UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 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 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes ___ No. Common Stock, par value $1 2/3 per share, outstanding at October 31, 1996 370,327,489 shares
PART I. FINANCIAL INFORMATION Item 1. Financial Statements. The following consolidated financial statements of Norwest Corporation and its subsidiaries are included herein: Page 1. Consolidated Balance Sheets - September 30, 1996 and December 31, 1995..................... 3 2. Consolidated Statements of Income - Quarters and Nine Months Ended September 30, 1996 and 1995... 4 3. Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1996 and 1995................ 5 4. Consolidated Statements of Stockholders' Equity - Nine Months Ended September 30, 1996 and 1995................ 6 5. Notes to Unaudited Consolidated Financial Statements........... 8 The financial information for the interim periods is unaudited. In the opinion of management, all adjustments necessary (which are of a normal recurring nature) have been included for a fair presentation of the results of operations. The results of operations for an interim period are not necessarily indicative of the results that may be expected for a full year or any other interim period. 2
Norwest Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) In millions, except shares September 30, December 31, 1996 1995 ASSETS Cash and due from banks ...................... $ 4,242.2 4,320.3 Interest-bearing deposits with banks ......... 26.5 29.4 Federal funds sold and resale agreements ..... 866.8 596.8 Total cash and cash equivalents .......... 5,135.5 4,946.5 Trading account securities ................... 212.2 150.6 Investment securities (fair value $782.5 in 1996 and $795.8 in 1995) ....... 764.4 760.5 Investment and mortgage-backed securities available for sale.......................... 17,867.7 15,243.0 Total investment securities .............. 18,632.1 16,003.5 Loans held for sale .......................... 2,732.5 3,343.9 Mortgages held for sale ...................... 5,162.9 6,514.5 Loans and leases, net of unearned discount.... 40,085.6 36,153.1 Allowance for credit losses .................. (1,033.8) (917.2) Net loans and leases ..................... 39,051.8 35,235.9 Premises and equipment, net .................. 1,183.3 1,034.1 Mortgage servicing rights, net ............... 2,619.6 1,226.7 Interest receivable and other assets ......... 3,697.7 3,678.7 Total assets ............................. $78,427.6 72,134.4 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing ........................ $12,910.6 11,623.9 Interest-bearing ........................... 35,115.2 30,404.9 Total deposits ........................... 48,025.8 42,028.8 Short-term borrowings ........................ 7,993.4 8,527.2 Accrued expenses and other liabilities ....... 3,219.9 2,589.5 Long-term debt ............................... 13,250.1 13,676.8 Total liabilities ........................ 72,489.2 66,822.3 Preferred stock .............................. 257.1 341.2 Unearned ESOP shares ......................... (68.6) (38.9) Total preferred stock .................... 188.5 302.3 Common stock, $1 2/3 par value - authorized 500,000,000 shares: Issued 375,533,625 and 358,332,153 shares in 1996 and 1995, respectively ............ 625.9 597.2 Surplus ...................................... 942.4 734.2 Retained earnings ............................ 4,071.4 3,496.3 Net unrealized gains on securities available for sale ......................... 275.2 327.1 Notes receivable from ESOP ................... (12.4) (13.3) Treasury stock - 5,191,076 and 5,571,696 common shares in 1996 and 1995, respectively (147.0) (125.9) Foreign currency translation ................. (5.6) (5.8) Total common stockholders' equity ........ 5,749.9 5,009.8 Total stockholders' equity ............... 5,938.4 5,312.1 Total liabilities and stockholders' equity ................... $78,427.6 72,134.4 See notes to unaudited consolidated financial statements. 3
Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> In millions, except per common share amounts Quarter Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 <S> <C> <C> <C> <C> INTEREST INCOME ON Loans and leases ............................... $1,100.8 1,028.4 3,195.0 2,898.8 Investment securities .......................... 8.7 21.3 27.6 61.7 Investment and mortgage-backed securities available for sale ............................ 312.0 264.9 871.1 778.3 Loans held for sale ............................ 48.6 44.5 201.8 137.5 Mortgages held for sale ........................ 125.1 107.9 366.8 240.0 Money market investments ....................... 9.6 5.2 27.4 25.2 Trading account securities ..................... 6.3 4.0 20.4 11.8 Total interest income ...................... 1,611.1 1,476.2 4,710.1 4,153.3 INTEREST EXPENSE ON Deposits ....................................... 339.7 296.3 975.9 846.6 Short-term borrowings .......................... 117.8 140.4 345.2 368.8 Long-term debt ................................. 205.9 199.7 634.0 556.2 Total interest expense ..................... 663.4 636.4 1,955.1 1,771.6 Net interest income ...................... 947.7 839.8 2,755.0 2,381.7 Provision for credit losses .................... 105.9 86.5 281.1 216.5 Net interest income after provision for credit losses ............ 841.8 753.3 2,473.9 2,165.2 NON-INTEREST INCOME Trust .......................................... 73.5 63.6 217.7 173.4 Service charges on deposit accounts ............ 84.9 68.9 239.8 195.5 Mortgage banking ............................... 203.5 134.0 596.2 395.5 Data processing ................................ 19.0 19.8 54.6 51.6 Credit card .................................... 27.7 34.0 89.1 97.2 Insurance ...................................... 68.4 53.5 211.4 171.9 Other fees and service charges ................. 69.1 63.5 214.3 164.4 Net investment securities gains ................ - 0.4 - 0.5 Net investment and mortgage-backed securities available for sale losses........... (12.4) (22.3) (56.5) (48.3) Net venture capital gains ...................... 35.7 37.9 167.7 64.3 Trading ........................................ 21.2 16.9 25.2 26.1 Other .......................................... 41.2 13.5 67.0 33.8 Total non-interest income .................. 631.8 483.7 1,826.5 1,325.9 NON-INTEREST EXPENSES Salaries and benefits .......................... 539.0 455.7 1,559.4 1,279.6 Net occupancy .................................. 88.5 66.4 230.4 186.5 Equipment rentals, depreciation and maintenance. 79.2 68.6 233.3 197.9 Business development ........................... 56.8 39.7 166.9 121.3 Communication .................................. 73.3 56.1 209.9 160.0 Data processing ................................ 47.6 36.8 120.6 102.8 Intangible asset amortization .................. 44.0 39.2 116.6 84.3 Other .......................................... 104.0 103.7 349.6 315.0 Total non-interest expenses ................ 1,032.4 866.2 2,986.7 2,447.4 INCOME BEFORE INCOME TAXES ..................... 441.2 370.8 1,313.7 1,043.7 Income tax expense ............................. 152.2 125.6 467.9 347.4 NET INCOME ..................................... $ 289.0 245.2 845.8 696.3 Average common and common equivalent shares .... 374.3 331.8 368.2 324.7 PER COMMON SHARE Net Income Primary ...................................... $ 0.76 0.70 2.26 2.04 Fully diluted ................................ 0.76 0.69 2.26 2.01 Dividends ..................................... 0.27 0.24 0.78 0.66 See notes to unaudited consolidated financial statements. </TABLE> 4 <page Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Nine Months Ended In millions September 30, 1996 1995 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income ............................................................$ 845.8 696.3 Adjustments to reconcile net income to net cash flows from operating activities: Provision for credit losses ....................................... 281.1 216.5 Depreciation and amortization ..................................... 489.7 202.1 Gains on sales of loans, securities and other assets, net.......... (120.8) (24.6) Release of preferred shares to ESOP................................ 30.4 30.5 Purchases of trading account securities ........................... (53,003.0) (66,235.7) Proceeds from sales of trading account securities ................. 52,966.5 66,052.2 Originations of mortgages held for sale ........................... (40,460.5) (23,771.6) Proceeds from sales of mortgages held for sale .................... 44,177.5 20,201.2 Originations of loans held for sale ............................... (954.9) (830.7) Proceeds from sales of loans held for sale ........................ 1,610.4 582.2 Interest receivable ............................................... (29.4) (111.3) Interest payable .................................................. 26.2 107.1 Other assets, net ................................................. (551.5) (1,212.0) Other accrued expenses and liabilities, net ....................... 367.6 582.4 Net cash flows from (used for) operating activities ............. 5,675.1 (3,515.4) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and paydowns of investment securities....... 78.7 129.5 Proceeds from maturities and paydowns of investment and mortgage- backed securities available for sale............................... 2,189.5 1,040.0 Proceeds from sales and calls of investment securities .............. 5.9 61.9 Proceeds from sales and calls of investment and mortgage-backed securities available for sale...................................... 3,296.1 3,590.2 Purchases of investment securities .................................. (300.0) (214.8) Purchases of investment and mortgage-backed securities available for sale........................................................... (6,442.0) (5,203.8) Net change in banking subsidiaries'loans and leases.................. 1,166.5 (1,470.0) Non-bank subsidiaries' loans and leases originated................... (5,062.8) (4,391.7) Principal collected on non-bank subsidiaries' loans and leases....... 3,394.5 4,264.0 Purchases of premises and equipment ................................. (180.6) (156.4) Proceeds from sales of premises, equipment & other real estate owned. 68.1 35.1 Cash paid for acquisitions, net of cash and cash equivalents acquired (2,495.8) (85.0) Divestiture of branches, net of cash and cash equivalents paid....... (23.7) (4.1) Net cash flows used for investing activities....................... (4,305.6) (2,405.1) CASH FLOWS FROM FINANCING ACTIVITIES Deposits, net ....................................................... 622.0 289.9 Short-term borrowings, net .......................................... (655.1) 1,995.9 Long-term debt borrowings ........................................... 2,674.0 4,543.2 Repayments of long-term debt ........................................ (3,272.1) (1,072.5) Issuances of common stock ........................................... 69.7 50.6 Repurchases of common stock ......................................... (209.8) (178.5) Sale of preferred stock held by subsidiary .......................... - 20.0 Repurchases of preferred stock ...................................... (112.7) (0.4) Net decrease in notes receivable from ESOP .......................... 2.3 - Dividends paid ...................................................... (298.8) (246.0) Net cash flows from (used for) financing activities................ (1,180.5) 5,402.2 Net increase (decrease) in cash and cash equivalents .............. 189.0 (518.3) CASH AND CASH EQUIVALENTS Beginning of period ................................................. 4,946.5 4,024.3 End of period .......................................................$ 5,135.5 3,506.0 See notes to unaudited consolidated financial statements. </TABLE> 5
Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> Net Unrealized Gains In (Losses) on millions, Unearned Securities Notes Foreign except for Preferred ESOP Common Sur- Retained Available Receivable Treasury Currency shares Stock Shares Stock plus Earnings for Sale from ESOP Stock Translation Total <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 1994....... $ 526.7 (14.7) 538.5 578.8 2,950.0 (360.4) (13.3) (350.9) (8.3) 3,846.4 Net income............... - - - - 696.3 - - - - 696.3 Dividends on Common stock........... - - - - (212.1) - - - - (212.1) Preferred stock........ - - - - (33.9) - - - - (33.9) Conversion of 1,174,197 preferred shares to 13,604,269 common shares................. (258.8) - 7.1 (7.8) (4.6) - - 264.1 - - Repurchase of 1,784 preferred shares....... (0.4) - - - - - - - - (0.4) Sale of 100,000 preferred shares held by subsidiary..... 20.0 - - - - - - - - 20.0 Issuance of 63,300 preferred shares to ESOP................ 63.3 (65.8) - 2.5 - - - - - - Release of preferred shares to ESOP......... - 31.7 - (1.2) - - - - - 30.5 Issuance of 2,594,010 common shares.......... - - - 119.1 (133.4) - - 72.3 - 58.0 Issuance of 18,900,556 common shares for acquisitions........... - - 25.6 (24.4) 13.8 (0.2) - 95.3 - 110.1 Repurchase of 6,312,559 common shares.......... - - - - - - - (178.5) - (178.5) Change in net unrealized gains (losses) on securities available for sale............... - - - - - 599.3 - - - 599.3 Foreign currency translation............ - - - - - - - - 4.4 4.4 Balance, September 30, 1995 ..... $ 350.8 (48.8) 571.2 667.0 3,276.1 238.7 (13.3) (97.7) (3.9) 4,940.1 (Continued on page 7) </TABLE> 6
Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Continued from page 6) <TABLE> <CAPTION> Net Unrealized Gains In (Losses) on millions, Unearned Securities Notes Foreign except for Preferred ESOP Common Sur- Retained Available Receivable Treasury Currency shares Stock Shares Stock plus Earnings for Sale from ESOP Stock Translation Total <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 1995...... $ 341.2 (38.9) 597.2 734.2 3,496.3 327.1 (13.3) (125.9) (5.8) 5,312.1 Net income.............. - - - - 845.8 - - - - 845.8 Dividends on Common stock.......... - - - - (285.5) - - - - (285.5) Preferred stock....... - - - - (13.3) - - - - (13.3) Conversion of 30,466 preferred shares to 823,914 common shares. (30.4) - - 3.8 - - - 26.6 - - Repurchase of 1,127,125 preferred shares...... (112.7) - - - - - - - - (112.7) Cash payments received on notes receivable from ESOP............. - - - - - - 2.3 - - 2.3 Issuance of 59,000 preferred shares to ESOP.................. 59.0 (61.3) - 2.3 - - - - - - Release of preferred shares to ESOP........ - 31.6 - (1.2) - - - - - 30.4 Issuance of 3,027,483 common shares......... - - - 37.4 (44.2) - - 91.0 - 84.2 Issuance of 19,417,886 common shares for acquisitions.......... - - 28.7 165.9 72.3 (1.5) (1.4) 71.1 - 335.1 Repurchase of 5,687,191 common shares......... - - - - - - - (209.8) - (209.8) Change in net unrealized gains (losses) on securities available for sale.............. - - - - - (50.4) - - - (50.4) Foreign currency translation........... - - - - - - - - 0.2 0.2 Balance, September 30, 1996.... $ 257.1 (68.6) 625.9 942.4 4,071.4 275.2 (12.4) (147.0) (5.6) 5,938.4 See notes to unaudited consolidated financial statements. </TABLE> 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Changes in Accounting Policies Effective January 1, 1996, the corporation adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of," (FAS 121). FAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not fully recoverable. The adoption of FAS 121 has not had a material effect on the corporation's consolidated financial statements. 2. Consolidated Statements of Cash Flows Supplemental disclosures of cash flow information for the nine months ended September 30, include: In millions 1996 1995 Interest...................................... $ 1,928.9 1,664.5 Income taxes.................................. 41.9 442.5 Transfer of loans to other real estate owned.. 35.0 22.7 See Notes 7 and 12 for certain non-cash common and preferred stock transactions. 8
3. Investment and Mortgage-backed Securities The amortized cost and fair value of investment securities at September 30, 1996 were: <TABLE> <CAPTION> In millions Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value <S> <C> <C> <C> <C> Available for sale: U.S. Treasury and federal agencies .. $ 1,517.1 10.7 (5.9) 1,521.9 State, municipal and housing - tax exempt ......................... 938.1 33.5 (6.1) 965.5 Other ............................... 878.6 405.1 (7.9) 1,275.8 Total investment securities available for sale .............. 3,333.8 449.3 (19.9) 3,763.2 Mortgage-backed securities: Federal agencies ................... 13,963.1 144.8 (149.7) 13,958.2 Collateralized mortgage obligations ....................... 145.1 2.3 (1.1) 146.3 Total mortgage-backed securities available for sale .............. 14,108.2 147.1 (150.8) 14,104.5 Total investment and mortgage-backed securities available for sale .................. 17,442.0 596.4 (170.7) 17,867.7 Other securities held for investment.. 764.4 24.9 (6.8) 782.5 Total investment securities ........ $18,206.4 621.3 (177.5) 18,650.2 </TABLE> Interest income on investment securities for the quarters and nine months ended September 30, were: Quarter Nine Months In millions 1996 1995 1996 1995 Available for sale: U.S. Treasury and federal agencies .. $ 22.7 19.1 59.8 53.4 State, municipal and housing - tax exempt ........................ 13.5 1.6 39.3 4.6 Other ............................... 12.2 10.6 35.2 25.3 Total investment securities available for sale .............. 48.4 31.3 134.3 83.3 Mortgage-backed securities: Federal agencies ................... 259.4 231.0 726.9 686.3 Collateralized mortgage obligations ....................... 4.2 2.6 9.9 8.7 Total mortgage-backed securities available for sale .............. 263.6 233.6 736.8 695.0 Total investment and mortgage-backed securities available for sale....... 312.0 264.9 871.1 778.3 Other securities held for investment.. 8.7 21.3 27.6 61.7 Total investment securities......... $ 320.7 286.2 898.7 840.0 Certain investment securities with a total amortized cost of $0.4 million and $5.9 million for the three and nine months ended September 30, 1996, respectively, and $21.2 million and $61.4 million for the three and nine months ended September 30, 1995, respectively, were sold by the corporation due to significant deterioration in the creditworthiness of the related issuers or because such securities were called by the issuers prior to maturity. The sales and calls of investment securities resulted in no gain or loss for the quarter and nine months ended September 30, 1996. The sales and calls of investment securities resulted in net gains of $0.4 million and $0.5 million for the quarter and nine months ended September 30, 1995. 9
4. Loans and Leases The carrying values of loans and leases at September 30, 1996 and December 31,1995 were: In millions September 30, December 31, 1996 1995 Commercial, financial and industrial...... $10,142.9 9,327.3 Agricultural.............................. 1,097.6 1,090.8 Real estate Secured by 1-4 family residential properties............................ 10,330.5 8,592.9 Secured by development properties....... 2,076.1 2,024.0 Secured by construction and land development........................... 885.2 742.0 Secured by owner-occupied properties.... 2,733.1 2,149.9 Consumer ................................. 11,336.2 10,520.7 Credit card .............................. 1,557.6 1,666.1 Lease financing .......................... 779.6 815.7 Foreign Consumer ............................... 740.1 705.2 Commercial ............................. 179.0 196.1 Total loans and leases ............... 41,857.9 37,830.7 Unearned discount ........................ (1,772.3) (1,677.6) Total loans and leases, net of unearned discount..................... $40,085.6 36,153.1 Changes in the allowance for credit losses for the quarters and nine months ended September 30, were: Quarter Nine Months In millions 1996 1995 1996 1995 Balance at beginning of period ....... $1,008.9 854.6 917.2 789.9 Allowance related to assets acquired, net ..................... 18.4 12.3 104.3 69.4 Provision for credit losses ........ 105.9 86.5 281.1 216.5 Credit losses....................... (129.4) (116.7) (358.5) (297.6) Recoveries ......................... 30.0 30.8 89.7 89.3 Net credit losses ................ (99.4) (85.9) (268.8) (208.3) Balance at end of period ............. $1,033.8 867.5 1,033.8 867.5 10
5. Non-performing Assets and 90-day Past Due Loans and Leases Total non-performing assets and 90-day past due loans and leases at September 30, 1996 and 1995 and December 31, 1995 were: In millions September 30, December 31, 1996 1995 1995 Impaired loans Non-accrual ........................... $ 117.4 76.9 100.1 Restructured .......................... 0.6 2.5 2.0 Total impaired loans ................ 118.0 79.4 102.1 Other non-accrual loans and leases....... 66.6 54.0 66.8 Total non-accrual and restructured loans and leases......... 184.6 133.4 168.9 Other real estate owned ................. 46.4 35.3 37.1 Total non-performing assets ........... 231.0 168.7 206.0 Loans and leases past due 90 days or more* 121.9 94.3 91.9 Total non-performing assets and 90-day past due loans and leases ..... $ 352.9 263.0 297.9 * Excludes non-accrual and restructured loans. The average balances of impaired loans for the nine months ended September 30, 1996 and 1995 were $114.4 million and $85.8 million, respectively. The allowance for credit losses related to impaired loans at September 30, 1996 and December 31, 1995 was $51.9 million and $43.3 million, respectively. Impaired loans of $3.3 million and $2.7 million were not subject to a related allowance for credit losses at September 30, 1996 and December 31, 1995, respectively, due to the net realizable value of loan collateral, guarantees and other factors. The effects of total non-accrual and restructured loans on interest income for the quarters and nine months ended September 30, were: Quarter Nine Months In millions 1996 1995 1996 1995 Interest As originally contracted ........... $ 9.8 3.3 20.0 12.2 As recognized ...................... (4.1) (1.1) (6.1) (2.6) Reduction of interest income ..... $ 5.7 2.2 13.9 9.6 6. Long-term Debt During the first nine months of 1996, the corporation issued $1.1 billion in medium-term notes bearing fixed rates of interest ranging from 5.625 percent to 6.875 percent, which mature from April 1999 to August 2006. Certain banking subsidiaries of the corporation received advances from the Federal Home Loan Bank. Advances of $1,470 million were issued bearing interest at one-month LIBOR minus six basis points to one-month LIBOR minus four basis points, which mature from March 1997 to March 2011. Norwest Financial, Inc. issued $100 million of senior medium-term notes bearing interest at a fixed rate of 6.68 percent, which mature in September 1999. 11
7. Stockholders' Equity The table below is a summary of the corporation's preferred and preference stock at September 30, 1996 and December 31, 1995. A detailed description of the corporation's preferred and preference stock is provided in Note 10 to the audited consolidated financial statements included in the corporation's 1995 Annual Report on Form 10-K. In millions, except share amounts <TABLE> <CAPTION> Annual Dividend Shares Outstanding Rate at Amount Outstanding September 30, December 31, September 30, September 30, December 31, 1996 1995 1996 1996 1995 <S> <C> <C> <C> <C> <C> Cumulative Tracking, $200 stated value............... 980,000 980,000 9.30% $196.0 196.0 1996 ESOP Cumulative Convertible, $1,000 stated value...................... 30,951 - 8.50% 31.0 - 1995 ESOP Cumulative Convertible, $1,000 stated value............... 23,190 24,572 10.00% 23.2 24.5 ESOP Cumulative Convertible, $1,000 stated value........ 11,949 12,984 9.00% 11.9 13.0 10.24% Cumulative, $100 stated value.......... - 1,127,125 - - 112.7 Less: Cumulative Tracking shares held by a subsidiary............... (25,000) (25,000) (5.0) (5.0) 1,021,090 2,119,681 257.1 341.2 Unearned ESOP shares......... (68.6) (38.9) Total preferred stock.... $188.5 302.3 </TABLE> On February 26, 1996, the corporation issued 59,000 shares of 1996 ESOP Cumulative Convertible Preferred Stock, $1,000 stated value per share ("1996 ESOP Preferred Stock"), in the stated amount of $59.0 million at a premium of $2.3 million; a corresponding charge of $61.3 million was recorded to unearned ESOP shares. On March 28, 1995, the corporation issued 63,300 shares of 1995 ESOP Cumulative Convertible Preferred Stock, $1,000 stated value per share ("1995 ESOP Preferred Stock"), in the stated amount of $63.3 million at a premium of $2.5 million; a corresponding charge of $65.8 million was recorded to unearned ESOP shares. During the quarter and nine months ended September 30, 1996, 7,817 and 30,466 shares of ESOP preferred stock were converted into 194,419 shares and 823,914 shares of common stock of the corporation, respectively. During the quarter and nine months ended September 30, 1995, 9,623 and 30,522 shares of ESOP preferred stock were converted into 296,091 and 1,073,266 shares of common stock of the corporation, respectively. All shares of the corporation's 10.24% Cumulative Preferred Stock, $100 stated value, in the form of 4,508,500 depositary shares, were called for redemption on January 2, 1996. Each depositary share represented one- quarter of a share of preferred stock. The shares were redeemed in accordance with their terms at the stated value. 12
8. Business Segments The corporation's operations include three primary business segments: banking, mortgage banking and consumer finance. See Note 16 to the audited consolidated financial statements included in the corporation's annual report on Form 10-K for the year ended December 31, 1995 for a detailed description of each business segment. Selected financial information by business segment for the quarters and nine months ended September 30 is included in the following summary: In millions Quarter Nine Months 1996 1995 1996 1995 Revenues:* Banking................. $ 1,417.7 1,285.9 4,172.7 3,658.4 Mortgage Banking........ 378.7 259.2 1,048.9 697.1 Norwest Financial....... 446.5 414.8 1,315.0 1,123.7 Total................. $ 2,242.9 1,959.9 6,536.6 5,479.2 Organizational earnings:* Banking................. $ 189.6 153.0 560.1 440.0 Mortgage Banking........ 31.8 28.0 92.9 75.5 Norwest Financial....... 67.6 64.2 192.8 180.8 Total................. $ 289.0 245.2 845.8 696.3 Total assets: Banking................. $59,261.2 53,431.2 Mortgage Banking........ 10,499.5 9,936.9 Norwest Financial....... 8,666.9 8,043.8 Total................. $78,427.6 71,411.9 * Revenues (interest income plus non-interest income), where applicable, and organizational earnings by business segment are impacted by intercompany revenues and expenses, such as interest on borrowings from the parent company, corporate service fees and allocation of federal income taxes. 13
9. Mortgage Banking Activities Additional information about mortgage banking non-interest income for the quarters and nine months ended September 30, is presented below: Quarter Nine Months In millions 1996 1995 1996 1995 Origination and other closing fees............. $ 79.2 47.9 240.1 129.0 Servicing fees............. 79.9 66.1 207.4 168.2 Net gains on sales of servicing rights......... 1.7 19.1 41.5 73.5 Net gains (losses) on sales of mortgages....... 4.3 (18.6) 1.2 (22.2) Other ..................... 38.4 19.5 106.0 47.0 Total mortgage banking non-interest income.... $203.5 134.0 596.2 395.5 Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The outstanding balances of serviced loans were $176.3 billion and $100.1 billion at September 30, 1996 and 1995, respectively, and $107.4 billion at December 31, 1995. Changes in capitalized mortgage servicing rights for the quarters and nine months ended September 30, were: Quarter Nine Months In millions 1996 1995 1996 1995 Mortgage servicing rights: Balance at beginning of period............. $2,156.9 890.5 1,061.5 550.3 Originations............ 88.9 75.8 272.9 157.1 Purchases............... 46.5 75.4 1,066.4 468.9 Sales................... (3.6) (64.3) (21.0) (156.9) Amortization............ (80.4) (30.8) (171.2) (72.3) Other................... (7.8) - (8.1) (0.5) 2,200.5 946.6 2,200.5 946.6 Less valuation allowance (64.2) (49.3) (64.2) (49.3) Balance at end of period.. 2,136.3 897.3 2,136.3 897.3 Excess servicing rights receivable: Balance at beginning of period............. 409.7 121.2 229.4 98.9 Additions............... 93.9 61.3 299.5 122.4 Sales................... (6.4) (17.7) (6.4) (43.5) Amortization............ (13.9) (7.0) (39.2) (16.2) Other................... - (2.5) - (6.3) Balance at end of period.. 483.3 155.3 483.3 155.3 Mortgage servicing rights, net........... $2,619.6 1,052.6 2,619.6 1,052.6 14
The fair value of capitalized mortgage servicing rights at September 30, 1996 was approximately $3.2 billion, calculated using discount rates ranging from 500 to 700 basis points over the ten-year U.S. Treasury rate. Changes in the valuation allowance for capitalized mortgage servicing rights for the quarters and nine months ended September 30, were: Quarter Nine Months In millions 1996 1995 1996 1995 Balance at beginning of period.............. $ 64.2 48.7 64.2 - Provision for capitalized mortgage servicing rights in excess of fair value.. - 0.6 - 49.3 Balance at end of period.................... $ 64.2 49.3 64.2 49.3 10. Trading Revenues For the quarters and nine months ended September 30, trading revenues were derived from the following activities: Quarter Nine Months In millions 1996 1995 1996 1995 Interest income: Securities............................... $ 6.3 3.3 20.4 8.2 Swaps and other interest rate contracts.. - 0.7 - 3.6 Total interest income.................. 6.3 4.0 20.4 11.8 Non-interest income: Gains(losses) on securities sold......... 10.4 3.9 (4.4) 7.6 Swaps and other interest rate contracts.. (0.1) (2.0) 23.1 1.1 Foreign exchange trading................. 2.1 1.8 6.3 5.7 Options.................................. 8.1 12.6 (1.2) 12.4 Futures.................................. 0.7 0.6 1.4 (0.7) Total non-interest income.............. 21.2 16.9 25.2 26.1 Total trading revenues..................... $ 27.5 20.9 45.6 37.9 11. Derivative Activities The corporation and its subsidiaries, as end-users, utilize various types of derivative products (principally interest rate swaps and interest rate caps and floors) as part of an overall interest rate risk management strategy. See Note 15 to the audited consolidated financial statements included in the corporation's annual report on Form 10-K for the year ended December 31, 1995 for a detailed description of derivative products utilized in end-user activities. Currently, interest rate floors, futures contracts and options on futures contracts are principally being used by the corporation in hedging its portfolio of mortgage servicing rights. The floors provide for the receipt of payments when interest rates are below predetermined interest rate levels. The unrealized gains (losses) on interest rate floors and futures contracts are included, as appropriate, in determining the fair value of the capitalized mortgage servicing rights. 15
For the nine months ended September 30, 1996, end-user derivative activities decreased interest income by $0.6 million and interest expense by $51.6 million, for a total benefit to net interest income of $51.0 million. For the same period in 1995, interest income was decreased by $2.5 million and interest expense was decreased by $3.1 million, for a total benefit to net interest income of $0.6 million. Activity in the notional amounts of end-user derivatives for the nine months ended September 30, 1996 is summarized as follows: <TABLE> <CAPTION> In millions December 31, Amortizations September 30, 1995 Additions & Maturities Terminations 1996 <S> <C> <C> <C> <C> <C> Swaps: Generic receive fixed...... $ 2,816 2,500 (255) - 5,061 Amortizing receive fixed... 1,575 522 (133) - 1,964 Generic pay fixed.......... 330 - (30) - 300 Basis...................... 229 - (200) - 29 Total swaps.............. 4,950 3,022 (618) - 7,354 Interest rate caps and floors................. 7,843 11,000 (6) - 18,837 Futures contracts............ - 11,606 (1,817) (5,399) 4,390 Options on futures contracts. - 16,993 (8,828) (3,365) 4,800 Security options............. - 4,400 (3,400) (200) 800 Total........................ $ 12,793 47,021 (14,669) (8,964) 36,181 </TABLE> Deferred gains and losses on closed end-user derivatives were not material at September 30, 1996 and December 31, 1995. A key assumption in the information which follows is that rates remain constant at September 30, 1996 levels. To the extent that rates change, both the average notional and variable interest rate information may change. 16 <page The following table presents the maturities and weighted average rates for end-user derivatives by type: <TABLE> <CAPTION> Dollars in millions Maturity There- September 30, 1996 1996 1997 1998 1999 2000 after Total <S> <C> <C> <C> <C> <C> <C> <C> Swaps: Generic receive fixed- Notional value.........$ 420 650 650 1,016 225 2,100 5,061 Weighted avg. receive rate......... 7.18% 6.77 6.34 6.81 6.33 6.47 6.61 Weighted avg. pay rate. 5.65% 5.95 5.62 5.56 5.69 5.58 5.59 Amortizing receive fixed- Notional value.........$ 463 1,416 64 21 - - 1,964 Weighted avg. receive rate......... 7.50% 7.49 2.89 2.89 - - 7.30 Weighted avg. pay rate. 5.34% 5.31 5.72 5.75 - - 5.33 Generic pay fixed- Notional value.........$ - - - - - 300 300 Weighted avg. receive rate......... -% - - - - 5.63 5.63 Weighted avg. pay rate. -% - - - - 5.89 5.89 Basis- Notional value.........$ - - 29 - - - 29 Weighted avg. receive rate......... -% - 4.02 - - - 4.02 Weighted avg. pay rate. -% - 3.86 - - - 3.86 Interest rate caps and floors (1): Notional value.........$ 10 - 1,077 2,650 6,350 8,750 18,837 Futures contracts (1): Notional value.........$ 3,615 725 50 - - - 4,390 Options on futures contracts (1): Notional value.........$ 3,760 1,040 - - - - 4,800 Security options (1): Notional value.........$ 800 - - - - - 800 Total notional value.....$ 9,068 3,831 1,870 3,687 6,575 11,150 36,181 Total weighted avg. rates on swaps: Receive rate......... 7.35% 7.27 5.95 6.74 6.33 6.37 6.75 Pay rate............. 5.48% 5.39 5.56 5.57 5.69 5.62 5.53 </TABLE> (1) Average rates are not meaningful for interest rate caps and floors, futures contracts or options. Note: Weighted average variable rates are based on the actual rates as of September 30, 1996. 17
The following table provides the gross gains and gross losses not yet recognized in the consolidated financial statements for open end-user derivatives applicable to certain hedged assets and liabilities: <TABLE> <CAPTION> In millions Balance Sheet Category Loans Mortgage Interest- Long- Investment and Servicing bearing term September 30, 1996 Securities Leases Rights Deposits Debt Total Swaps: <S> <C> <C> <C> <C> <C> <C> Pay variable Unrealized gains......... $ - - - - 37.4 37.4 Unrealized (losses)...... - - (6.6) (23.7) (70.7) (101.0) Pay variable net......... - - (6.6) (23.7) (33.3) (63.6) Pay fixed Unrealized gains......... - 3.6 - 10.2 - 13.8 Basis Unrealized gains......... 0.5 - - - - 0.5 Total unrealized gains..... 0.5 3.6 - 10.2 37.4 51.7 Total unrealized (losses).. - - (6.6) (23.7) (70.7) (101.0) Total net................ $ 0.5 3.6 (6.6) (13.5) (33.3) (49.3) Interest rate caps and floors: Unrealized gains........... $ 1.3 - 10.3 - - 11.6 Unrealized (losses)........ - - (77.7) (0.2) (0.2) (78.1) Total net................ $ 1.3 - (67.4) (0.2) (0.2) (66.5) Futures contracts: Unrealized gains........... $ - 0.3 4.9 - - 5.2 Options on futures contracts: Unrealized gains........... $ - 10.9 7.3 - - 18.2 Unrealized (losses)........ - (0.7) - - - (0.7) Total net................ $ - 10.2 7.3 - - 17.5 Security options: Unrealized gains........... $ - 3.3 - - - 3.3 Unrealized (losses)........ - (0.9) (0.7) - - (1.6) Total net................ $ - 2.4 (0.7) - - 1.7 Grand total unrealized gains......... $ 1.8 18.1 22.5 10.2 37.4 90.0 Grand total unrealized (losses)...... - (1.6) (85.0) (23.9) (70.9) (181.4) Grand total net............ $ 1.8 16.5 (62.5) (13.7) (33.5) (91.4) </TABLE> 18
As a result of interest rate fluctuations, off balance-sheet derivatives have unrealized appreciation or depreciation in market values as compared with their cost. As these derivatives hedge certain assets and liabilities of the corporation, as noted in the table above, there has been offsetting unrealized appreciation and depreciation in the assets and liabilities hedged. The corporation has entered into mandatory and standby forward contracts to reduce interest rate risk on certain mortgage loans held for sale and other commitments. The contracts provide for the delivery of securities at a specified future date, at a specified price or yield. At September 30, 1996, the corporation had forward contracts totaling $14.5 billion, all of which mature within 240 days. Gains and losses on forward contracts are included in the determination of market value of mortgages held for sale. At September 30, 1996, the corporation's trading account portfolio included futures and written options of $318 million and $260 million notional value, respectively, which are valued at market with any gains or losses recognized currently. 12. Business Combinations The corporation regularly explores opportunities for acquisitions of financial institutions and related businesses. Generally, management of the corporation does not make a public announcement about an acquisition opportunity until a definitive agreement has been signed. At September 30, 1996, the corporation had five pending acquisitions with total assets of approximately $2.0 billion, and it is anticipated that cash of $91.1 million and approximately 5.5 million common shares will be issued upon completion of these acquisitions. Pending acquisitions include Central Bancorporation, Inc., a $1.1 billion bank holding company based in Fort Worth, Texas. The pending acquisitions, subject to approval by regulatory agencies, are expected to be completed by the first quarter of 1997 and are not individually significant to the financial statements of the corporation. 19
Transactions completed in the nine months ended September 30, 1996 include: <TABLE> <CAPTION> In millions, except share amounts Common Cash Shares Method of Date Assets Paid Issued Accounting <S> <C> <C> <C> <C> <C> The Bank of Robstown, Robstown, Texas (B)......... January 12 $ 71.4 $ 9.5 - Purchase AMFED Financial, Inc., Reno, Nevada (B)............ January 18 1,518.8 - 6,046,636 Pooling of interests* Irene Bancorporation, Inc., Viborg, South Dakota (B).... January 31 39.7 7.1 - Purchase Canton Bancshares, Inc., Canton, Illinois (B)........ February 15 49.7 - 279,270 Purchase Henrietta Bancshares, Inc., Henrietta, Texas (B)........ March 12 164.0 24.4 - Purchase Victoria Bankshares, Inc., Victoria, Texas (B)......... April 11 1,918.7 - 8,510,801 Pooling of interests* The Prudential Home Mortgage Company, Inc. (M)........... May 7 3,335.6 3,335.6 - Purchase of assets Cardinal Credit Corporation, Lexington, Kentucky (F)..... May 13 34.2 33.6 - Purchase of assets Benson Financial Corporation, San Antonio, Texas (B)...... May 31 463.8 - 2,044,035 Pooling of interests* Regional Bank of Colorado, N.A., Rifle, Colorado (B)... June 1 56.0 - 354,967 Purchase AmeriGroup, Incorporated, Minneapolis, Minnesota (B).. June 4 155.1 - 916,200 Purchase Union Texas Bancorporation, Inc., Laredo, Texas (B)..... June 27 245.0 - 394,979 Purchase B & G Investment Company, San Antonio, Texas (B)...... July 3 71.2 - 270,998 Purchase PriMerit Bank, F.S.B., Las Vegas, Nevada (B)........ July 19 1,577.6 190.7 - Purchase of assets DUMAE Insurance Agency, Inc. Baltic, South Dakota (B).... July 25 0.2 0.2 - Purchase of assets Aman Collection Service, Inc. Aberdeen, South Dakota (F).. August 1 4.1 - 600,000 Pooling of interests* Rapid Finance, Inc., Jacksonville, Mississippi (F) August 19 28.6 28.6 - Purchase of assets National Business Finance, Inc., Denver, Colorado (B)..September 30 8.4 7.5 - Purchase $9,742.1 $3,637.2 19,417,886 </TABLE> * Pooling of interests transactions were not material to the corporation's consolidated financial statements; accordingly, previously reported results have not been restated. (B) - Banking Group; (M) - Mortgage Banking; (F) - Norwest Financial. 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis should be read together with the financial statements submitted under Item 1 of Part I and with Norwest Corporation's 1995 Annual Report on Form 10-K. EARNINGS PERFORMANCE The corporation reported net income of $289.0 million for the quarter ended September 30, 1996, a 17.9 percent increase over the $245.2 million earned in the third quarter of 1995. Fully diluted earnings per share were 76 cents, compared with 69 cents in the third quarter of 1995, an increase of 10.1 percent. Return on realized common equity was 21.0 percent and return on assets was 1.48 percent for the third quarter of 1996, compared with 22.3 percent and 1.43 percent, respectively, in the third quarter of 1995. For the nine months ended September 30, 1996, net income was $845.8 million, or $2.26 per fully diluted common share, an increase of 21.5 percent and 12.4 percent, respectively, over the $696.3 million or $2.01 per fully diluted common share earned in the first nine months of 1995. Return on realized common equity was 21.9 percent and return on assets was 1.49 percent for the first nine months of 1996, compared with 22.4 percent and 1.45 percent for the same period a year ago. In September 1996, legislation was enacted by Congress that imposed a one- time charge on deposits insured by the Savings Association Insurance Fund (SAIF) to recapitalize the SAIF deposit insurance fund for savings and loan associations. In the past, the corporation acquired savings and loan associations which are subject to this charge. In the third quarter of 1995, when the SAIF recapitalization legislation was first introduced in Congress, the corporation included as a charge in its operating results $23.5 million for its share of recapitalization of the SAIF deposit insurance fund. In 1996 the corporation has acquired thrift institutions and recorded a charge of $19.0 million in the third quarter 1996 results for the payments due for these institutions. Excluding the $19.0 million pre-tax charge, net operating earnings were $300.8 million or 79 cents per fully diluted share for the third quarter of 1996, and $857.6 million or $2.29 per fully diluted share for the nine months ended September 30, 1996. On an operating basis, return on realized common equity was 21.9 percent and 22.2 percent, respectively, and return on assets was 1.54 percent and 1.51 percent, respectively, for the three and nine-month periods ended September 30, 1996. ORGANIZATIONAL EARNINGS The organizational earnings of the corporation's primary business segments for the three and nine months ended September 30, 1996 and 1995 are included in Note 8 to the unaudited consolidated financial statements for the quarter ended September 30, 1996 and are discussed in the following paragraphs. Banking Group The Banking Group reported third quarter 1996 earnings of $189.6 million, a 24.0 percent increase over the third quarter 1995 earnings of $153.0 million. For the nine months ended September 30, 1996, earnings increased 27.3 percent to $560.1 million, compared with $440.0 million for the same period in 1995. The increased earnings in the first nine months of 1996 reflected a 15.0 percent increase in tax-equivalent net interest income to $1,909.6 million, due to a 10.8 percent increase in average earning assets and a 22 basis point increase in net interest margin. The Banking Group's 21
provision for credit losses for the nine months ended September 30, 1996 increased $12.9 million to $107.0 million from a year earlier, as average loans and leases rose $2.1 billion, or 7.3 percent, while net charge-offs as a percent of average loans and leases remained essentially unchanged at 0.46 percent. Non-interest income rose $253.0 million to $1,003.4 million for the first nine months of 1996, due primarily to increases in venture capital gains and $33.5 million in gains on sale of credit card receivables. Non-interest expenses of $1,918.4 million for the first nine months of 1996 were $270.3 million higher when compared with the first nine months of 1995, reflecting the previously discussed SAIF assessment charge, writedowns of goodwill and other intangibles and additional operating expenses related to acquired companies, partially offset by reduced pension expense. Mortgage Banking Mortgage Banking earned $31.8 million in the current quarter compared with $28.0 million in the third quarter of 1995. For the first nine months of 1996, Mortgage Banking earned $92.9 million compared with $75.5 million in the same period of 1995. See Note 9 to the unaudited consolidated financial statements for the quarter ended September 30, 1996 for additional information about mortgage banking revenues for the three and nine months ended September 30, 1996 and 1995. The growth in Mortgage Banking earnings reflects the continued growth in mortgage loan fundings and the servicing portfolio, partially offset by a decrease in combined gains on sales of mortgages and servicing rights. Such combined gains totaled $42.7 million in the first nine months of 1996, compared with $51.3 million in the same period a year ago. Mortgage loan originations amounted to $13.2 billion during the third quarter, and totaled $39.8 billion for the first nine months of 1996, compared with $10.7 billion and $23.0 billion, respectively, in the comparable periods in 1995. Increases in volume were attributable in part to the acquisition of certain assets of Prudential Home Mortgage Company, Inc. in May 1996, including $47 billion of its mortgage servicing portfolio. Mortgage Banking capitalized $272.9 million of mortgage servicing rights in the first nine months of 1996, representing 122 basis points of originated mortgage loans, compared with $157.1 million for the first nine months of 1995. Amortization of capitalized mortgage servicing rights, including excess servicing rights, was $210.4 million for the nine months ended September 30, 1996, compared with $88.5 million for the nine months ended September 30, 1995. The servicing portfolio totaled $176.3 billion at September 30, 1996, compared with $107.4 billion at year-end 1995 and currently has a weighted average coupon of 7.77 percent. Norwest Financial Norwest Financial (including Norwest Financial Services, Inc. and Island Finance) reported earnings of $67.6 million in the third quarter of 1996, compared with $64.2 million in the third quarter of 1995, an increase of 5.2 percent. For the first nine months of 1996, Norwest Financial's net income was $192.8 million, up 6.7 percent from the first nine months of 1995. The growth in earnings reflected a 19.1 percent increase in Norwest Financial's tax-equivalent net interest income as average finance receivables grew 18.3 percent from the first nine months of 1995. The increase in net interest income was partially offset by a higher provision for credit losses of $173.1 million, compared with $121.3 million for the first nine months of 1995. Norwest Financial's net charge-offs in the first nine months of 1996 were $164.9 million, or 3.07 percent of average loans, compared with $110.0 million, or 2.43 percent of average loans, in the same period in 1995. The increase in charge-offs was due to higher domestic consumer credit losses as well as to Island Finance. 22
CONSOLIDATED INCOME STATEMENT ANALYSIS Net Interest Income Consolidated tax-equivalent net interest income was $955.6 million in the third quarter of 1996, compared with $848.1 million in the third quarter of 1995, an increase of 12.7 percent. For the first nine months of 1996, tax- equivalent net interest income increased 15.4 percent from the same period in 1995 to $2,778.4 million. The increase in tax-equivalent net interest income over the three and nine months ended September 30, 1995 was primarily due to growth in average earning assets, principally loans and investment securities. Net interest margin, the ratio of annualized tax-equivalent net interest income to average earning assets, was 5.66 percent in the third quarter of 1996, compared with 5.59 percent in the third quarter of 1995. Net interest margin was 5.63 percent for the nine months ended September 30, 1996, up from 5.58 percent for the first nine months of 1995. The following table summarizes changes in tax-equivalent net interest income between the quarters ended September 30 and June 30 and the nine months ended September 30. Changes in Tax-Equivalent Net Interest Income* In millions 3Q 96 3Q 96 9 Mos. 96 from from from 3Q 95 2Q 96 9 Mos. 95 Increase (decrease) due to: Change in earning asset volume ............ $ 94.7 9.6 344.5 Change in volume of interest-free funds ... (2.2) 7.3 (32.6) Change in net return from Interest-free funds ...................... 39.6 (2.8) 168.2 Interest-bearing funds ................... (8.8) 1.0 (20.2) Change in earning asset mix ............... (24.3) 9.6 (81.8) Change in funding mix ..................... 8.5 6.4 (6.4) Change in tax-equivalent net interest income. $107.5 31.1 371.7 * Net interest income is presented on a tax-equivalent basis utilizing a federal incremental tax rate of 35 percent in each period presented. Provision for Credit Losses The corporation provided $105.9 million for credit losses in the third quarter of 1996, compared with $86.5 million in the same period a year ago. Net credit losses totaled $99.4 million and $85.9 million for the three months ended September 30, 1996 and 1995, respectively. As a percentage of average loans and leases, net credit losses were 100 basis points in the third quarter of 1996, compared with 94 basis points in the same period a year ago. For the first nine months of 1996, the provision for credit losses totaled $281.1 million, compared with $216.5 million in the first nine months of 1995. Net credit losses were $268.8 million, or 94 basis points of average loans and leases, for the nine months ended September 30, 1996, compared with $208.3 million, or 80 basis points, for the same period in 1995. 23
The increase in net credit losses for the third quarter and the first nine months of 1996 is principally due to higher levels of charge-offs in regions where Norwest has had acquisitions and to slightly higher consumer credit charge-offs at Norwest Financial. Non-interest Income Consolidated non-interest income was $631.8 million in the third quarter of 1996, an increase of $148.1 million, or 30.6 percent, from the third quarter of 1995, due to increased mortgage banking revenues and a lower level of net investment securities losses. Net investment securities losses of $12.4 million were recorded in the third quarter of 1996, compared with losses of $21.9 million in the third quarter of 1995. For the first nine months of 1996, consolidated non-interest income was up $500.6 million to $1,826.5 million, an increase of 37.8 percent over 1995. The increase was primarily due to increased mortgage banking revenues, gains on the disposition of credit card receivables held for sale and increases in venture capital gains. Net venture capital gains were $35.7 million for the three months and $167.7 million for the nine months ended September 30, 1996, compared with $37.9 million and $64.3 million, respectively, for the same periods in 1995. Sales of venture capital securities generally relate to timing of holdings becoming publicly traded and subsequent market conditions, causing venture capital gains to be unpredictable in nature. Net unrealized appreciation in the venture capital investment portfolio was $256.8 million at September 30, 1996. Mortgage banking revenues in the third quarter of 1996 were $203.5 million, compared with $134.0 million in the third quarter of 1995. For the nine months ended September 30, 1996, mortgage banking revenues were $596.2 million, compared with $395.5 million for the first nine months of 1995. The increases for both the quarter and the first nine months were principally due to increased levels of origination and other closing fees and servicing fees. Mortgage banking revenue derived from sales of servicing rights and future sales of servicing rights are largely dependent upon portfolio characteristics and prevailing market conditions. See Note 9 to the unaudited consolidated financial statements for the quarter ended September 30, 1996 for additional information about mortgage banking revenues for the three and nine months ended September 30, 1996 and 1995. Non-interest Expenses Consolidated non-interest expenses were $1,032.4 million in the third quarter of 1996, compared with $866.2 million in the same period of 1995, an increase of 19.2 percent. In addition to the non-recurring charge related to recapitalization of SAIF, third quarter 1996 results reflect increased operating expenses associated with acquisitions and included one- time acquisition charges of $32.7 million taken in connection with acquisitions closed within the quarter. Third quarter 1996 non-interest expenses also reflect a $13.3 million reduction in salaries and benefits expense due to changes in pension assumptions. For the nine months ended September 30, 1996, non-interest expenses were up $539.3 million to $2,986.7 million, an increase of 22.0 percent over the nine months ended September 30, 1995, and primarily reflect increased operating expenses related to acquisitions, acquisition-related special charges of $49.9 million related to completed 1996 transactions, and writedowns of goodwill and other intangibles of $58.6 million before taxes ($50.6 million after taxes, since $35.7 million of the writedown is not tax deductible) in the second quarter of 1996, partially offset by reduced pension benefits expense of $39.9 million due to the change in pension assumptions. 24
Income Taxes The effective income tax rate for the first nine months of 1996 was 35.6 percent, which reflects the non-deductible intangible writedowns during the second quarter. Excluding the effect of those writedowns, the effective income tax rate was 34.7 percent for the nine months ended September 30, 1996. CONSOLIDATED BALANCE SHEET ANALYSIS At September 30, 1996, earning assets were $67.7 billion, an increase of 7.8 percent from $62.8 billion at December 31, 1995. This increase was primarily due to a 10.9 percent increase in net loans and a 16.4 percent increase in total investment securities. The increase in mortgage servicing rights of $1.4 billion since December 31, 1995, included $0.8 billion from the Prudential acquisition, with the remaining increase due to higher levels of originations. At September 30, 1996, interest-bearing liabilities totaled $56.4 billion, a 7.1 percent increase from $52.6 billion at December 31, 1995. The increase was primarily due to increases in interest-bearing deposits from acquisitions. Credit Quality The major categories of loans and leases are included in Note 4 to the unaudited consolidated financial statements for the quarter ended September 30, 1996. At September 30, 1996, the allowance for credit losses totaled $1,033.8 million, or 2.58 percent of loans and leases outstanding. Comparable amounts were $867.5 million, or 2.37 percent, at September 30, 1995, and $917.2 million, or 2.54 percent, at December 31, 1995. The ratio of the allowance for credit losses to total non-performing assets and 90-day past due loans and leases was 292.9 percent at September 30, 1996, compared with 329.8 percent at September 30, 1995 and 307.9 percent at December 31, 1995. 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 allocation of the allowance for credit losses to major categories of loans at September 30, 1996 and December 31, 1995 was: September 30, December 31, 1996 1995 Commercial .................... $ 224.9 186.4 Consumer ...................... 308.5 276.5 Real estate ................... 163.9 171.8 Foreign ....................... 30.6 27.0 Unallocated ................... 305.9 255.5 Total ...................... $1,033.8 917.2 25
Non-performing assets and 90-day past due loans and leases totaled $352.9 million, or 0.45 percent of total assets, at September 30, 1996, compared with $263.0 million, or 0.37 percent, at September 30, 1995, and $297.9 million, or 0.41 percent, at December 31, 1995. Non-performing loans increased because of acquisitions by $48.7 million and $66.0 million from December 31, 1995 and September 30, 1995, respectively. 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 Banking Group operates in 16 states, largely in the Midwest, Southwest and Rocky Mountain regions of the country. Distribution of average loans by region during the first nine months of 1996 was approximately 59 percent in the North Central Midwest, 13 percent in the South Central Midwest and 28 percent in the Rocky Mountain/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 country. The five states with the highest originations year to date in 1996 are: California $7.6 billion; Minnesota $2.5 billion; Illinois $1.8 billion; Washington $1.8 billion; and Colorado $1.8 billion. The originations in these five states comprise approximately 39 percent of total originations in 1996. The five highest states in servicing include: California $35.2 billion; Minnesota $10.1 billion; Texas $8.5 billion; New York $8.5 billion; and Florida $7.9 billion. These five states comprise approximately 40 percent of the total servicing portfolio at September 30, 1996. Norwest Financial engages in consumer finance activities in 47 states, all 10 Canadian provinces, the Caribbean, Central America and Guam. The five states with the largest consumer finance receivables are: California $456.8 million; Florida $232.5 million; Texas $230.9 million; Illinois $220.0 million; and Ohio $178.9 million. Consumer finance receivables in Puerto Rico and Canada totaled $1.3 billion and $519.3 million, respectively, at September 30, 1996. The consumer finance receivables of Puerto Rico, Canada, and the five largest states listed above comprise approximately 42 percent of total consumer finance receivables at September 30, 1996. With respect to credit card receivables, approximately 61 percent of the portfolio is within the corporation's 16-state banking region. Minnesota and Iowa represent approximately 12 percent and 10 percent of the total outstanding credit card portfolio, respectively. No other state accounts for more than 10 percent of the portfolio. In general, the economy in regions of the U.S. where the corporation primarily conducts operations continues to reflect modest growth. 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. 26 <page Capital and Liquidity Management The corporation's regulatory capital and ratios are summarized as follows: September 30, December 31, 1996 1995 Tier 1 capital......................... $ 4,660 3,994 Tier 1 and Tier 2 capital.............. 5,716 5,012 Total risk adjusted assets............. 54,066 49,255 Tier 1 capital ratio................... 8.62% 8.11 Total capital to risk adjusted assets.. 10.57% 10.18 Leverage ratio......................... 6.12% 5.65 The corporation's Tier 1 capital, total capital to risk-adjusted assets and leverage ratios exceed the regulatory minimums of 4.0 percent, 8.0 percent and 3.0 percent, respectively. The corporation's dividend payout ratio was 35.5 percent for the third quarter of 1996 compared with 34.3 percent for the third quarter of 1995. The corporation filed shelf registration statements in July, 1996 which permit the corporation to issue up to $5 billion and $2 billion of debt securities in domestic and international money and capital markets, respectively. As of September 30, 1996, the corporation has not issued any securities under such shelf registrations. On September 24, 1996, the corporation's board of directors authorized the corporation to repurchase up to 4.5 million shares of the corporation's common stock to be used to meet periodic common stock issuance requirements of the corporation's Dividend Reinvestment Plan, the Savings Investment Plans, the Long-Term Incentive Compensation Plan and other stock issuance requirements other than acquisitions accounted for as pooling of interests. 27
Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES <TABLE> <CAPTION> Quarter Ended September 30, In millions, except ratios 1996 1995 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* Assets <S> <C> <C> <C> <C> <C> <C> Money market investments..... $ 629 $ 9.6 5.97% $ 364 $ 5.2 5.52% Trading account securities... 365 6.3 6.95 212 4.1 7.72 Investment securities U.S. Treasury & federal agencies................. - - - 27 0.3 5.36 State, municipal and housing tax-exempt....... - - - 710 17.9 10.13 Other...................... 864 8.7 4.05 700 8.8 4.90 Total.................... 864 8.7 4.05 1,437 27.0 7.52 Investment securities available for sale U.S. Treasury & federal agencies................. 1,419 22.7 6.36 1,125 19.1 6.89 State, municipal and housing tax-exempt....... 898 19.7 8.97 127 2.2 7.31 Mortgage-backed............ 14,088 263.7 7.45 12,623 233.6 7.44 Other...................... 1,135 12.3 6.12 747 10.7 7.71 Total.................... 17,540 318.4 7.38 14,622 265.6 7.40 Loans held for sale.......... 2,493 48.6 7.77 2,089 44.5 8.46 Mortgages held for sale...... 6,385 125.1 7.84 5,923 107.9 7.29 Loans and leases (net of unearned discount) Commercial................. 12,839 296.4 9.19 10,683 249.8 9.28 Real estate................ 14,225 342.4 9.61 13,390 318.7 9.52 Consumer................... 12,367 463.5 14.96 12,192 461.7 15.09 Total loans and leases... 39,431 1,102.3 11.15 36,265 1,030.2 11.32 Allowance for credit losses (1,034) (869) Net loans and leases..... 38,397 35,396 Total earning assets (before the allowance for credit losses)........... 67,707 1,619.0 9.59 60,912 1,484.5 9.76 Cash and due from banks...... 3,503 3,074 Other assets................. 7,663 5,044 Total assets............... $77,839 $68,161 (Continued on page 29) </TABLE> 28
Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (Continued from page 28) <TABLE> <CAPTION> Quarter Ended September 30, In millions, except ratios 1996 1995 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* Liabilities and Stockholders' Equity <S> <C> <C> <C> <C> <C> <C> Noninterest-bearing deposits. $12,499 $ - -% $10,415 $ - -% Interest-bearing deposits Savings and NOW accounts... 7,634 32.9 1.72 5,017 24.4 1.93 Money market accounts...... 10,910 88.6 3.23 10,495 82.2 3.11 Savings certificates....... 12,696 172.9 5.42 10,940 152.9 5.54 Certificates of deposit and other time........... 2,940 41.3 5.58 1,896 27.1 5.66 Foreign time............... 365 4.0 4.38 673 9.7 5.74 Total interest-bearing deposits............... 34,545 339.7 3.91 29,021 296.3 4.05 Federal funds purchased & repurchase agreements...... 2,647 33.5 5.03 3,966 57.1 5.71 Short-term borrowings........ 6,178 84.3 5.43 5,727 83.3 5.78 Long-term debt............... 13,409 205.9 6.14 12,203 199.7 6.55 Total interest-bearing liabilities............ 56,779 663.4 4.66 50,917 636.4 4.97 Other liabilities............ 2,814 2,062 Preferred stock.............. 188 454 Common stockholders' equity.. 5,559 4,313 Total liabilities and stockholders' equity... $77,839 $68,161 Net interest income (tax-equivalent basis)... $955.6 $ 848.1 Yield spread............... 4.93 4.79 Net interest margin........ 5.66 5.59 Interest-bearing liabilities to earning assets........ 83.86 83.59 </table * Interest income and yields are calculated on a tax-equivalent basis utilizing a federal incremental tax rate of 35% in each period presented. Non-accrual loans and the related negative income effect have been included in the calculation of yields. 29
Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES </TABLE> <TABLE> <CAPTION> Nine Months Ended September 30, In millions, except ratios 1996 1995 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* Assets <S> <C> <C> <C> <C> <C> <C> Money market investments..... $ 659 $ 27.4 5.54% $ 580 $ 25.2 5.81% Trading account securities... 420 20.6 6.58 173 12.1 9.39 Investment securities U.S. Treasury & federal agencies................. - - - 28 1.0 5.00 State, municipal and housing tax-exempt....... - - - 702 53.9 10.24 Other...................... 833 27.6 4.42 643 24.0 4.93 Total.................... 833 27.6 4.42 1,373 78.9 7.66 Investment securities available for sale U.S. Treasury & federal agencies................. 1,255 59.8 6.37 1,058 53.4 6.79 State, municipal and housing tax-exempt....... 872 57.5 9.08 119 6.6 7.37 Mortgage-backed............ 13,319 736.9 7.39 12,387 695.0 7.40 Other...................... 1,093 35.2 6.44 611 25.4 7.34 Total.................... 16,539 889.4 7.36 14,175 780.4 7.35 Loans held for sale.......... 2,966 201.8 9.09 2,148 137.5 8.56 Mortgages held for sale...... 6,629 366.8 7.38 4,146 240.0 7.72 Loans and leases (net of unearned discount) Commercial................. 12,622 863.7 9.14 10,416 721.7 9.26 Real estate................ 13,588 989.9 9.72 13,059 911.8 9.31 Consumer................... 11,961 1,346.3 15.02 11,512 1,270.7 14.74 Total loans and leases... 38,171 3,199.9 11.19 34,987 2,904.2 11.08 Allowance for credit losses (992) (843) Net loans and leases..... 37,179 34,144 Total earning assets (before the allowance for credit losses)........... 66,217 4,733.5 9.60 57,582 4,178.3 9.69 Cash and due from banks...... 3,562 3,101 Other assets................. 6,839 4,281 Total assets............... $75,626 $64,121 (Continued on page 31) </TABLE> 30
Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (Continued from page 30) <TABLE> <CAPTION> Nine Months Ended September 30, In millions, except ratios 1996 1995 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* Liabilities and Stockholders' Equity <S> <S> <S> <C> <C> <C> <C> Noninterest-bearing deposits. $11,866 $ - -% $ 9,626 $ - -% Interest-bearing deposits Savings and NOW accounts... 6,356 83.1 1.75 4,898 74.3 2.03 Money market accounts...... 11,441 260.1 3.04 10,486 247.2 3.15 Savings certificates....... 12,288 502.3 5.46 10,664 427.1 5.35 Certificates of deposit and other time........... 2,741 116.0 5.65 1,744 73.7 5.65 Foreign time............... 403 14.4 4.77 566 24.3 5.74 Total interest-bearing deposits............... 33,229 975.9 3.92 28,358 846.6 3.99 Federal funds purchased & repurchase agreements...... 2,985 112.4 5.03 3,715 161.5 5.81 Short-term borrowings........ 5,708 232.8 5.45 4,590 207.3 6.04 Long-term debt............... 13,791 634.0 6.13 11,303 556.2 6.56 Total interest-bearing liabilities............ 55,713 1,955.1 4.68 47,966 1,771.6 4.93 Other liabilities............ 2,514 2,055 Preferred stock.............. 189 505 Common stockholders' equity.. 5,344 3,969 Total liabilities and stockholders' equity... $75,626 $64,121 Net interest income (tax-equivalent basis)... $2,778.4 $2,406.7 Yield spread............... 4.92 4.76 Net interest margin........ 5.63 5.58 Interest-bearing liabilities to earning assets........ 84.14 83.30 </table * Interest income and yields are calculated on a tax-equivalent basis utilizing a federal incremental tax rate of 35% in each period presented. Non-accrual loans and the related negative income effect have been included in the calculation of yields. 31
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are filed or incorporated by reference in response to Item 601 of Regulation S-K. Exhibit No. Exhibit Page 3(a). Restated Certificate of Incorporation, as amended, incorporated by reference to Exhibit 3(b) to the corporation's Current Report on Form 8-K dated June 28, 1993. Certificate of Amendment of Certificate of Incorporation of the corporation authorizing 4,000,000 shares of Preference Stock, incorporated by reference to Exhibit 3 to the corporation's Current Report on Form 8-K dated July 3, 1995. 3(b). Certificate of Designations of powers, preferences and rights relating to the corporation's ESOP Cumulative Convertible Preferred Stock incorporated by reference to Exhibit 4 to the corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994. 3(c). Certificate of Designations of powers, preferences and rights relating to the corporation's Cumulative Tracking Preferred Stock incorporated by reference to Exhibit 3 to the corporation's Current Report on Form 8-K dated January 9, 1995. 3(d). Certificate of Designations of powers, preferences and rights relating to the corporation's 1995 ESOP Cumulative Convertible Preferred Stock incorporated by reference to Exhibit 4 to the corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 3(e). Certificate Eliminating the Certificate of Designations with respect to the Cumulative Convertible Preferred Stock, Series B, incorporated by reference to Exhibit 3(a) to the corporation's Current Report on Form 8-K dated November 1, 1995. 3(f). Certificate Eliminating the Certificate of Designations with respect to the 10.24% Cumulative Preferred Stock incorporated by reference to Exhibit 3 to the corporation's Current Report on Form 8-K dated February 20, 1996. 3(g). 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. 32
Exhibit No. Exhibit Page 3(h). By-Laws, as amended, incorporated by reference to Exhibit 4(c) to the corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991. 4(a). See 3(a) through 3(h) 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 November 6, 1988 and Certificates of Adjustment pursuant to Section 16 of the Rights Agreement incorporated by reference to Exhibit 3 to the corporation's Form 8 dated July 21, 1989 and Exhibit 4 to the corporation's Form 8-A/A dated June 29, 1993. 4(c). Copies of instruments with respect to long-term debt will be furnished to the Commission upon request. 11. Computation of Earnings Per Share 35 12(a). Computation of Ratio of Earnings to Fixed Charges 37 12(b). Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends 38 (b) Reports on Form 8-K. The corporation filed a Current Report on Form 8-K, dated July 2, 1996, filing certain documents in connection with the offering of Medium-Term Notes, Series J. The corporation filed a Current Report on Form 8-K, dated July 15, 1996, reporting consolidated operating results of the corporation for the quarter ended June 30, 1996. 33
SIGNATURES Pursuant to the requirements 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. NORWEST CORPORATION November 14, 1996 By /s/ Michael A. Graf Senior Vice President and Controller (Chief Accounting Officer) 34
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