WFC

Business Context and Reporting Period

This summary covers the Form 10-Q filed by Norwest Corporation for the quarterly period ended June 30, 1998. The filing includes unaudited consolidated financial statements for the quarter and six months ended June 30, 1998, compared to the same periods in 1997. The corporation operates primarily through three segments: Banking, Mortgage Banking, and Norwest Financial (Consumer Finance).

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Growth: Net income increased 15.3% to $382.1 million for the quarter and 14.8% to $749.8 million for the six months compared to the prior year periods. Diluted EPS rose 14.0% to $0.49 for the quarter.
• Revenue Drivers: Non-interest income surged 25.6% in the quarter, driven primarily by a 62.1% increase in mortgage banking revenue ($287.4 million vs. $177.3 million) due to higher origination fees and gains on sales of mortgages and servicing rights. Trust fees, service charges, and credit card fees also contributed to growth.
• Expense Increases: Non-interest expenses rose 18.3% in the quarter to $1,324.5 million, attributed to higher mortgage banking operating costs and expenses from recent acquisitions.
• Net Interest Margin: The net interest margin decreased 15 basis points to 5.54% in the quarter, primarily due to a higher mix of lower-yielding mortgages held for sale and investment securities.
• Asset Growth: Total assets increased to $93.15 billion, with a significant $3.3 billion rise in mortgages held for sale reflecting increased origination activity.
• Credit Quality: Net credit losses increased to $139.6 million for the quarter (131 basis points of average loans), up from 114 basis points in 1997, largely due to higher consumer credit charge-offs.

Guidance, Outlook, and Risks

• Merger with Wells Fargo: On June 7, 1998, Norwest signed a definitive agreement to merge with Wells Fargo & Company. The transaction, expected to close in Q4 1998, will be accounted for as a pooling of interests. Wells Fargo shareholders will receive 10 shares of Norwest stock for each share of Wells Fargo stock.
• Dividend Increase: The Board of Directors approved an increase in the quarterly common stock dividend to $0.185 per share, payable September 1, 1998.
• Year 2000 Compliance: The company estimates total costs for Year 2000 compliance at approximately $150 million, with $36.3 million incurred in the first half of 1998. Management believes the issue will not pose a significant operational risk.
• Acquisitions: Beyond the Wells Fargo merger, the company had six other pending acquisitions totaling approximately $95.5 billion in assets as of June 30, 1998.
• Accounting Standards: The company adopted FAS 130 (Comprehensive Income) in 1998. Future adoption of FAS 133 (Derivatives) in 2000 is expected, though the impact has not yet been determined.
• Segment Performance: While Banking and Mortgage Banking earnings grew significantly, Norwest Financial earnings declined 19.0% in the quarter due to higher charge-offs (4.16% of average loans) and expenses related to the Fidelity Acceptance Corporation acquisition.

Investor Verification Checklist

• Merger Completion: Verify the status of regulatory and shareholder approvals for the Wells Fargo merger and the expected closing date in Q4 1998.
• Consumer Credit Trends: Monitor the Norwest Financial segment's charge-off rates, which rose to 4.16% of average loans, driven by bankruptcies in Puerto Rico and the Fidelity acquisition.
• Mortgage Pipeline: Assess the sustainability of mortgage banking revenue given the low interest rate environment and the $19.4 billion unclosed pipeline.
• Year 2000 Costs: Track actual expenditures against the $150 million estimate for Y2K compliance.
• Capital Ratios: Confirm that Tier 1 capital (8.84%) and total capital ratios (10.64%) remain well above regulatory minimums post-merger integration.