inc. maintain an issuer
rating of A from Thomson BankWatch. The corporation's senior debt is currently
rated AA+ by Thomson BankWatch, Fitch IBCA, Inc. and Duff & Phelps, AA- by
Standard & Poor's and Aa3 by Moody's. Norwest Financial, Inc.'s senior debt is
currently rated AA+ by Thomson BankWatch and Fitch IBCA, Inc., AA by Duff &
Phelps, AA- by Standard & Poor's and Aa3 by Moody's.
24
INTEREST RATE SENSITIVITY AND
LIQUIDITY MANAGEMENT
Asset and Liability Management The goal of the asset and liability management
process is to manage the structure of the balance sheet to provide the maximum
level of net interest income while maintaining acceptable levels of interest
sensitivity risk (as defined below) and liquidity. The focal point of this
process is the corporate Asset and Liability Management Committee (ALCO). This
committee forms and monitors policies governing investments, funding sources,
off-balance sheet commitments, overall interest sensitivity risk and liquidity.
These policies form the framework for management of the asset and liability
process at the corporate and affiliate levels. The corporation's interest
sensitivity position is managed as a function of balance sheet trends, asset
opportunities and interest rate expectations, and the corporation is normally
well within policy risk limits at any given time.
Definition of Interest Sensitivity Risk Interest sensitivity risk is the risk
that future changes in interest rates will reduce net interest income or the net
market value of the corporation's balance sheet. Two basic ways of defining
interest rate risk in the financial services industry are commonly referred to
as the accounting perspective and the economic perspective. The corporation
draws upon aspects of each perspective to provide a more complete view of
interest rate risk than would be provided by either perspective alone.
The accounting perspective focuses on the risk to reported net income over a
particular time frame. Differences in the timing of interest rate repricing
(repricing or "gap" risk) and changing market rate relationships (basis risk)
determine the exposure of net income to changes in interest rates.
The economic perspective focuses on the risk to the market value of the
corporation's balance sheet, the net of which is referred to as the market value
of balance sheet equity. The sensitivity of the market value of balance sheet
equity to changes in interest rates is an indicator of the level of interest
rate risk inherent in an institution's current position and an indicator of
longer horizon earnings trends. Assessing interest rate risk from the economic
perspective focuses on the risk to net worth arising from all repricing
mismatches (gaps) across the full maturity spectrum.
Measurement of Interest Rate Risk Measurement of interest rate risk from the
accounting perspective has traditionally taken the form of the gap report, which
represents the difference between assets and liabilities that reprice in given
time periods. While providing a rough measure of rate risk, the gap report
provides only a static (i.e., point-in-time) measurement, and it does not
capture basis risk or risks that vary either asymmetrically or non-
proportionately with rate movements.
The corporation uses a simulation model as its primary method of measuring
earnings risk. The simulation model, because of its dynamic nature, can capture
the effects of future balance sheet trends, different patterns of rate
movements, and changing relationships between rates (basis risk). In addition,
it can capture the effects of embedded option risk by taking into account the
effects of interest rate caps and floors, and varying the level of prepayment
rates on assets as a function of interest rates. The simulation model is used to
determine the one and three year gap levels which correspond to the limits
within which the corporation has placed earnings at risk to interest rate
movements.
Measurement of interest rate risk from the economic perspective is accomplished
with a market valuation model. The market value of each asset and liability is
calculated by computing the present value of all cash flows generated. In each
case the cash flows are discounted by a market interest rate chosen to reflect
as closely as possible the characteristics of the given asset or liability.
Management of Interest Rate Risk As indicated above, the primary measure of
interest rate risk is the simulation of net income under different future rate
environments. The model was used to measure the impact on after-tax net income,
relative to a base case scenario, of rates increasing or decreasing gradually
100 basis points over the next 12 months. The yield curve is assumed to flatten
slightly as rates increase and to steepen as rates decrease. Embedded options
are captured by including the effects of caps and floors, and by varying
prepayment rates on assets as a function of interest rates. The effects of
financial derivatives which are used to hedge balance sheet items are also
included. Rate sensitivity of non-maturity core deposits is based on their
measured historical sensitivity to market interest rates.
The resulting model simulations show that a 100 basis point increase in rates
will result in a negative variance in net income of $18 million relative to the
base case over the next 12 months; while a decrease of 100 basis points will
result in a positive variance of $6 million. Under neither rate scenario would
net income be affected by impairment of capitalized mortgage servicing rights.
25
CHANGES IN INTEREST SENSITIVITY The table below presents the corporation's
interest sensitivity gaps for December 1997. The cumulative gap within one year
was $(4,807) million, or (5.6) percent of assets. This compares with a one year
gap of $(1,197) million, or (1.5) percent of assets, in December 1996. The
cumulative gap within three years was $(1,411) million, or (1.6) percent of
assets, in December 1997, compared to $1,025 million, or 1.3 percent of assets,
in December 1996. The movement of the gaps in the negative direction was due to
the addition of fixed rate investments and amortizing interest rate swaps in the
first half of the year, as well as growth in loans in the consumer finance
subsidiary. These changes were partly offset by growth in non-interest bearing
deposits and core retail deposits, which are considered a largely non-sensitive
source of funding. The effect of the current interest sensitivity position is to
make the corporation's earnings slightly vulnerable to rising rates, but in a
position to benefit from falling short-term rates.
Norwest Corporation and Subsidiaries
INTEREST RATE SENSITIVITY
In millions, except ratios
Repricing or Maturing
--------------------------------------------------------
Within 6 Months 1 Year 3 Years After
6 Months - 1 Year - 3 Years - 5 Years 5 Years
---------- --------- --------- --------- ---------
Average Balances For December 1997
- ----------------------------------
Loans and leases............................... $16,772 3,343 6,538 3,424 12,216
Investment securities.......................... 2,062 1,834 3,541 2,735 8,539
Loans held for sale............................ 3,257 -- -- -- --
Mortgages held for sale........................ 7,691 -- -- -- --
Other earning assets........................... 2,389 -- -- -- --
Other assets................................... -- 750 -- -- 10,987
---------- ---------- ---------- --------- --------
Total assets.................................. $32,171 5,927 10,079 6,159 31,742
========== ========== ========== ========= ========
Noninterest-bearing deposits................... $ 4,638 74 306 206 10,521
Interest-bearing deposits...................... 16,187 4,214 4,899 1,170 12,292
Short-term borrowings.......................... 8,608 -- -- -- --
Long-term debt................................. 2,405 799 3,129 2,262 4,008
Other liabilities and equity................... 2 -- 188 -- 10,170
---------- ---------- ---------- --------- --------
Total liabilities and equity.................. $31,840 5,087 8,522 3,638 36,991
========== ========== ========== ========= ========
Swaps and options.............................. $(6,632) 654 1,839 1,396 2,743
Gap*........................................... (6,301) 1,494 3,396 3,917 (2,506)
Cumulative gap................................. (6,301) (4,807) (1,411) 2,506 --
Gap as a percent of total assets............... (7.3)% (5.6) (1.6) 2.9 --
*[assets - (liabilities + equity) + swaps and options] The gap includes the
effect of off-balance sheet instruments on the corporation's interest
sensitivity.
In addition to adjusting the pricing and levels of assets and liabilities, the
corporation uses off-balance sheet derivative financial instruments to manage
interest rate risk. The corporation primarily enters into interest rate swaps,
interest rate caps and floors, futures contracts and options as part of its
overall risk management activities. Certain of these derivative financial
instruments synthetically change the repricing or other characteristics of
underlying assets and liabilities hedged. The corporation principally uses
interest rate swaps to hedge certain fixed-rate debt and certain deposit
liabilities and to convert these funding sources to floating rates. Interest
rate floors, futures contracts and options on futures contracts are principally
used to hedge the corporation's portfolio of mortgage servicing rights. The
floors provide for the receipt of payments when interest rates are below
predetermined interest rate levels. The cash flows on the floors and futures
contracts are used, as appropriate, to offset lost future servicing revenue
related to increased levels of prepayments associated with lower interest rates.
In Notes 1, 9 and 15 to the consolidated financial statements on pages 36, 45
and 57, respectively, the corporation has disclosed additional information with
respect to its use of derivative financial instruments.
The corporation's net cash flows from off-balance sheet derivative financial
instruments used to manage interest rate risk added approximately $81.9 million
to net interest income in 1997, compared with $56.9 million in 1996 and $7.1
million in 1995. This resulted in an impact on net interest margin of 11 basis
points in 1997, compared with nine basis points in 1996 and one basis point in
1995. Based on interest rate levels at December 31, 1997, total estimated future
cash flows related to the corporation's derivative financial instruments,
including interest rate swaps and floors hedging capitalized mortgage
26
servicing rights, are expected to approximate $207 million in 1998, $114 million
in 1999, $67 million in 2000, $44 million in 2001, $17 million in 2002, and $27
million thereafter.
Liquidity Management Liquidity management involves planning to meet funding
needs and cash flow requirements of customers and the corporation at a
reasonable cost, and is governed by policies formulated and monitored by ALCO.
Each affiliate is responsible for managing its own liquidity position within
overall guidelines, which consider the marketability of assets, the sources and
stability of funding, and the level of unfunded commitments.
The corporation has a significant liquidity reserve in its investment securities
portfolio, as approximately 81 percent of the $18.7 billion portfolio consists
of highly marketable U.S. Treasury or federal agency securities. Several other
factors provide a favorable liquidity position for the corporation compared with
most large bank holding companies, including the large amount of funding that
comes from consumer deposits, which are a more stable source of funding than
purchased funds.
Another source of asset liquidity is the ability to securitize assets such as
automobile and mortgage loans. Through public offerings, affiliates of the
corporation securitized $5.8 billion in mortgage loans in 1997; and $1.1 billion
in automobile loans and $2.7 billion in mortgage loans in 1996.
The corporation also filed shelf registration statements in July 1996 which
permit the corporation to issue up to $5 billion and $2 billion of debt
securities, respectively, in domestic and international money and capital
markets. As of December 31, 1997, the corporation has issued $700 million of
securities under such shelf registrations.
CAPITAL MANAGEMENT
The corporation believes that a strong capital position is vital to continued
profitability and to promote depositor and investor confidence. The
corporation's consolidated capital levels are a result of its capital policy,
which establishes guidelines for each subsidiary based on industry standards,
regulatory requirements, perceived risk of the various businesses, and future
growth opportunities. Pursuant to the capital policy, bank affiliates maintain
capital levels above regulatory minimums for Tier 1 capital and total capital
(Tier 1 plus Tier 2) to risk-weighted assets and leverage ratios. The primary
source of equity capital available for the affiliates is earnings, with other
forms of capital available from the corporation as needed. Earnings above levels
required to meet capital policy requirements are paid to the corporation in the
form of dividends and are used to support capital needs of other affiliates, to
pay corporate dividends or to reduce the corporation's borrowings.
Various federal and state statutes and regulations limit the amount of dividends
the subsidiary banks can pay to the corporation without regulatory approval. The
approval of the Office of the Comptroller of the Currency is required for any
dividend by a national bank if the total of all dividends declared by the bank
in any calendar year would exceed the total of its net income for that year
combined with its retained net income for the preceding two calendar years, less
any required transfers to surplus or a fund for the retirement of preferred
stock. The corporation also has state bank subsidiaries that are subject to
state regulations limiting dividends. Under these provisions, the corporation's
national bank subsidiaries and state-chartered bank subsidiaries could have
declared as of December 31, 1997 aggregate dividends of at least $462.9 million
without obtaining prior regulatory approval and without reducing the capital
below minimum regulatory levels. Additionally, the corporation's non-bank
subsidiaries could have declared dividends totaling $978.0 million at December
31, 1997.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as standby letters of credit) is eight
percent. The minimum Tier 1 capital to risk-adjusted assets is four percent.
Through implementation of its capital policies, the corporation has achieved a
strong capital position. The corporation's total capital and Tier 1 capital to
risk-adjusted assets ratios were 11.01 percent and 9.09 percent, respectively,
at December 31, 1997, compared with 10.42 percent and 8.63 percent,
respectively, at December 31, 1996. The Federal Reserve Board also requires bank
holding companies to comply with minimum leverage ratio guidelines. The leverage
ratio is the ratio of a bank holding company's Tier 1 capital to its total
consolidated quarterly average assets, less goodwill and certain other
intangible assets. The guidelines require a minimum leverage ratio of three
percent for bank holding companies that meet certain specified criteria. The
corporation's leverage ratio was 6.63 percent at December 31, 1997, compared
with 6.15 percent at December 31, 1996.
The Federal Deposit Insurance Act requires federal bank regulatory agencies to
take "prompt corrective action" with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements. A depository
institution's treatment for purposes of the prompt corrective action provisions
will depend upon how its capital levels compare to various capital measures and
certain other factors, as established by regulation.
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Federal bank regulatory agencies have adopted regulations that classify insured
depository institutions into one of five capital-based categories. The
regulations use the total capital ratio, the Tier 1 capital ratio and the
leverage ratio as the relevant measures of capital. A depository institution is
(a) "well capitalized" if it has a risk-adjusted total capital ratio of at least
ten percent, a Tier 1 capital ratio of at least six percent and a leverage ratio
of at least five percent and is not subject to any order or written directive to
maintain a specific capital level; (b) "adequately capitalized" if it has a
risk-adjusted total capital ratio of at least eight percent, a Tier 1 capital
ratio of at least four percent and a leverage ratio of at least four percent
(three percent in some cases) and is not well capitalized; (c)
"undercapitalized" if it has a risk-adjusted total capital ratio of less than
eight percent, a Tier 1 capital ratio of less than four percent or a leverage
ratio of less than four percent (three percent in some cases); (d)
"significantly undercapitalized" if it has a risk-adjusted total capital ratio
of less than six percent, a Tier 1 capital ratio of less than three percent or a
leverage ratio of less than three percent; and (e) "critically undercapitalized"
if its tangible equity is less than two percent of total assets. As of December
31, 1997, all of the corporation's insured depository institutions met the
criteria for well capitalized institutions as set forth above.
Common stockholders' equity was $6,834.2 million at December 31, 1997, compared
with $5,875.4 million at December 31, 1996. The corporation's internal capital
growth rate (ICGR) in 1997 was 13.74 percent. The ICGR represents the rate at
which the corporation's average common equity grew as a result of earnings
retained (net income less dividends paid).
Since 1986, the corporation has repurchased common stock in the open market in a
systematic pattern to meet the common stock issuance requirements of the
corporation's Savings Investment Plans, the Long-Term Incentive Compensation
Plan, and other stock issuance requirements other than acquisitions accounted
for as pooling of interests. In November 1997, the corporation's board of
directors authorized additional purchases, upon such terms and conditions as
management approves, of 11,000,000 shares of the corporation's common stock, and
as of December 31, 1997, the remaining total common stock purchase authority was
7,876,000 shares.
During 1997, the corporation repurchased 3,526,000 shares of its common stock
for issuance in conjunction with specific purchase acquisitions that were
consummated during the year. In addition, approximately 13,102,000 shares were
repurchased during 1997 for benefit plans, including shares acquired related to
the vesting of options granted in 1996 under the corporation's Best Practices
PartnerShares plan, and other ongoing needs. During 1996, 7,462,000 shares were
repurchased for acquisition purposes and 10,475,000 shares were repurchased for
benefit plans and other ongoing needs.
All shares of the corporation's 10.24% Cumulative Preferred Stock, in the form
of depositary shares, were redeemed on January 2, 1996. The redemption price for
each depositary share, representing one-q