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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 June 30, 1997 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 August 1, 1997.
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)
June 30, December 31,
Assets 1997 1996
Cash and cash equivalents $ 118,235 $ 141,692
Securities available for sale 985,724 816,980
Finance receivables:
Consumer:
Loans 3,424,985 3,324,655
Sales finance 1,721,701 1,683,655
Other 420,110 447,021
Commercial 455,784 494,104
Total finance receivables 6,022,580 5,949,435
Less allowance for credit losses 173,180 169,133
Finance receivables - net 5,849,400 5,780,302
Notes receivable - affiliates 625,307 574,344
Property and equipment (at cost, less
accumulated depreciation of $94,842
for 1997 and $89,373 for 1996) 82,515 75,068
Deferred income taxes 39,903 34,456
Other assets 200,166 338,003
Total assets $7,901,250 $7,760,845
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited)
June 30, December 31,
Liabilities and
Stockholder's Equity 1997 1996
Loans payable - short-term:
Commercial paper $1,767,986 $1,732,095
Affiliates 250,662 173,006
Other 195,000
Unearned insurance premiums
and commissions 134,349 136,564
Insurance claims and
policy reserves 36,233 35,893
Accrued interest payable 69,378 75,765
Other payables to affiliates 12,434 5,565
Other liabilities 230,756 216,031
Long-term debt:
Senior 4,097,321 4,080,894
Subordinated 2,000 52,000
Total long-term debt 4,099,321 4,132,894
Total liabilities 6,601,119 6,702,813
Stockholder's equity:
Common stock without par value
(authorized 1,000 shares,
issued 1,000 shares) 3,855 3,855
Additional paid in capital 202,766 90,766
Retained earnings (note 2) 1,089,054 959,697
Foreign currency translation
adjustment (6,881) (5,991)
Net unrealized holding gain
on securities available for sale,
net of income taxes 11,337 9,705
Total stockholder's equity 1,300,131 1,058,032
Total liabilities and
stockholder's equity $7,901,250 $7,760,845
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Statements of Consolidated Earnings (Unaudited)
(Thousands of Dollars)
Quarter Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
Income:
Finance charges and interest $298,593 $296,939 $599,957 $593,364
Insurance premiums and commissions 34,679 34,553 69,857 67,631
Other income (note 3) 50,166 46,618 98,079 91,443
Total income 383,438 378,110 767,893 752,438
Expenses:
Operating expenses 130,112 128,276 260,806 254,416
Interest and debt expense 92,934 92,703 185,813 187,407
Provision for credit losses 44,627 43,884 99,376 89,836
Insurance losses and loss expenses 11,007 10,147 20,281 20,037
Total expenses 278,680 275,010 566,276 551,696
Earnings before income taxes 104,758 103,100 201,617 200,742
Income taxes 36,449 36,102 70,531 71,745
Net earnings $ 68,309 $ 66,998 $131,086 $128,997
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)
Six Months Ended June 30,
1997 1996
Cash flows from operating activities:
Net earnings $ 131,086 $ 128,997
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Provision for credit losses 99,376 89,836
Depreciation and amortization 13,963 13,665
Deferred income taxes (6,258) (1,596)
Other receivables from affiliate 31,643
Other assets (21,680) 20,270
Unearned insurance premiums and
commissions (2,215) (3,921)
Insurance claims and policy reserves 340 3,230
Accrued interest payable (6,387) 756
Other payables to affiliates 6,869 74,254
Other liabilities 14,725 32,968
Net cash flows from operating activities 229,819 390,102
Cash flows from investing activities:
Finance receivables:
Principal collected 2,767,976 2,802,231
Receivables originated or
purchased (2,936,450) (2,833,499)
Proceeds from sales of securities 63,170 85,358
Proceeds from maturities of securities 44,372 26,855
Purchases of securities (273,843) (150,763)
Net additions to property and equipment (15,302) (10,658)
Net increase in notes receivable -
affiliates (50,963) (86,679)
Other 151,890 124,314
Net cash flows from investing activities (249,150) (42,841)
Cash flows from financing activities:
Net decrease in loans payable -
short term (81,453) (187,977)
Proceeds from issuance of long-term debt -
Senior 365,679
Subordinated - affiliate 50,000
Repayment of long-term debt -
Senior (348,623) (19,860)
Subordinated (50,000) (20,000)
Dividends paid (1,729) (150,000)
Paid in capital 112,000
Net cash flows used for financing
activities (4,126) (327,837)
Net increase (decrease) in cash and
cash equivalents (23,457) 19,424
Cash and cash equivalents
beginning of period 141,692 72,991
Cash and cash equivalents end of period $ 118,235 $ 92,415
See accompany 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
1996 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
("Norwest").
2. Dividend Restrictions.
Certain of the Company's bank credit agreements contain requirements as to
maintenance of net worth (as defined). Approximately $650 million of
consolidated retained earnings was unrestricted at June 30, 1997.
3. Other Income.
Income from affiliates was $13.2 million and $13.6 million for the quarters
ended June 30, 1997 and 1996, respectively, and $26.9 million and $28.3 million
for the six months ended June 30, 1997 and 1996, respectively.
Interest and dividends from securities available for sale and cash equivalents
were $15.7 million and $12.9 million for the quarters ended June 30, 1997 and
1996, respectively and $29.9 million and $25.7 million for the six months ended
June 30, 1997 and 1996, respectively.
4. Capital Infusion.
On April 1, 1997, the Company received a capital infusion of $112 million from
Norwest Financial Services, Inc. for the sole purpose of investing in
securities. All of the funds received in the capital infusion have been
invested in securities and none of these funds are currently being used in the
operations of the company.
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NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
5. Business Acquisition.
On June 23, 1997, Norwest entered into a definitive purchase agreement with
BankBoston Corporation ("BankBoston") for Norwest to acquire Fidelity Acceptance
Corporation ("Fidelity"), BankBoston's subprime automobile finance subsidiary.
It is contemplated that the Company will acquire Fidelity, directly or through
Norwest. The principal business of Fidelity is making direct loans secured by
automobiles and purchasing sales finance contracts directly from automobile
dealers. As of May 31, 1997, Fidelity and its subsidiaries operated 150 branch
offices in 31 states and Guam and had approximately $1.12 billion of net finance
receivables outstanding.
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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 second quarter of 1997 closely
paralleled performance for the first six months of 1997. The discussion and
analysis that follows, therefore, is limited to a discussion of the first six
months as a whole and does not include a separate discussion of the second
quarter unless otherwise noted.
Norwest Financial's total income (revenue) increased 2% for the first six months
($767.9 million in the first six months of 1997 compared with $752.4 million in
the first six months of 1996).
Income from finance charges and interest increased 1% for the first six months
($600.0 million in the first six months of 1997 compared with $593.4 million in
the first six months of 1996). 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 first six months of 1997
increased 2% from the first six months of 1996; average consumer receivables
outstanding increased 3% while average commercial receivables outstanding
declined 3%.
Six Months Ended June 30,
Rate of charge on finance receivables: 1997 1996
Consumer 21.03% 21.16%
Commercial 13.59 14.99
Total 20.41 20.62
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 3% ($69.9 million in the first six
months of 1997 compared with $67.6 million in the first six months of 1996.)
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 six months of 1997 compared with the first six months of 1996.
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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 1% ($20.3 million in the first six
months of 1997 compared with $20.0 million in the first six months of 1996).
Other income increased 7% ($98.1 million in the first six months of 1997
compared with $91.4 million in the first six months of 1996). The increase is
due primarily to an increase in investment income and other fee income offset in
part by a decrease in income from affiliates.
Operating expenses increased 3% ($260.8 million in the first six months of 1997
compared with $254.4 million in the first six months of 1996). The increase was
due primarily to increases in employee compensation and benefits and other costs
resulting from business expansion. At June 30, 1997, Norwest Financial was
operating 1,097 consumer finance branch offices compared with 1,047 at June 30,
1996.
Interest and debt expense decreased 1% ($185.8 million in the first six months
of 1997 compared with $187.4 million in the first six months of 1996). Changes
in interest and debt expense result primarily from (1) changes in the amount of
borrowings outstanding and (2) changes in the cost of those borrowings. Average
total outstanding borrowings in the first six months of 1997 increased 1% from
the first six months of 1996.
Six Months Ended June 30,
Costs of funds: 1997 1996
Short-term 5.15% 5.44%
Long-term 6.84 6.94
Total 6.33 6.50
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 in
the first six months of 1997 remained approximately the same as the first six
months of 1996.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Concluded
Provision for credit losses increased 11% ($99.4 million in the first six months
of 1997 compared with $89.8 million in the first six months of 1996). Net write
offs as a percentage of average net receivables outstanding increased to 1.61%
in the first six months of 1997 compared with 1.51% in the first six months of
1996. Provision for credit losses in the second quarter of 1997 increased 2%
compared with the second quarter of 1996 ($44.6 million compared with $43.9
million). Net write-offs as a percentage of average net receivables outstanding
was .74% for both the second quarter of 1997 and the second quarter of 1996.
Norwest Financial, along with the consumer finance industry, has experienced an
increase in net write-offs. Management believes the allowance for credit losses
at June 30, 1997, and December 31, 1996, is adequate to absorb possible losses
in the finance receivables portfolio.
Federal and state income taxes decreased 2% ($70.5 million in the six months of
1997 compared with $71.7 million in the first six months of 1996). The
effective tax rate was 35.0% for the first six months of 1997 and 35.7% for the
first six months of 1996.
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 June 30, 1997, lines of credit and
revolving credit agreements totaling $1,327 million were being maintained at 33
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 and one of its Canadian subsidiaries also obtain 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:
Six Months Ended Years Ended December 31,
June 30, 1997 1996 1995 1994 1993 1992
2.05 2.11 2.13 2.26 2.22 2.02
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, 1996, 1995, 1994, 1993 and 1992 and the six
months ended June 30, 1997.
(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: August 1, 1997
By /S/ Eric Torkelson
Eric Torkelson
Vice President and Controller
(Principal Accounting Officer)