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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1996 Commission file number 2-80466
Norwest Financial, Inc.
(Exact name of registrant as specified in its charter)
Iowa 42 1186565
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
206 Eighth Street, Des Moines, Iowa 50309
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515) 243-2131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 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. Yes X . No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock (without par
value): 1,000 shares outstanding as of November 1, 1996.
The registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
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PART I. FINANCIAL INFORMATION
NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited)
September 30, December 31,
Assets 1996 1995
Cash and cash equivalents $ 108,806 $ 72,991
Marketable securities 804,811 757,291
Finance receivables:
Consumer:
Loans 3,289,255 3,172,895
Sales finance 1,632,584 1,567,629
Other 492,442 586,840
Commercial 484,884 507,480
Total finance receivables 5,899,165 5,834,844
Less allowance for credit losses 168,022 158,618
Finance receivables - net 5,731,143 5,676,226
Notes receivable - affiliates 556,647 552,005
Property and equipment (at cost, less
accumulated depreciation of $93,472
for 1996 and $94,334 for 1995) 71,254 63,888
Deferred income taxes 51,054 40,072
Other receivables from affiliate 31,643
Other assets 173,852 345,143
Total assets $7,497,567 $7,539,259
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited)
September 30, December 31,
Liabilities and
Stockholder's Equity 1996 1995
Loans payable - short-term:
Commercial paper $1,807,286 $1,739,683
Affiliates 71,840
Other 218,800
Unearned insurance premiums and commissions 137,309 140,020
Insurance claims and policy reserves 39,680 34,683
Accrued interest payable 77,598 76,916
Other payables to affiliates 23,735
Other liabilities 228,622 210,029
Long-term debt:
Senior 3,842,990 3,864,531
Subordinated 197,000 217,000
Subordinated - affiliate 50,000
Total long-term debt 4,089,990 4,081,531
Total liabilities 6,476,060 6,501,662
Stockholder's equity:
Common stock without par value
(authorized 1,000 shares,
issued 1,000 shares) 3,855 3,855
Additional paid in capital 90,766 90,766
Retained earnings (note 2) 929,920 933,366
Foreign currency translation adjustment (5,149) (5,393)
Net unrealized holding gain
on marketable securities 2,115 15,003
Total stockholder's equity 1,021,507 1,037,597
Total liabilities and
stockholder's equity $7,497,567 $7,539,259
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Statements of Consolidated Earnings (Unaudited)
(Thousands of Dollars)
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Income:
Finance charges and interest $303,295 $283,085 $ 896,659 $ 826,511
Insurance premiums and commissions 35,184 33,970 102,815 92,118
Other income (note 3) 44,853 44,885 136,296 119,577
Total income 383,332 361,940 1,135,770 1,038,206
Expenses:
Operating expenses 128,685 119,530 383,101 348,017
Interest and debt expense 92,557 92,165 279,964 264,141
Provision for credit losses 49,295 39,680 139,131 101,491
Insurance losses and loss expenses 9,102 10,337 29,139 28,529
Total expenses 279,639 261,712 831,335 742,178
Earnings before income taxes 103,693 100,228 304,435 296,028
Income taxes 36,136 35,942 107,881 106,009
Net earnings $ 67,557 $ 64,286 $ 196,554 $ 190,019
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Statements of Consolidated Cash Flows (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(Thousands of Dollars)
Nine Months Ended September 30,
1996 1995
Cash flows from operating activities:
Net earnings $ 196,554 $ 190,019
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Provision for credit losses 139,131 101,491
Depreciation and amortization 19,411 19,366
Deferred income taxes (3,978) (200)
Other receivables from affiliate 31,643
Other assets 42,929 (29,645)
Unearned insurance premiums
and commissions (2,711) 11,622
Insurance claims and policy reserves 4,997 2,634
Accrued interest payable 682 22,804
Other payables to affiliates 23,735 (7,170)
Other liabilities 18,593 10,372
Net cash flows from operating activities 470,986 321,293
Cash flows from investing activities:
Finance receivables:
Principal collected 4,171,482 3,624,057
Receivables originated or purchased (4,365,530) (4,080,803)
Proceeds from sales of marketable securities 113,588 64,916
Proceeds from maturities of
marketable securities 41,374 31,482
Purchase of marketable securities (222,374) (165,924)
Net additions to property and equipment (17,809) (14,418)
Net increase in notes receivable - affiliates (4,642) (388,696)
Contributed subsidiaries received, net of
cash and cash equivalents 2,477
Other 119,707 130,612
Net cash flows used for investing activities (164,204) (796,297)
Cash flows from financing activities:
Net decrease in loans payable -
short term (79,357) (169,462)
Proceeds from issuance of long-term debt:
Senior 100,000 929,411
Subordinated - affiliate 50,000
Repayments of long-term debt:
Senior (121,610) (81,638)
Subordinated (20,000) (30,650)
Dividends paid (200,000) (130,000)
Net cash flows from (used for)
financing activities (270,967) 517,661
Net increase in cash and cash equivalents 35,815 42,657
Cash and cash equivalents beginning of period 72,991 63,496
Cash and cash equivalents end of period $ 108,806 $ 106,153
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
The accompanying unaudited financial statements and notes have been
prepared in accordance with the accounting policies set forth in Norwest
Financial, Inc.'s 1995 Annual Report on Form 10-K and should be read in
conjunction with the Notes to Consolidated Financial Statements therein.
In the opinion of management, all adjustments (none of which were other
than normal recurring accruals) necessary to present fairly the
financial statements for the periods presented have been included.
1. Principles of Consolidation.
The consolidated financial statements include the accounts of Norwest
Financial, Inc. (the "Company") and subsidiaries. Intercompany accounts
and transactions are eliminated. The Company is a wholly-owned
subsidiary of Norwest Financial Services, Inc. which is a wholly-owned
subsidiary of Norwest Corporation.
2. Dividend Restrictions.
Certain of the Company's bank credit agreements contain requirements as
to maintenance of net worth (as defined). Approximately $48 million of
consolidated retained earnings was unrestricted at September 30, 1996.
3. Other Income.
Income from affiliates was $13.9 million and $13.2 million for the
quarters ended September 30, 1996 and 1995, respectively, and $42.2
million and $30.3 million for the nine months ended September 30, 1996
and 1995, respectively.
Interest and dividends from marketable securities and cash equivalents
were $13.2 million and $12.2 million for the quarters ended September
30, 1996 and 1995, respectively and $38.9 million and $36.8 million for
the nine months ended September 30, 1996 and 1995, respectively.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Norwest Financial's performance for the third quarter of 1996 closely
paralleled performance for the first nine months of 1996. The
discussion and analysis that follows, therefore, is limited to a
discussion of the first nine months as a whole and does not include a
separate discussion of the third quarter unless otherwise noted.
Norwest Financial's total income (revenue) increased 9% for the first
nine months ($1,135.8 million in the first nine months of 1996 compared
with $1,038.2 million in the first nine months of 1995).
Income from finance charges and interest increased 8% for the first nine
months ($896.7 million in the first nine months of 1996 compared with
$826.5 million in the first nine months of 1995). Changes in income
from finance charges and interest result primarily from (1) changes in
the amount of finance receivables outstanding and (2) changes in the
rate of charge on those receivables. In total, average finance
receivables outstanding in the first nine months of 1996 increased 10%
from the first nine months of 1995; average consumer receivables
outstanding increased 11% while average commercial receivables
outstanding declined 1%.
Nine Months Ended September 30,
Rate of charge on finance receivables: 1996 1995
Consumer 21.23% 21.63%
Commercial 14.99 14.70
Total 20.70 20.97
The increase in income from finance charges and interest was due to
growth in average finance receivables outstanding offset somewhat by the
decline in the rate of charge. The increase in average finance
receivables was due primarily to regular business activity.
Insurance premiums and commissions increased 12% ($102.8 million in the
first nine months of 1996 compared with $92.1 million in the first nine
months of 1995). Changes in insurance premiums and commissions
generally correspond to changes in average consumer finance loans
outstanding (those secured by real estate and not secured by real
estate). Average consumer finance loans outstanding increased 5% in the
first nine months of 1996 compared with the first nine months of 1995.
In addition, Norwest Financial began providing credit insurance as part
of the consumer finance business of several affiliates in the second
quarter of 1995 and a non-related company in the fourth quarter of 1995.
Insurance premiums and commissions on these arrangements were $13.7
million in the first nine months of 1996 compared with $5.0 million in
the first nine months of 1995. Insurance premiums and commissions
increased 4% in the third quarter of 1996 compared with the third
quarter of 1995 ($35.2 million compared with $34.0 million). Average
consumer finance loans outstanding increased 4% in the third quarter of
1996 compared with the same period in 1995. In addition, the income
from the credit insurance provided as part of the consumer finance
business of several affiliates and a non-related company totaled $4.9
million in the third quarter of 1996 compared with $3.6 million in the
third quarter of 1995.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
Insurance losses and loss expenses increased 2% ($29.1 million in the
first nine months of 1996 compared with $28.5 million in the first nine
months of 1995). Insurance losses and loss expenses on the new
insurance arrangements noted above were $1.6 million in the first nine
months of 1996 compared with $.7 million in the first nine months of
1995.
Other income increased 14% ($136.3 million in the first nine months of
1996 compared with $119.6 million in the first nine months of 1995).
Income from affiliates was $42.2 million in the first nine months of
1996 compared with $30.3 million in the first nine months of 1995.
Changes in income from affiliates result from changes in notes
receivable - affiliate combined with management fees charged to
affiliates. Average notes receivable - affiliate increased $179 million
from the first nine months of 1995. Effective May 4, 1995, Norwest
Financial, Inc. agreed to lend $500 million in term loans to an
affiliate, Island Finance Puerto Rico, Inc. This debt has a weighted
average interest rate of 8.80% and matures in 2000. Other income
remained the same in the third quarter of 1996 compared with the third
quarter of 1995 ($44.9 million). Income from affiliates was $13.9
million in the third quarter of 1996 compared with $13.2 million in the
third quarter of 1995.
Operating expenses increased 10% ($383.1 million in the first nine
months of 1996 compared with $348.0 million in the first nine months of
1995). The increase was due primarily to increases in employee
compensation and benefits and other costs resulting from business
expansion. At September 30, 1996, Norwest Financial was operating 1,061
consumer finance branch offices compared with 1,025 at September 30,
1995.
Interest and debt expense increased 6% ($280.0 million in the first nine
months of 1996 compared with $264.1 million in the first nine months of
1995). Changes in interest and debt expense result primarily from (1)
changes in the amount of borrowings outstanding due to funding
requirements for receivables, dividends, and notes receivable -
affiliates and (2) changes in the cost of those borrowings. Average
total outstanding borrowings in the first nine months of 1996 increased
11% from the first nine months of 1995.
Nine Months Ended September 30,
Costs of funds: 1996 1995
Short-term 5.41% 6.21%
Long-term 6.92 7.00
Total 6.46 6.77
Changes in average debt outstanding generally corresponds to changes in
average finance receivables outstanding combined with the change in
notes receivable - affiliates. Average finance receivables and notes
receivable - affiliates increased 12% from the first nine months of
1995.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Concluded
Interest and debt expense remained about the same in the third quarter
of 1996 compared with the third quarter of 1995 ($92.6 million compared
with $92.2 million). Average total outstanding borrowings in the third
quarter of 1996 increased 6% from the third quarter of 1995. The total
cost of funds was 6.39% in the third quarter of 1996 compared with 6.73%
in the third quarter of 1995.
Provision for credit losses increased 37% ($139.1 million in the first
nine months of 1996 compared with $101.5 million in the first nine
months of 1995). Net write-offs as a percentage of average net
receivables outstanding increased to 2.31% in the first nine months of
1996 compared with 1.77% in the first nine months of 1995.
Federal and state income taxes increased 2% ($107.9 million in the first
nine months of 1996 compared with $106.0 million in the first nine
months of 1995). The increase was due primarily to the increase in
earnings before income taxes. The effective tax rate was 35.4% for the
first nine months of 1996 and 35.8% for the first nine months of 1995.
The Company and one of its Canadian subsidiaries maintain bank lines of
credit and revolving credit agreements to provide an alternative source
of liquidity to support the commercial paper borrowings. At September
30, 1996, lines of credit and revolving credit agreements totaling
$1,328 million were being maintained at 32 unaffiliated banks. None of
this credit was in use at the time.
The Company and one of its Canadian subsidiaries obtain long-term debt
capital primarily from (i) the issuance of debt securities to the public
through underwriters on a firm-commitment basis, (ii) the issuance of
debt securities to institutional investors, and (iii) term borrowings
from commercial banks. The Company also obtains long-term debt from the
issuance of medium-term notes (which may have maturities ranging from
nine months to 30 years) through underwriters (acting as agent or
principal).
Norwest Financial anticipates the continued availability of borrowed
funds, at prevailing interest rates, to provide for Norwest Financial's
growth in the foreseeable future. Funds are also generated internally
from payments of principal and interest received on Norwest Financial's
finance receivables.
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PART II. OTHER INFORMATION
NORWEST FINANCIAL, INC.
Item 5. Other Information.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges
of Norwest Financial, Inc. and its subsidiaries for the periods
indicated:
Nine Months Ended Years Ended December 31,
September 30, 1996 1995 1994 1993 1992 1991
2.06 2.13 2.26 2.22 2.02 1.74
The ratios of earnings to fixed charges have been computed by dividing
net earnings plus fixed charges and income taxes by fixed charges. Fixed
charges consist of interest and debt expense plus one-third of rentals
(which is deemed representative of the interest factor).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit (12) Computation of ratios of earnings to fixed charges for
the years ended December 31, 1995, 1994, 1993, 1992 and
1991 and the nine months ended September 30, 1996.
(b) Reports on 8-K.
No reports on Form 8-K were filed during the quarter for which this
report is filed.
S I G N A T U R E S
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 FINANCIAL, INC.
Date: November 1, 1996
By \s\ Robert W. Bettle
Robert W. Bettle
Vice President and Controller
(Principal Accounting Officer)