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 June 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 July 31, 1996 370,645,028 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 - June 30, 1996 and December 31, 1995.......................... 3 2. Consolidated Statements of Income - Quarters and Six Months Ended June 30, 1996 and 1995......... 4 3. Consolidated Statements of Cash Flows - Six Months Ended June 30, 1996 and 1995...................... 5 4. Consolidated Statements of Stockholders' Equity - Six Months Ended June 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 June 30, December 31, 1996 1995 ASSETS Cash and due from banks ....................... $ 3,890.0 4,320.3 Interest-bearing deposits with banks .......... 34.9 29.4 Federal funds sold and resale agreements ...... 1,054.4 596.8 Total cash and cash equivalents ........... 4,979.3 4,946.5 Trading account securities .................... 397.5 150.6 Investment securities (fair value $825.6 in 1996 and $795.8 in 1995) ........ 809.5 760.5 Investment and mortgage-backed securities available for sale........................... 17,222.3 15,243.0 Total investment securities ............... 18,031.8 16,003.5 Loans held for sale ........................... 2,286.6 3,343.9 Mortgages held for sale ....................... 7,040.0 6,514.5 Loans and leases, net of unearned discount..... 38,652.3 36,153.1 Allowance for credit losses ................... (1,008.9) (917.2) Net loans and leases ...................... 37,643.4 35,235.9 Premises and equipment, net ................... 1,167.4 1,034.1 Mortgage servicing rights, net ................ 2,502.4 1,226.7 Interest receivable and other assets .......... 3,800.9 3,678.7 Total assets .............................. $77,849.3 72,134.4 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing ......................... $12,259.0 11,623.9 Interest-bearing ............................ 34,025.4 30,404.9 Total deposits ............................ 46,284.4 42,028.8 Short-term borrowings ......................... 9,335.9 8,527.2 Accrued expenses and other liabilities ........ 2,806.5 2,589.5 Long-term debt ................................ 13,787.6 13,676.8 Total liabilities ......................... 72,214.4 66,822.3 Preferred stock ............................... 264.9 341.2 Unearned ESOP shares .......................... (76.7) (38.9) Total preferred stock ..................... 188.2 302.3 Common stock, $1 2/3 par value - authorized 500,000,000 shares: Issued 374,933,625 and 358,332,153 shares in 1996 and 1995, respectively ............. 624.9 597.2 Surplus ....................................... 936.8 734.2 Retained earnings ............................. 3,896.3 3,496.3 Net unrealized gains on securities available for sale .......................... 128.2 327.1 Notes receivable from ESOP .................... (13.7) (13.3) Treasury stock - 4,744,191 and 5,571,696 common shares in 1996 and 1995, respectively. (120.0) (125.9) Foreign currency translation .................. (5.8) (5.8) Total common stockholders' equity ......... 5,446.7 5,009.8 Total stockholders' equity ................ 5,634.9 5,312.1 Total liabilities and stockholders' equity .................... $77,849.3 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 Six Months Ended June 30, June 30, 1996 1995 1996 1995 <S> <C> <C> <C> <C> INTEREST INCOME ON Loans and leases ............................... $1,054.4 982.9 2,094.2 1,870.4 Investment securities .......................... 10.0 21.2 18.9 40.4 Investment and mortgage-backed securities available for sale ............................ 293.2 252.0 559.1 513.4 Loans held for sale ............................ 66.0 47.5 153.2 93.0 Mortgages held for sale ........................ 133.3 74.9 241.7 132.1 Money market investments ....................... 10.0 6.1 17.8 20.0 Trading account securities ..................... 8.1 4.5 14.1 7.8 Total interest income ...................... 1,575.0 1,389.1 3,099.0 2,677.1 INTEREST EXPENSE ON Deposits ....................................... 326.2 283.2 636.2 550.3 Short-term borrowings .......................... 116.6 115.6 227.4 228.4 Long-term debt ................................. 215.7 192.1 428.1 356.5 Total interest expense ..................... 658.5 590.9 1,291.7 1,135.2 Net interest income ...................... 916.5 798.2 1,807.3 1,541.9 Provision for credit losses .................... 87.4 74.7 175.2 130.0 Net interest income after provision for credit losses ............ 829.1 723.5 1,632.1 1,411.9 NON-INTEREST INCOME Trust .......................................... 78.1 53.3 153.1 109.8 Service charges on deposit accounts ............ 79.7 65.1 154.9 126.6 Mortgage banking ............................... 221.4 130.3 392.7 261.5 Data processing ................................ 19.1 17.0 35.6 31.8 Credit card .................................... 29.9 32.3 61.4 63.2 Insurance ...................................... 73.3 71.0 143.0 118.4 Other fees and service charges ................. 75.6 53.0 145.2 100.9 Net investment securities gains ................ - 0.1 - 0.1 Net investment and mortgage-backed securities available for sale gains (losses)... (45.8) 9.2 (44.1) (26.0) Net venture capital gains ...................... 65.5 4.8 132.0 26.4 Trading ........................................ 19.3 (1.2) 4.0 9.2 Other .......................................... 30.5 12.5 25.8 20.3 Total non-interest income .................. 646.6 447.4 1,203.6 842.2 NON-INTEREST EXPENSES Salaries and benefits .......................... 511.3 425.4 1,020.4 823.9 Net occupancy .................................. 73.6 60.4 141.9 120.1 Equipment rentals, depreciation and maintenance. 81.4 65.7 154.1 129.3 Business development ........................... 56.9 38.1 110.1 81.6 Communication .................................. 70.1 53.4 136.6 103.9 Data processing ................................ 40.8 35.9 75.2 66.0 Intangible asset amortization .................. 34.4 26.7 72.6 45.1 Other .......................................... 147.3 116.4 252.3 211.3 Total non-interest expenses ................ 1,015.8 822.0 1,963.2 1,581.2 INCOME BEFORE INCOME TAXES ..................... 459.9 348.9 872.5 672.9 Income tax expense ............................. 174.5 114.6 315.7 221.8 NET INCOME ..................................... $ 285.4 234.3 556.8 451.1 Average Common and Common Equivalent Shares .... 369.6 327.5 365.2 321.0 PER COMMON SHARE Net Income Primary ...................................... $ 0.76 0.68 1.50 1.34 Fully diluted ................................ 0.76 0.67 1.50 1.32 Dividends ..................................... 0.27 0.21 0.51 0.42 See notes to unaudited consolidated financial statements. </TABLE> 4
Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six Months Ended In millions June 30, 1996 1995 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income ............................................................$ 556.8 451.1 Adjustments to reconcile net income to net cash flows from operating activities: Provision for credit losses ....................................... 175.2 130.0 Depreciation and amortization ..................................... 297.3 175.2 Gains on sales of loans, securities and other assets, net.......... (69.6) (23.3) Release of preferred shares to ESOP................................ 22.6 20.9 Purchases of trading account securities ........................... (35,919.3) (45,656.9) Proceeds from sales of trading account securities ................. 35,676.3 45,518.8 Originations of mortgages held for sale ........................... (27,215.7) (12,884.7) Proceeds from sales of mortgages held for sale .................... 29,060.3 11,207.9 Originations of loans held for sale ............................... (421.9) (394.7) Proceeds from sales of loans held for sale ........................ 1,522.2 510.6 Interest receivable ............................................... (36.4) (157.8) Interest payable .................................................. 14.7 76.9 Other assets, net ................................................. (582.4) (700.9) Other accrued expenses and liabilities, net ....................... 233.3 149.4 Net cash flows from (used for) operating activities ............. 3,313.4 (1,577.5) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and paydowns of investment securities....... 10.4 45.2 Proceeds from maturities and paydowns of investment and mortgage- backed securities available for sale............................... 1,653.8 569.7 Proceeds from sales and calls of investment securities .............. 180.7 75.2 Proceeds from sales and calls of investment and mortgage-backed securities available for sale...................................... 2,349.4 3,098.7 Purchases of investment securities .................................. (262.9) (160.8) Purchases of investment and mortgage-backed securities available for sale........................................................... (5,131.1) (2,104.5) Net change in banking subsidiaries'loans and leases.................. 1,235.1 (1,237.4) Non-bank subsidiaries' loans and leases originated................... (3,298.8) (2,797.8) Principal collected on non-bank subsidiaries' loans and leases....... 1,985.4 2,642.1 Purchases of premises and equipment ................................. (109.0) (105.0) Proceeds from sales of premises, equipment & other real estate owned. 41.8 21.5 Cash paid for acquisitions, net of cash and cash equivalents acquired (2,488.1) (94.9) Divestiture of branches, net of cash and cash equivalents paid....... (23.7) (4.1) Net cash flows used for investing activities....................... (3,857.0) (52.1) CASH FLOWS FROM FINANCING ACTIVITIES Deposits, net ....................................................... 134.3 (807.1) Short-term borrowings, net .......................................... 724.1 (662.7) Long-term debt borrowings ........................................... 2,372.2 3,372.2 Repayments of long-term debt ........................................ (2,264.4) (203.5) Issuances of common stock ........................................... 43.0 34.8 Repurchases of common stock ......................................... (127.1) (131.9) Sale of preferred stock held by subsidiary .......................... - 20.0 Repurchases of preferred stock ...................................... (112.7) - Net decrease in notes receivable from ESOP .......................... 1.1 - Dividends paid ...................................................... (194.1) (154.8) Net cash flows from financing activities .......................... 576.4 1,467.0 Net increase (decrease) in cash and cash equivalents .............. 32.8 (162.6) CASH AND CASH EQUIVALENTS Beginning of period ................................................. 4,946.5 4,024.3 End of period .......................................................$ 4,979.3 3,861.7 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............... - - - - 451.1 - - - - 451.1 Dividends on Common stock........... - - - - (133.9) - - - - (133.9) Preferred stock........ - - - - (20.9) - - - - (20.9) Conversion of 23,699 preferred shares to 808,089 common shares.. (21.4) - - (1.2) (0.1) - - 22.7 - - 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......... - 21.7 - (0.8) - - - - - 20.9 Issuance of 1,813,771 common shares.......... - - - 24.3 (35.4) - - 50.6 - 39.5 Issuance of 17,930,967 common shares for acquisitions........... - - 25.6 (13.3) 13.8 (0.3) - 68.1 - 93.9 Repurchase of 4,671,669 common shares.......... - - - - - - - (131.9) - (131.9) Change in net unrealized gains (losses) on securities available for sale............... - - - - - 538.8 - - - 538.8 Foreign currency translation............ - - - - - - - - 2.1 2.1 Balance, June 30, 1995 .......... $ 588.6 (58.8) 564.1 590.3 3,224.6 178.1 (13.3) (341.4) (6.2) 4,726.0 (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.............. - - - - 556.8 - - - - 556.8 Dividends on Common stock.......... - - - - (185.2) - - - - (185.2) Preferred stock....... - - - - (8.9) - - - - (8.9) Conversion of 22,649 preferred shares to 629,495 common shares. (22.6) - - 2.9 - - - 19.7 - - Repurchase of 1,127,125 preferred shares...... (112.7) - - - - - - - - (112.7) Cash payments received on notes receivable from ESOP............. - - - - - - 1.1 - - 1.1 Issuance of 59,000 preferred shares to ESOP.................. 59.0 (61.3) - 2.3 - - - - - - Release of preferred shares to ESOP........ - 23.5 - (0.9) - - - - - 22.6 Issuance of 1,780,038 common shares......... - - - 31.6 (32.7) - - 51.3 - 50.2 Issuance of 18,546,938 common shares for acquisitions.......... - - 27.7 166.7 70.0 (1.6) (1.5) 62.0 - 323.3 Repurchase of 3,527,494 common shares......... - - - - - - - (127.1) - (127.1) Change in net unrealized gains (losses) on securities available for sale.............. - - - - - (197.3) - - - (197.3) Foreign currency translation........... - - - - - - - - - - Balance, June 30, 1996......... $ 264.9 (76.7) 624.9 936.8 3,896.3 128.2 (13.7) (120.0) (5.8) 5,634.9 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 six months ended June 30, include: In millions 1996 1995 Interest...................................... $ 1,277.0 1,058.4 Income taxes.................................. 55.8 203.5 Transfer of loans to other real estate owned.. 23.9 12.7 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 June 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 $ 1,249.3 8.0 (13.5) 1,243.8 State, municipal and housing - tax exempt ....................... 870.3 20.3 (9.3) 881.3 Other ............................. 777.2 383.6 (7.6) 1,153.2 Total investment securities available for sale ............ 2,896.8 411.9 (30.4) 3,278.3 Mortgage-backed securities: Federal agencies ................. 13,990.0 102.8 (290.6) 13,802.2 Collateralized mortgage obligations ..................... 141.8 1.4 (1.4) 141.8 Total mortgage-backed securities available for sale ............ 14,131.8 104.2 (292.0) 13,944.0 Total investment and mortgage-backed securities available for sale ................ 17,028.6 516.1 (322.4) 17,222.3 Other securities held for investment 809.5 22.9 (6.8) 825.6 Total investment securities ......$17,838.1 539.0 (329.2) 18,047.9 </TABLE> Interest income on investment securities for the quarters and six months ended June 30, were: Quarter Six Months In millions 1996 1995 1996 1995 Available for sale: U.S. Treasury and federal agencies .. $ 19.8 16.1 37.1 34.3 State, municipal and housing - tax exempt ........................ 13.2 1.6 25.8 3.0 Other ............................... 12.1 7.7 23.0 14.7 Total investment securities available for sale .............. 45.1 25.4 85.9 52.0 Mortgage-backed securities: Federal agencies ................... 246.1 226.3 467.5 455.3 Collateralized mortgage obligations ....................... 2.0 0.3 5.7 6.1 Total mortgage-backed securities available for sale .............. 248.1 226.6 473.2 461.4 Total investment and mortgage-backed securities available for sale....... 293.2 252.0 559.1 513.4 Other securities held for investment.. 10.0 21.2 18.9 40.4 Total investment securities......... $ 303.2 273.2 578.0 553.8 </table Certain investment securities with a total amortized cost of $4.7 million and $5.5 million for the three and six months ended June 30, 1996, respectively, and $19.7 million and $40.2 million for the three and six months ended June 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 six months ended June 30, 1996. The sales and calls of investment securities resulted in a $0.1 million gain for the quarter and six months ended June 30, 1995. 9
4. Loans and Leases The carrying values of loans and leases at June 30, 1996 and December 31,1995 were: In millions June 30, December 31, 1996 1995 Commercial, financial and industrial...... $10,255.7 9,327.3 Agricultural.............................. 1,091.6 1,090.8 Real estate Secured by 1-4 family residential properties............................ 9,368.3 8,592.9 Secured by development properties....... 2,084.6 2,024.0 Secured by construction and land development........................... 822.1 742.0 Secured by owner-occupied properties.... 2,551.5 2,149.9 Consumer ................................. 10,992.5 10,520.7 Credit card .............................. 1,561.6 1,666.1 Lease financing .......................... 776.0 815.7 Foreign Consumer ............................... 711.3 705.2 Commercial ............................. 177.4 196.1 Total loans and leases ............... 40,392.6 37,830.7 Unearned discount ........................ (1,740.3) (1,677.6) Total loans and leases, net of unearned discount..................... $38,652.3 36,153.1 Changes in the allowance for credit losses for the quarters and six months ended June 30, were: Quarter Six Months In millions 1996 1995 1996 1995 Balance at beginning of period ....... $ 959.7 812.5 917.2 789.9 Allowance related to assets acquired, net ..................... 45.7 41.8 85.9 57.1 Provision for credit losses ........ 87.4 74.7 175.2 130.0 Credit losses....................... (113.1) (100.4) (229.1) (180.9) Recoveries ......................... 29.2 26.0 59.7 58.5 Net credit losses ................ (83.9) (74.4) (169.4) (122.4) Balance at end of period ............. $1,008.9 854.6 1,008.9 854.6 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 June 30, 1996 and 1995 and December 31, 1995 were: In millions June 30, December 31, 1996 1995 1995 Impaired loans Non-accrual ........................... $ 109.9 70.9 100.1 Restructured .......................... 1.4 1.9 2.0 Total impaired loans ................ 111.3 72.8 102.1 Other non-accrual loans and leases....... 72.2 49.9 66.8 Total non-accrual and restructured loans and leases......... 183.5 122.7 168.9 Other real estate owned ................. 41.8 32.2 37.1 Total non-performing assets ........... 225.3 154.9 206.0 Loans and leases past due 90 days or more* 93.3 92.4 91.9 Total non-performing assets and 90-day past due loans and leases ..... $ 318.6 247.3 297.9 * Excludes non-accrual and restructured loans. The average balances of impaired loans for the six months ended June 30, 1996 and 1995 were $108.7 million and $86.7 million, respectively. The allowance for credit losses related to impaired loans at June 30, 1996 and December 31, 1995 was $43.2 million and $43.3 million, respectively. Impaired loans of $1.5 million and $2.7 million were not subject to a related allowance for credit losses at June 30, 1996 and December 31, 1995, respectively, due to the net realizable value of loan collateral, guarantees and other factors. Interest income on impaired loans is recognized after all past due and current principal payments have been made, and collectibility is no longer doubtful. Interest income of $1.5 million and $2.0 million was recognized on impaired loans for the quarter and six months ended June 30, 1996, respectively, and $1.1 million and $1.5 million was recognized for the comparable periods of 1995. The effects of total non-accrual and restructured loans on interest income for the quarters and six months ended June 30, were: Quarter Six Months In millions 1996 1995 1996 1995 Interest As originally contracted ........... $ 5.6 4.4 10.2 8.9 As recognized ...................... (1.5) (1.1) (2.0) (1.5) Reduction of interest income ..... $ 4.1 3.3 8.2 7.4 11
6. Long-term Debt During the first six months of 1996, the corporation issued $900 million in medium-term notes bearing fixed rates of interest ranging from 5.625 percent to 6.25 percent, which mature from April 1999 to February 2003. Certain banking subsidiaries of the corporation received advances from the Federal Home Loan Bank of $1,470 million bearing interest at one-month LIBOR minus six basis points to one-month LIBOR minus four basis points maturing from March 1997 to March 2011 and $1.4 million at fixed rates of interest ranging from 6.24 percent to 6.50 percent maturing from May 1999 to June 2011. 7. Stockholders' Equity Preferred and Preference Stock The corporation is authorized to issue 5,000,000 shares of preferred stock without par value and 4,000,000 shares of preference stock without par value. Shares of preferred stock and preference stock have such powers, preferences and rights as may be determined by the corporation's board of directors, provided that each share of preference stock will not be entitled to more than one vote per share. No shares of preference stock are currently outstanding. The table below is a summary of the corporation's preferred stock at June 30, 1996 and December 31, 1995. A detailed description of the corporation's preferred 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 June 30, December 31, June 30, June 30, December 31, 1996 1995 1996 1996 1995 <S> <C> <C> <C> <C> <C> 10.24% Cumulative, $100 stated value.......... - 1,127,125 - $ - 112.7 Cumulative Tracking, $200 stated value............... 980,000 980,000 9.30% 196.0 196.0 ESOP Cumulative Convertible, $1,000 stated value........ 12,304 12,984 9.00% 12.3 13.0 1995 ESOP Cumulative Convertible, $1,000 stated value............... 23,664 24,572 10.00% 23.7 24.5 1996 ESOP Cumulative Convertible, $1,000 stated value...................... 37,939 - 8.50% 37.9 - Less: Cumulative Tracking shares held by a subsidiary............... (25,000) (25,000) (5.0) (5.0) 1,028,907 2,119,681 264.9 341.2 Unearned ESOP shares......... (76.7) (38.9) Total preferred stock.... $188.2 302.3 </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. 12
All shares of the 1996 ESOP Preferred Stock, the 1995 ESOP Preferred Stock, and ESOP Cumulative Convertible Preferred Stock, $1,000 stated value per share (collectively, ESOP Preferred Stock), were issued to a trustee acting on behalf of the Norwest Corporation Savings Investment Plan and Master Savings Trust (the Plan). Dividends are cumulative from the date of initial issuance and are payable quarterly. Each share of ESOP Preferred Stock released from the unallocated reserve of the Plan is convertible into shares of common stock of the corporation based on the stated value of the ESOP Preferred Stock and the then current market price of the corporation's common stock. During the quarter and six months ended June 30, 1996, 9,243 and 22,649 shares of ESOP Preferred Stock were converted into 265,824 shares and 629,495 shares of common stock of the corporation, respectively. During the quarter and six months ended June 30, 1995, 10,036 and 20,899 shares of ESOP Preferred Stock were converted into 349,078 and 777,175 shares of common stock of the corporation, respectively. The ESOP Preferred Stock is also convertible at the option of the holder at any time, unless previously redeemed. The ESOP Preferred Stock is redeemable at any time, in whole or in part, at the option of the corporation at a redemption price per share equal to the higher of (a) $1,000 per share plus accrued and unpaid dividends and (b) the fair market value, as defined in the Certificates of Designations of the ESOP Preferred Stock. 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. 8. Segment Reporting 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 six months ended June 30 is included in the following summary: In millions Quarter Six Months 1996 1995 1996 1995 Revenues:* Banking................. $ 1,415.7 1,221.7 2,763.9 2,372.5 Mortgage Banking........ 368.8 235.3 670.2 437.9 Norwest Financial....... 437.1 379.5 868.5 708.9 Total................. $ 2,221.6 1,836.5 4,302.6 3,519.3 Organizational earnings:* Banking................. $ 189.3 146.9 370.5 287.0 Mortgage Banking........ 30.7 26.4 61.1 47.5 Norwest Financial....... 65.4 61.0 125.2 116.6 Total................. $ 285.4 234.3 556.8 451.1 Total assets: Banking................. $56,930.6 50,837.1 Mortgage Banking........ 12,438.2 7,960.0 Norwest Financial....... 8,480.5 7,825.9 Total................. $77,849.3 66,623.0 * 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 The detail of mortgage banking non-interest income for the quarters and six months ended June 30, is presented below: Quarter Six Months In millions 1996 1995 1996 1995 Origination fees........... $ 58.1 33.3 98.7 53.2 Servicing fees............. 69.1 53.7 127.5 102.1 Net gains on sales of servicing rights......... 24.7 8.6 39.8 54.4 Net gains (losses) on sales of mortgages....... 2.6 1.1 (3.1) (3.6) Other ..................... 66.9 33.6 129.8 55.4 Total mortgage banking non-interest income.... $221.4 130.3 392.7 261.5 Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The outstanding balances of serviced loans were $168.0 billion and $100.5 billion at June 30, 1996 and 1995, respectively, and $107.4 billion at December 31, 1995. Changes in capitalized mortgage servicing rights for the quarters and six months ended June 30, were: Quarter Six Months In millions 1996 1995 1996 1995 Mortgage servicing rights: Balance at beginning of period............. $1,196.6 862.1 1,061.5 550.3 Originations............ 99.8 55.9 184.0 81.3 Purchases............... 917.4 62.1 1,019.9 393.5 Sales................... (0.5) (64.8) (17.4) (92.6) Amortization............ (56.2) (24.6) (90.8) (41.5) Other................... (0.2) (0.2) (0.3) (0.5) 2,156.9 890.5 2,156.9 890.5 Less valuation allowance (64.2) (48.7) (64.2) (48.7) Balance at end of period.. 2,092.7 841.8 2,092.7 841.8 Excess servicing rights receivable: Balance at beginning of period............. 305.7 108.4 229.4 98.9 Additions............... 116.9 34.7 205.6 61.1 Sales................... - (14.6) - (25.8) Amortization............ (12.9) (4.8) (25.3) (9.2) Other................... - (2.5) - (3.8) Balance at end of period.. 409.7 121.2 409.7 121.2 Mortgage servicing rights, net........... $2,502.4 963.0 2,502.4 963.0 14
The fair value of capitalized mortgage servicing rights at June 30, 1996 was approximately $3,063.4 million, 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 six months ended June 30, were: Quarter Six Months In millions 1996 1995 1996 1995 Balance at beginning of period.............. $ 64.2 24.2 64.2 - Provision for capitalized mortgage servicing rights in excess of fair value.. - 24.5 - 48.7 Balance at end of period.................... $ 64.2 48.7 64.2 48.7 10. Trading Revenues The corporation conducts trading of debt and equity securities, money market instruments, derivative products and foreign exchange contracts to satisfy the investment and risk management needs of its customers and those of the corporation. For the quarters and six months ended June 30, trading revenues were derived from the following activities: Quarter Six Months In millions 1996 1995 1996 1995 Interest income: Securities............................... $ 8.1 2.6 14.1 4.9 Swaps and other interest rate contracts.. - 1.9 - 2.9 Total interest income.................. 8.1 4.5 14.1 7.8 Non-interest income: Gains(losses) on securities sold......... 11.5 1.9 (14.8) 3.7 Swaps and other interest rate contracts.. 14.7 0.5 23.2 3.1 Foreign exchange trading................. 2.1 2.1 4.2 3.9 Options.................................. (7.7) (4.5) (9.3) (0.2) Futures.................................. (1.3) (1.2) 0.7 (1.3) Total non-interest income.............. 19.3 (1.2) 4.0 9.2 Total trading revenues..................... $ 27.4 3.3 18.1 17.0 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 six months ended June 30, 1996, end-user derivative activities decreased interest income by $0.1 million and interest expense by $34.4 million, for a total increase to net interest income of $34.3 million. For the same period in 1995, interest income was decreased by $2.0 million and interest expense was increased by $0.2 million, for a total reduction to net interest income of $2.2 million. Activity in the notional amounts of end-user derivatives for the six months ended June 30, 1996 is summarized as follows: <TABLE> <CAPTION> In millions December 31, Amortizations June 30, 1995 Additions and Maturities Terminations 1996 <S> <C> <C> <C> <C> <C> Swaps: Generic receive fixed...... $ 2,816 2,300 (205) - 4,911 Amortizing receive fixed... 1,575 522 (97) - 2,000 Generic pay fixed.......... 330 - (30) - 300 Basis...................... 229 - (200) - 29 Total swaps.............. 4,950 2,822 (532) - 7,240 Interest rate caps and floors................. 7,843 10,500 (6) - 18,337 Futures contracts............ - 7,162 (1,295) (2,164) 3,703 Options on futures contracts. - 11,356 (6,688) (674) 3,994 Security options............. - 2,250 (400) (200) 1,650 Total........................ $ 12,793 34,090 (8,921) (3,038) 34,924 </TABLE> Deferred gains and losses on closed end-user derivatives were not material at June 30, 1996 and December 31, 1995. A key assumption in the information which follows is that rates remain constant at June 30, 1996 levels. To the extent that rates change, both the average notional and variable interest rate information may change. 16
The following table presents the maturities and weighted average rates for end-user derivatives by type: Dollars in millions <TABLE> <CAPTION> Maturity There- June 30, 1996 1996 1997 1998 1999 2000 after Total <S> <C> <C> <C> <C> <C> <C> <C> Swaps: Generic receive fixed- Notional value.........$ 470 650 650 1,016 225 1,900 4,911 Weighted avg. receive rate......... 6.92% 6.77 6.34 6.81 6.33 6.42 6.58 Weighted avg. pay rate. 5.50% 5.52 5.52 5.51 5.54 5.52 5.51 Amortizing receive fixed- Notional value.........$ 473 1,440 66 21 - - 2,000 Weighted avg. receive rate......... 7.50% 7.50 2.89 2.89 - - 7.30 Weighted avg. pay rate. 5.48% 5.52 5.68 5.71 - - 5.52 Generic pay fixed- Notional value.........$ - - - - - 300 300 Weighted avg. receive rate......... -% - - - - 5.54 5.54 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. -% - 3.64 - - - 3.64 Interest rate caps and floors (1): Notional value.........$ 10 - 1,077 2,650 6,350 8,250 18,337 Futures contracts (1) Notional value.........$ 2,908 795 - - - - 3,703 Options on futures contracts (1) Notional value.........$ 3,394 600 - - - - 3,994 Security options (1) Notional value........ $ 1,650 - - - - - 1,650 Total notional value.... $ 8,905 3,485 1,822 3,687 6,575 10,450 34,924 Total weighted avg. rates on swaps: Receive rate........ 7.21% 7.27 5.94 6.73 6.33 6.30 6.73 Pay rate............ 5.49% 5.52 5.46 5.52 5.54 5.57 5.52 </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 June 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 Interest- Long- Investment and bearing term June 30, 1996 Securities Leases Deposits Debt Other* Total <S> <C> <C> <C> <C> <C> <C> Swaps: Pay variable Unrealized gains......... $ - - 0.1 37.9 - 38.0 Unrealized (losses)...... - - (32.3) (90.0) (8.0) (130.3) Pay variable net......... - - (32.2) (52.1) (8.0) (92.3) Pay fixed Unrealized gains......... - 4.6 12.1 - - 16.7 Basis Unrealized gains......... 0.6 - - - - 0.6 Total unrealized gains..... 0.6 4.6 12.2 37.9 - 55.3 Total unrealized (losses).. - - (32.3) (90.0) (8.0) (130.3) Total net................ $ 0.6 4.6 (20.1) (52.1) (8.0) (75.0) Interest rate caps and floors: Unrealized gains........... $ - - - - 8.3 8.3 Unrealized (losses)........ (0.2) - (0.3) (0.1) (92.6) (93.2) Total net................ $ (0.2) - (0.3) (0.1) (84.3) (84.9) Futures contracts: Unrealized gains........... $ - - - - 13.2 13.2 Options on futures contracts: Unrealized gains........... $ - 0.5 - - 5.8 6.3 Unrealized (losses)........ - (0.2) - - (5.8) (6.0) Total net................ $ - 0.3 - - - 0.3 Security options: Unrealized gains........... $ - 2.0 - - - 2.0 Unrealized (losses)........ - (0.9) - - - (0.9) Total net................ $ - 1.1 - - - 1.1 Grand total unrealized gains......... $ 0.6 7.1 12.2 37.9 27.3 85.1 Grand total unrealized (losses)...... (0.2) (1.1) (32.6) (90.1) (106.4) (230.4) Grand total net............ $ 0.4 6.0 (20.4) (52.2) (79.1) (145.3) *Includes $27.3 million in gains and $106.4 million in losses on floors, futures and swaps hedging mortgage servicing rights. </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 June 30, 1996, the corporation had forward contracts totaling $15.8 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 June 30, 1996, the corporation's trading account portfolio included written options of $1.0 billion notional value, 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. Transactions completed in the six months ended June 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, N.A., 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* 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, 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 - 395,029 Purchase $8,052.0 $3,410.2 18,546,938 * 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. </TABLE> 19
At June 30, 1996, the corporation had seven other pending acquisitions with total assets of approximately $2.1 billion, and it is anticipated that cash of $251.5 million and approximately 1.6 million common shares will be issued upon completion of these acquisitions. Pending acquisitions include PriMerit Bank, a $1.8 billion bank in Las Vegas, Nevada (consummated July 19, 1996). The pending acquisitions, subject to approval by regulatory agencies, are expected to be completed by the end of 1996 and are not individually significant to the financial statements of the corporation. 20 <page 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 $285.4 million for the quarter ended June 30, 1996, a 21.8 percent increase over the $234.3 million earned in the second quarter of 1995. Fully diluted earnings per share were 76 cents, compared with 67 cents in the second quarter of 1995, an increase of 13.4 percent. Return on realized common equity was 22.1 percent and return on assets was 1.50 percent for the second quarter of 1996, compared with 22.6 percent and 1.48 percent, respectively, in the second quarter of 1995. For the six months ended June 30, 1996, net income was $556.8 million, or $1.50 per fully diluted common share, an increase of 23.4 percent and 13.6 percent, respectively, over the $451.1 million or $1.32 per common share earned in the first six months of 1995. Return on realized common equity was unchanged from the prior year at 22.4 percent and return on assets was 1.50 percent, compared with 1.47 percent for the same period a year ago. ORGANIZATIONAL EARNINGS The organizational earnings of the corporation's primary business segments for the three and six months ended June 30, 1996 and 1995 are included in Note 8 to the unaudited consolidated financial statements for the quarter ended June 30, 1996 and are discussed in the following paragraphs. Banking Group The Banking Group reported second quarter 1996 earnings of $189.3 million, a 28.8 percent increase over the second quarter 1995 earnings of $146.9 million. For the six months ended June 30, 1996, earnings increased 29.0 percent to $370.5 million compared with $287.0 million for the same period in 1995. The increased earnings in the first six months of 1996 reflected a 14.5 percent increase in tax-equivalent net interest income to $1,248.9 million, due to a 10.0 percent increase in average earning assets and a 26 basis point increase in net interest margin. The Banking Group's provision for credit losses for the six months ended June 30, 1996 increased $2.1 million to $61.9 million from a year earlier, as average loans and leases rose $1.9 billion, or 6.6 percent, while net charge-offs as a percent of average loans and leases remained essentially unchanged at 0.41 percent. Non-interest income rose $220.7 million to $680.7 million for the first half of 1996, due to gains on sales of credit card receivables and increased venture capital gains and fee income. The Banking Group also recorded investment securities losses of $44.7 million in the six months ended June 30, 1996, compared with losses of $26.0 million in the same period last year. Non-interest expenses of $1,272.6 million for the first half of 1996 were $208.3 million higher when compared with the first six months of 1995, reflecting writedowns of goodwill and other intangibles and additional operating expenses related to acquired companies. These increases were partially offset by reduced pension benefits expense. 21
Mortgage Banking Mortgage Banking earned $30.7 million in the current quarter compared with $26.4 million in the second quarter of 1995. For the first six months of 1996, Mortgage Banking earned $61.1 million compared with $47.5 million in the same period of 1995. See Note 9 to the unaudited consolidated financial statements for the quarter ended June 30, 1996 for a detailed analysis of mortgage banking revenues for the three and six months ended June 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 $36.7 million in the first half of 1996 compared with $50.8 million in the same period a year ago. Mortgage loan originations amounted to $14.9 billion during the second quarter, and totaled $26.6 billion for the first half of 1996, compared with $7.7 billion and $12.3 billion, respectively, in the comparable periods in 1995. Increases in volume were attributable in part to the acquisition of substantially all the assets of Prudential Home Mortgage Company, Inc. in May 1996, including $47 billion of its mortgage servicing portfolio. Mortgage Banking capitalized $184.0 million of mortgage servicing rights in the first six months of 1996, representing 124 basis points of originated mortgage loans, compared with $81.3 million for the first six months of 1995. Amortization of capitalized mortgage servicing rights, including excess servicing rights, was $116.1 million for the six months ended June 30, 1996, compared with $50.7 million for the six months ended June 30, 1995. The servicing portfolio totaled $168.0 billion at June 30, 1996, compared with $107.4 billion at year-end 1995 and currently has a weighted average coupon of 7.74 percent. Norwest Financial Norwest Financial (including Norwest Financial Services, Inc. and Island Finance) reported earnings of $65.4 million in the second quarter of 1996, compared with $61.0 million in the second quarter of 1995, an increase of 7.2 percent. For the first six months of 1996, Norwest Financial's net income was $125.2 million, up 7.5 percent from the first six months of 1995. The growth in earnings reflected a 23.7 percent increase in Norwest Financial's tax-equivalent net interest income as average finance receivables grew 23.4 percent from the first half of 1995, due in part to the May 1995 acquisition of Island Finance. The increase in earnings was partially offset by a higher provision for credit losses. Norwest Financial's net charge-offs in the first six months of 1996 were $108.1 million compared with $64.8 million 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. CONSOLIDATED INCOME STATEMENT ANALYSIS Net Interest Income Consolidated tax-equivalent net interest income was $924.5 million in the second quarter of 1996, compared with $806.6 million in the second quarter of 1995, an increase of 14.6 percent. For the first six months of 1996, tax-equivalent net interest income increased 16.9 percent from the same period in 1995 to $1,822.8 million. Growth in tax-equivalent net interest income over the second quarter of 1995 was a result of a 17.1 percent growth in average earning assets and lower borrowing costs. Net interest margin, the ratio of annualized tax-equivalent net interest income to 22
average earning assets, was 5.54 percent in the second quarter of 1996, compared with 5.66 percent in the second quarter of 1995. The decrease was principally the result of strong growth in lower-yielding earning assets in the Banking Group and in Mortgage Banking, and the sale of $0.9 billion of higher-yielding credit card receivables in May 1996. Net interest margin was 5.62 percent for the six months ended June 30, 1996, up slightly from 5.58 percent for the first half of 1995. The following table summarizes changes in tax-equivalent net interest income between the quarters ended June 30 and March 31 and the six months ended June 30. Changes in Tax-Equivalent Net Interest Income* In millions 2Q 96 2Q 96 6 Mos. 96 over over over 2Q 95 1Q 96 6 Mos. 95 Increase (decrease) due to: Change in earning asset volume ............ $137.1 50.1 250.2 Change in volume of interest-free funds ... (16.3) (3.6) (30.6) Change in net return from Interest-free funds ...................... (9.7) (2.4) (11.3) Interest-bearing funds ................... 56.1 (1.4) 131.1 Change in earning asset mix ............... (43.9) (15.6) (59.8) Change in funding mix ..................... (5.4) (0.9) (15.4) Change in tax-equivalent net interest income. $117.9 26.2 264.2 * 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 $87.4 million for credit losses in the second quarter of 1996, compared with $74.7 million in the same period a year ago. Net credit losses totaled $83.9 million and $74.4 million for the three months ended June 30, 1996 and 1995, respectively. As a percentage of average loans and leases, net credit losses were 0.88 percent in the second quarter of 1996, compared with 0.84 percent in the same period a year ago. For the first six months of 1996, the provision for credit losses totaled $175.2 million, compared with $130.0 million in the first six months of 1995. Net credit losses were $169.4 million, or 0.91 percent of average loans and leases, for the six months ended June 30, 1996, compared with $122.4 million, or 0.72 percent, for the same period in 1995. Non-interest Income Consolidated non-interest income was $646.6 million in the second quarter of 1996, an increase of $199.2 million, or 44.5 percent, from the second quarter of 1995. In the second quarter of 1996, the corporation recorded gains on the disposition of credit card receivables held for sale of $33.5 million. For the six months ended June 30, 1996, non-interest income was up $361.4 million to $1,203.6 million, an increase of 42.9 percent over 1995. The increase was primarily due to higher levels of fee income and trust revenues, mortgage banking revenues, and net venture capital gains, partially offset by investment securities losses. Net venture capital gains were $65.5 million for the three months and $132.0 million for the six months ended June 30, 1996, compared with $4.8 million and $26.4 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 23
capital gains to be unpredictable in nature. Net unrealized appreciation in the venture capital investment portfolio was $248.0 million at June 30, 1996. Net investment securities losses of $45.8 million were recorded in the second quarter of 1996 compared with net gains of $9.3 million in the second quarter of 1995. For the six months ended June 30, 1996 and 1995, net investment securities losses totaled $44.1 million and $25.9 million, respectively. Mortgage banking revenues in the second quarter of 1996 were $221.4 million, compared with $130.3 million in the second quarter of 1995. For the six months ended June 30, 1996, mortgage banking revenues were $392.7 million, compared with $261.5 million for the first half of 1995. The increases for both the quarter and the first six months were principally due to increased levels of originations and servicing fees, while the second quarter of 1996 benefited from additional gains on sales of servicing rights. 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 June 30, 1996 for a detailed analysis of mortgage banking revenues for the three and six months ended June 30, 1996 and 1995. Non-interest Expenses Consolidated non-interest expenses in the second quarter of 1996 were $1,015.8 million, an increase of $193.8 million or 23.6 percent over the second quarter of 1995. During the second quarter of 1996, the corporation recorded writedowns of goodwill and other intangibles of $58.6 million before taxes, which represent $50.6 million after taxes since $35.7 million of the writedown is not tax deductible. Second quarter 1996 results also reflect higher levels of operating expenses associated with acquisitions. There were $17.2 million of acquisition-related special charges taken in conjunction with acquisitions closed within the quarter. These increases in expenses were partially offset by the year-to-date effect of reduced pension benefits expense of $26.6 million resulting from a change in pension assumptions. For the six months ended June 30, 1996, non-interest expenses were up $382.0 million to $1,963.2 million, an increase of 24.2 percent over the six months ended June 30, 1995, and primarily reflect increased expenses related to acquisitions. Income Taxes The effective income tax rate for the first half of 1996 was 36.2 percent, which reflects the non-deductible intangible writedowns during the second quarter. Excluding the effect of those writedowns, the effective income tax rate was 34.8 percent for the six months ended June 30, 1996. CONSOLIDATED BALANCE SHEET ANALYSIS At June 30, 1996, earning assets were $67.5 billion, an increase of 7.5 percent from $62.8 billion at December 31, 1995. This increase was primarily due to a 6.9 percent increase in net loans and a 12.7 percent increase in total investment securities. The increase in mortgage servicing rights of $1.3 billion since December 31, 1995, included $0.8 billion from the Prudential acquisition, with the remaining increase due to higher levels of originations. At June 30, 1996, interest-bearing liabilities totaled $57.1 billion, an 8.6 percent increase from $52.6 billion at December 31, 1995. The increase was primarily due to increases in interest-bearing deposits. 24
Credit Quality The major categories of loans and leases are included in Note 4 to the unaudited consolidated financial statements for the quarter ended June 30, 1996. At June 30, 1996, the allowance for credit losses totaled $1,008.9 million, or 2.61 percent of loans and leases outstanding. Comparable amounts were $854.6 million, or 2.36 percent, at June 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 316.7 percent at June 30, 1996, compared with 345.7 percent at June 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 June 30, 1996 and December 31, 1995 was: June 30, December 31, 1996 1995 Commercial .................... $ 233.8 186.4 Consumer ...................... 288.8 276.5 Real estate ................... 166.2 171.8 Foreign ....................... 27.0 27.0 Unallocated ................... 293.1 255.5 Total ...................... $1,008.9 917.2 Non-performing assets and 90-day past due loans and leases totaled $318.6 million, or 0.41 percent of total assets, at June 30, 1996, compared with $247.3 million, or 0.37 percent, at June 30, 1995, and $297.9 million, or 0.41 percent, at December 31, 1995. Non-performing loans increased because of acquisitions by $31.6 million and $52.1 million from December 31, 1995 and June 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 half 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 Card Services, Norwest Mortgage and Norwest Financial operate on a nationwide basis. With respect to credit card receivables, approximately 61 percent of the portfolio is within the 16-state Norwest banking region. 25
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% of the portfolio. Norwest Mortgage operates in all 50 states, representing the largest retail mortgage origination network in the country. Norwest Financial engages in consumer finance activities in 47 states, all 10 Canadian provinces, the Caribbean, Central America and Guam. 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. Capital The corporation's regulatory capital and ratios are summarized as follows: June 30, December 31, 1996 1995 Tier 1 capital............................ $ 4,553 3,994 Tier 1 and Tier 2 capital................. 5,602 5,012 Total risk adjusted assets................ 53,410 49,255 Tier 1 capital ratio...................... 8.53% 8.11 Total capital to risk adjusted assets..... 10.49% 10.18 Leverage ratio............................ 6.09% 5.65 The corporation's Tier 1 capital, total capital to risk-adjusted assets and leverage ratios compare favorably to 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 second quarter of 1996 compared with 30.9 percent for the second quarter of 1995. On July 23, 1996, the corporation's board of directors approved the Norwest Corporation Best Practices PartnerShares Plan, a broad-based employee stock option plan. In conjunction with the Plan's approval, options for approximately 4.8 million shares were granted with an exercise price of $33.125 per share. Options are generally exercisable upon the earlier of July 24, 2001, or the first date the market value of the corporation's common stock exceeds $60 per share. 26
Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES <TABLE> <CAPTION> Quarter Ended June 30, In millions, except ratios 1996 1995 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* <S> <C> <C> <C> <C> <C> <C> Assets Money market investments..... $ 790 $ 10.0 5.14% $ 408 $ 6.1 6.15% Trading account securities... 498 8.2 6.66 165 4.6 11.27 Investment securities U.S. Treasury & federal agencies................. - - - 28 0.4 5.16 State, municipal and housing tax-exempt....... - - - 695 17.7 10.15 Other...................... 839 10.0 4.73 661 8.8 5.33 Total.................... 839 10.0 4.73 1,384 26.9 7.75 Investment securities available for sale U.S. Treasury & federal agencies................. 1,214 19.8 6.52 993 16.1 6.56 State, municipal and housing tax-exempt....... 877 19.4 9.07 121 2.3 7.59 Mortgage-backed............ 13,527 248.1 7.31 12,133 226.6 7.44 Other...................... 1,209 12.0 6.13 662 7.7 6.23 Total.................... 16,827 299.3 7.29 13,909 252.7 7.33 Loans held for sale.......... 2,970 66.0 8.94 2,202 47.5 8.65 Mortgages held for sale...... 7,160 133.3 7.45 3,657 74.9 8.19 Loans and leases (net of unearned discount) Commercial................. 12,738 287.4 9.07 10,654 246.0 9.26 Real estate................ 13,447 324.5 9.65 13,212 309.0 9.36 Consumer................... 11,864 444.3 15.02 11,578 429.8 14.87 Total loans and leases... 38,049 1,056.2 11.13 35,444 984.8 11.13 Allowance for credit losses (991) (851) Net loans and leases..... 37,058 34,593 Total earning assets (before the allowance for credit losses)........... 67,133 1,583.0 9.50 57,169 1,397.5 9.81 Cash and due from banks...... 3,632 3,155 Other assets................. 6,938 4,232 Total assets............... $76,712 $63,705 (Continued on page 28) </TABLE> 27
Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (Continued from page 27) <TABLE> <CAPTION> Quarter Ended June 30, In millions, except ratios 1996 1995 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* <S> <C> <C> <C> <C> <C> <C> Liabilities and Stockholders' Equity Noninterest-bearing deposits. $11,926 $ - -% $ 9,526 $ - -% Interest-bearing deposits Savings and NOW accounts... 5,907 26.0 1.77 4,879 24.8 2.04 Money market accounts...... 11,933 86.9 2.93 10,562 84.6 3.21 Savings certificates....... 12,336 166.7 5.44 10,771 144.2 5.37 Certificates of deposit and other time........... 2,772 39.0 5.66 1,785 25.8 5.80 Foreign time............... 605 7.6 5.05 275 3.8 5.54 Total interest-bearing deposits............... 33,553 326.2 3.91 28,272 283.2 4.02 Federal funds purchased & repurchase agreements...... 3,143 37.8 4.83 3,345 49.5 5.94 Short-term borrowings........ 5,843 78.8 5.43 4,237 66.1 6.25 Long-term debt............... 14,279 215.7 6.04 11,603 192.1 6.62 Total interest-bearing liabilities............ 56,818 658.5 4.65 47,457 590.9 4.99 Other liabilities............ 2,393 2,145 Preferred stock.............. 188 530 Common stockholders' equity.. 5,387 4,047 Total liabilities and stockholders' equity... $76,712 $63,705 Net interest income (tax-equivalent basis)... $924.5 $ 806.6 Yield spread............... 4.85 4.82 Net interest margin........ 5.54 5.66 Interest-bearing liabilities to earning assets........ 84.64 83.01 </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. 28
Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES <TABLE> <CAPTION> Six Months Ended June 30, In millions, except ratios 1996 1995 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* <S> <C> <C> <C> <C> <C> <C> Assets Money market investments..... $ 674 $ 17.8 5.34% $ 688 $ 20.0 5.89% Trading account securities... 448 14.3 6.43 153 8.0 10.57 Investment securities U.S. Treasury & federal agencies................. - - - 28 0.7 4.83 State, municipal and housing tax-exempt....... - - - 698 36.0 10.30 Other...................... 818 18.9 4.61 614 15.2 4.95 Total.................... 818 18.9 4.61 1,340 51.9 7.73 Investment securities available for sale U.S. Treasury & federal agencies................. 1,173 37.1 6.38 1,024 34.3 6.73 State, municipal and housing tax-exempt....... 858 37.8 9.14 115 4.4 7.41 Mortgage-backed............ 12,930 473.2 7.36 12,267 461.4 7.39 Other...................... 1,071 22.9 6.64 543 14.7 7.10 Total.................... 16,032 571.0 7.35 13,949 514.8 7.33 Loans held for sale.......... 3,205 153.2 9.61 2,178 93.0 8.61 Mortgages held for sale...... 6,752 241.7 7.16 3,243 132.1 8.15 Loans and leases (net of unearned discount) Commercial................. 12,512 567.3 9.11 10,281 471.9 9.25 Real estate................ 13,266 647.5 9.76 12,891 593.1 9.20 Consumer................... 11,756 882.8 15.05 11,166 809.0 14.55 Total loans and leases... 37,534 2,097.6 11.20 34,338 1,874.0 10.96 Allowance for credit losses (971) (831) Net loans and leases..... 36,563 33,507 Total earning assets (before the allowance for credit losses)........... 65,463 3,114.5 9.61 55,889 2,693.8 9.65 Cash and due from banks...... 3,592 3,115 Other assets................. 6,423 3,895 Total assets............... $74,507 $62,068 (Continued on page 30) </TABLE> 29
Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (Continued from page 29) <TABLE> <CAPTION> Six Months Ended June 30, In millions, except ratios 1996 1995 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* <S> <C> <C> <C> <C> <C> <C> Liabilities and Stockholders' Equity Noninterest-bearing deposits. $11,546 $ - -% $ 9,225 $ - -% Interest-bearing deposits Savings and NOW accounts... 5,710 50.2 1.77 4,837 49.9 2.08 Money market accounts...... 11,709 171.5 2.94 10,481 165.0 3.17 Savings certificates....... 12,081 329.4 5.48 10,524 274.2 5.25 Certificates of deposit and other time........... 2,641 74.7 5.69 1,667 46.6 5.64 Foreign time............... 422 10.4 4.95 512 14.6 5.74 Total interest-bearing deposits............... 32,563 636.2 3.93 28,021 550.3 3.96 Federal funds purchased & repurchase agreements...... 3,156 78.9 5.02 3,588 104.4 5.87 Short-term borrowings........ 5,472 148.5 5.46 4,011 124.0 6.23 Long-term debt............... 13,984 428.1 6.12 10,846 356.5 6.57 Total interest-bearing liabilities............ 55,175 1,291.7 4.70 46,466 1,135.2 4.91 Other liabilities............ 2,362 2,052 Preferred stock.............. 189 531 Common stockholders' equity.. 5,235 3,794 Total liabilities and stockholders' equity... $74,507 $62,068 Net interest income (tax-equivalent basis)... $1,822.8 $1,558.6 Yield spread............... 4.91 4.74 Net interest margin........ 5.62 5.58 Interest-bearing liabilities to earning assets........ 84.28 83.14 </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. 30 <page PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of stockholders of the corporation was held on April 23, 1996. There were 358,395,538 shares of common stock outstanding and entitled to vote at said meeting; and a total 294,844,134 (82.27%) shares were present at the meeting in person or by proxy. The stockholders voted to approve an amendment to the corporation's 1985 Long-Term Incentive Compensation Plan to increase the number of shares available for awards by 17,500,000, to limit the number of shares that may be subject to stock options or stock appreciation rights granted to any employee in a calendar year, to permit the Human Resources Committee to extend the exercise period for stock options and stock appreciation rights following a holder's death, permanent disability, or retirement to a date no later than the original expiration date, and to eliminate a stated expiration date for the Plan (266,339,795 for, 24,916,679 against, 3,587,660 abstained and no broker non-votes); an amendment to the Directors' Formula Stock Award Plan to award non-employee directors annually shares of common stock with a value equal to the annual cash retainer and to provide for a one-time award under the Plan for 1996 (270,039,303 for, 20,985,822 against, 3,819,009 abstained and no broker non-votes); and ratified the appointment of KPMG Peat Marwick LLP to audit the books of the corporation for the year ending December 31, 1996 (292,423,829 for, 976,213 against, 1,444,092 abstained and no broker non-votes). In addition, 14 nominees were elected directors of the corporation, as follows: Shares FOR Shares WITHHELD David A. Christensen 293,795,273 1,048,861 Gerald J. Ford 291,991,332 2,852,802 Pierson M. Grieve 293,775,649 1,068,485 Charles M. Harper 293,619,299 1,224,835 William A. Hodder 293,713,387 1,130,747 Lloyd P. Johnson 293,813,775 1,030,359 Reatha Clark King 293,741,280 1,102,854 Richard M. Kovacevich 293,908,706 935,428 Richard S. Levitt 293,895,291 948,843 Richard D. McCormick 292,878,499 1,965,635 Cynthia H. Milligan 291,838,025 3,006,109 Benjamin F. Montoya 293,612,567 1,231,567 Ian M. Rolland 293,726,914 1,117,220 Michael W. Wright 293,702,464 1,141,670 31
Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are filed in response to Item 601 of Regulation S-K. Exhibit No. Exhibit Page 4. Copies of instruments with respect to long-term debt will be furnished to the Commission upon request. 10(a). Long-Term Incentive Compensation Plan (as amended 34 effective April 23, 1996 10(b). Directors' Formula Stock Award Plan (as amended 45 effective April 23, 1996) 11. Computation of Earnings Per Share 49 12(a). Computation of Ratio of Earnings to Fixed Charges 51 12(b). Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends 52 (b) Reports on Form 8-K. The corporation filed a Current Report on Form 8-K, dated April 17, 1996, reporting consolidated operating results of the corporation for the quarter ended March 31, 1996. The corporation filed a Current Report on Form 8-K, dated April 30, 1996, placing on file a description of its common stock, par value $1-2/3 per share. 32
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 August 13, 1996 By /s/ Michael A. Graf Senior Vice President and Controller (Chief Accounting Officer) 33