How did Norwest's profitability change in 1996?

Net income reached a record $1,153.9 million, up 20.7% from $956.0 million in 1995. Growth came from higher net interest income (up 13.0%), a large increase in non-interest income (up 38.8%), and acquisitions, partly offset by a 20.9% rise in non-interest expenses. Return on assets improved to 1.51% from 1.44%, while return on realized common equity eased slightly to 21.9% from 22.3%.

Are credit losses a concern for investors?

Credit costs rose meaningfully. The provision for credit losses increased to $394.7 million, and net charge-offs reached 0.99% of average loans, up from 0.86%. Most of the increase came from consumer loans at Norwest Financial and Norwest Card Services and from acquired regions. Non-performing assets were stable at about 0.4% of total assets, and the allowance covered 2.64% of loans, so management appears to be reserving conservatively.

How strong is Norwest's capital position?

Capital is solid. The Tier 1 risk-based capital ratio was 8.63%, the total capital ratio 10.42%, and the leverage ratio 6.15%, all above regulatory minimums. Every bank subsidiary met the well-capitalized standard at year-end 1996. Common stockholders' equity grew to $5.9 billion, and the internal capital growth rate was 13.74%.

How much of Norwest's earnings depends on mortgage banking and venture capital?

Mortgage banking earned a record $125.0 million, and the servicing portfolio grew to $179.7 billion, which provides recurring fee income. Venture capital gains were $256.4 million, a large but volatile contributor. Management notes that venture gains depend on market conditions and the timing of portfolio companies going public, so they are less predictable than core banking or consumer finance earnings.

What is the outlook for acquisitions and dividends?

Norwest had six pending acquisitions with about $2.0 billion in combined assets, including Central Bancorporation ($1.1 billion, Fort Worth, Texas), expected to close in 1997 and not individually significant. The board raised the quarterly dividend 11.1% to $0.30 per share, consistent with a 30–35% payout policy. Interstate banking rules effective June 1, 1997 may allow further cross-state consolidation, although Texas and Montana have opted out of the Riegle-Neal Act.

WFC 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 4, 1997. Cited figures are marked; the original filing is the authoritative source.

Norwest Corporation (the filing entity; the input labels it Wells Fargo & Company/MN, WFC, which is its later name after the 1998 merger) reported record 1996 net income of $1,153.9 million^a, up 20.7% from $956.0 million in 1995, with fully diluted EPS of $3.07 versus $2.73.

Return on realized common equity was 21.9% and return on assets 1.51%. Excluding a $19.0 million^b pre-tax SAIF recapitalization charge, operating earnings were $1,165.7 million, or $3.10 per diluted share. Growth was driven by a 13.0% rise in tax-equivalent net interest income, a 38.8% jump in non-interest income (boosted by $256.4 million of venture capital gains and a $286 million increase in mortgage banking revenue), and acquisitions, partly offset by a 20.9% increase in non-interest expenses to $4,089.7 million and higher credit losses.

Credit costs rose: the provision for credit losses reached $394.7 million^c (1.02% of average loans, versus 0.88% in 1995), and net charge-offs were 0.99% of average loans. Consumer lending, particularly at Norwest Financial and Norwest Card Services, drove most of the deterioration. The allowance for credit losses stood at 2.64% of loans.

Total assets grew to $80.2 billion^d, and the Tier 1 risk-based capital ratio was 8.63% with a total capital ratio of 10.42%, both above well-capitalized thresholds. The leverage ratio was 6.15%.

The business mix is diversified across three segments: Banking (operating earnings of $776.4 million), Mortgage Banking (record $125.0 million, with $51.5 billion in fundings and a $179.7 billion servicing portfolio after the Prudential Home acquisition), and Norwest Financial (record $264.3 million, with 1,244 consumer finance stores). Management raised the quarterly dividend 11.1% to $0.30 per share in January 1997, consistent with a 30–35% payout policy, and six pending acquisitions with about $2.0 billion in total assets were expected to close in 1997.

02—Key points

Key Highlights

Record 1996 net income of $1,153.9 million, up 20.7%; fully diluted EPS of $3.07 (up 12.5%), or $3.10 excluding the $19.0 million SAIF charge
Return on realized common equity of 21.9% and return on assets of 1.51%, both slightly below 1995's 22.3% and 1.44% on ROA (ROA improved)
Non-interest income rose 38.8% to $2,564.6 million, driven by $256.4 million in venture capital gains and higher mortgage banking revenue
Credit quality pressure: provision for credit losses up 26.3% to $394.7 million; net charge-offs 0.99% of average loans versus 0.86% in 1995, mainly consumer lending
Mortgage servicing portfolio grew to $179.7 billion (from $107.4 billion) and fundings reached $51.5 billion, aided by the Prudential Home Mortgage acquisition
Capital remains strong: Tier 1 risk-based ratio 8.63%, total capital ratio 10.42%, all banking subsidiaries well capitalized; quarterly dividend raised to $0.30 from $0.27
Interest rate sensitivity is modest: a 200 basis point rise in short rates would reduce net income by about $40 million, while a 200 basis point decline would add about $63 million

03—Questions

Frequently Asked Questions

How did Norwest's profitability change in 1996?
Net income reached a record $1,153.9 million, up 20.7% from $956.0 million in 1995. Growth came from higher net interest income (up 13.0%), a large increase in non-interest income (up 38.8%), and acquisitions, partly offset by a 20.9% rise in non-interest expenses. Return on assets improved to 1.51% from 1.44%, while return on realized common equity eased slightly to 21.9% from 22.3%.
Are credit losses a concern for investors?
Credit costs rose meaningfully. The provision for credit losses increased to $394.7 million, and net charge-offs reached 0.99% of average loans, up from 0.86%. Most of the increase came from consumer loans at Norwest Financial and Norwest Card Services and from acquired regions. Non-performing assets were stable at about 0.4% of total assets, and the allowance covered 2.64% of loans, so management appears to be reserving conservatively.
How strong is Norwest's capital position?
Capital is solid. The Tier 1 risk-based capital ratio was 8.63%, the total capital ratio 10.42%, and the leverage ratio 6.15%, all above regulatory minimums. Every bank subsidiary met the well-capitalized standard at year-end 1996. Common stockholders' equity grew to $5.9 billion, and the internal capital growth rate was 13.74%.
How much of Norwest's earnings depends on mortgage banking and venture capital?
Mortgage banking earned a record $125.0 million, and the servicing portfolio grew to $179.7 billion, which provides recurring fee income. Venture capital gains were $256.4 million, a large but volatile contributor. Management notes that venture gains depend on market conditions and the timing of portfolio companies going public, so they are less predictable than core banking or consumer finance earnings.
What is the outlook for acquisitions and dividends?
Norwest had six pending acquisitions with about $2.0 billion in combined assets, including Central Bancorporation ($1.1 billion, Fort Worth, Texas), expected to close in 1997 and not individually significant. The board raised the quarterly dividend 11.1% to $0.30 per share, consistent with a 30–35% payout policy. Interstate banking rules effective June 1, 1997 may allow further cross-state consolidation, although Texas and Montana have opted out of the Riegle-Neal Act.

04—Continue

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