WFC

Business Context and Reporting Period

This Form 10-Q summarizes the financial results for Norwest Corporation (the parent company of Wells Fargo & Company) for the quarterly and nine-month periods ended September 30, 1996. The corporation operates through three primary segments: Banking, Mortgage Banking, and Norwest Financial (Consumer Finance). The financial statements are unaudited but include all normal recurring adjustments necessary for a fair presentation.

Key Financial Metrics

Income Statement Highlights (Nine Months Ended Sept 30, 1996)

• Net Income: $845.8 million ($2.26 per fully diluted share), a 21.5% increase from $696.3 million in the prior year period.
• Total Revenues: $6,536.6 million (Interest income of $4,710.1 million + Non-interest income of $1,826.5 million).
• Net Interest Income: $2,755.0 million (Tax-equivalent: $2,778.4 million).
• Net Interest Margin: 5.63% (up from 5.58% in 1995).
• Provision for Credit Losses: $281.1 million.
• Non-Interest Expenses: $2,986.7 million.
• Return on Assets (ROA): 1.49%.
• Return on Realized Common Equity (ROE): 21.9%.

Balance Sheet Highlights (As of Sept 30, 1996)

• Total Assets: $78.4 billion (up from $72.1 billion at Dec 31, 1995).
• Net Loans and Leases: $39.1 billion.
• Total Deposits: $48.0 billion.
• Long-term Debt: $13.3 billion.
• Stockholders' Equity: $5.9 billion.
• Cash and Cash Equivalents: $5.1 billion.

Cash Flow (Nine Months Ended Sept 30, 1996)

• Operating Activities: Net cash provided of $5,675.1 million.
• Investing Activities: Net cash used of $4,305.6 million, driven by loan originations and acquisitions.
• Financing Activities: Net cash used of $1,180.5 million, including debt repayments and stock repurchases.

Material Changes vs. Prior Period

• Earnings Growth: Net income increased significantly due to higher net interest income and non-interest income, partially offset by higher provisions for credit losses and expenses related to acquisitions.
• Acquisition Activity: The corporation completed numerous acquisitions in the first nine months of 1996, including The Bank of Robstown, AMFED Financial, and The Prudential Home Mortgage Company. These transactions contributed to asset growth and increased operating expenses.
• Non-Interest Income: Increased 37.8% year-over-year to $1.8 billion, driven by mortgage banking revenues ($596.2 million) and venture capital gains ($167.7 million).
• SAIF Charge: A one-time pre-tax charge of $19.0 million was recorded in Q3 1996 related to the Savings Association Insurance Fund (SAIF) recapitalization legislation. Excluding this charge, operating earnings were $300.8 million for the quarter.
• Non-Performing Assets: Total non-performing assets and 90-day past due loans increased to $352.9 million (0.45% of total assets) from $263.0 million in 1995, largely due to acquired assets.

Guidance, Outlook, and Risks

Management Commentary

Management attributes earnings growth to a 10.8% increase in average earning assets and a 22 basis point increase in net interest margin within the Banking Group. The Mortgage Banking segment saw growth in loan originations ($39.8 billion for nine months) and the servicing portfolio ($176.3 billion), though gains on sales of mortgages and servicing rights decreased compared to the prior year.

Risks and Contingencies

• Credit Risk: Net charge-offs at Norwest Financial increased to 3.07% of average loans, driven by higher domestic consumer credit losses and losses at Island Finance.
• Interest Rate Risk: The corporation utilizes derivatives (swaps, caps, floors) to manage interest rate risk. Unrealized gains and losses on these instruments fluctuate with market rates.
• Acquisition Integration: Pending acquisitions totaling approximately $2.0 billion in assets (including Central Bancorporation) are expected to close in Q1 1997, subject to regulatory approval.
• Regulatory Charges: Future charges may arise from SAIF assessments or other regulatory requirements affecting acquired thrift institutions.

Investor Verification Checklist

• Verify the impact of the $19.0 million SAIF charge on Q3 1996 operating earnings.
• Review the credit quality trends in the Norwest Financial segment, specifically the 3.07% net charge-off rate.
• Confirm the status and expected closing dates of the five pending acquisitions totaling $2.0 billion in assets.
• Assess the sustainability of mortgage banking revenue growth given the decrease in gains on sales of servicing rights.
• Monitor the allowance for credit losses coverage ratio, which stood at 292.9% of non-performing assets and 90-day past due loans.