<PAGE 1>
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, 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 November 3, 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.
<PAGE 2>
PART I. FINANCIAL INFORMATION
NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited)
September 30, December 31,
Assets 1997 1996
Cash and cash equivalents $ 98,964 $ 141,692
Securities available for sale 1,053,743 816,980
Finance receivables:
Consumer:
Loans 3,910,195 3,324,655
Sales finance 2,382,528 1,683,655
Other 451,582 447,021
Commercial 455,499 494,104
Total finance receivables 7,199,804 5,949,435
Less allowance for credit losses 293,505 169,133
Finance receivables - net 6,906,299 5,780,302
Notes receivable - affiliates 613,085 574,344
Property and equipment (at cost, less
accumulated depreciation of $103,873
for 1997 and $89,373 for 1996) 93,403 75,068
Deferred income taxes 78,893 34,456
Other assets 342,605 338,003
Total assets $9,186,992 $7,760,845
See accompanying notes to consolidated financial statements.
<PAGE 3>
NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited)
September 30, December 31,
Liabilities and
Stockholder's Equity 1997 1996
Loans payable - short-term:
Commercial paper $2,044,461 $1,732,095
Affiliates 337,189 173,006
Other 195,000
Unearned insurance premiums
and commissions 147,619 136,564
Insurance claims and policy reserves 36,827 35,893
Accrued interest payable 91,669 75,765
Other payables to affiliates 3,268 5,565
Other liabilities 257,140 216,031
Long-term debt:
Senior 4,908,657 4,080,894
Subordinated 2,000 52,000
Total long-term debt 4,910,657 4,132,894
Total liabilities 7,828,830 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 202,769 90,766
Retained earnings (note 2) 1,139,335 959,697
Foreign currency translation
adjustment (6,856) (5,991)
Net unrealized holding gain
on securities available for sale,
net of income taxes 19,059 9,705
Total stockholder's equity 1,358,162 1,058,032
Total liabilities and
stockholder's equity $9,186,992 $7,760,845
See accompanying notes to consolidated financial statements.
<PAGE 4>
NORWEST FINANCIAL, INC.
Statements of Consolidated Earnings (Unaudited)
(Thousands of Dollars)
Quarter Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Income:
Finance charges and interest $322,762 $303,295 $ 922,719 $ 896,659
Insurance premiums and
commissions 33,894 35,184 103,751 102,815
Other income (note 3) 52,977 44,853 151,056 136,296
Total income 409,633 383,332 1,177,526 1,135,770
Expenses:
Operating expenses 139,003 128,685 399,809 383,101
Interest and debt expense 102,042 92,557 287,855 279,964
Provision for credit losses 57,819 49,295 157,195 139,131
Insurance losses and
loss expenses 9,125 9,102 29,406 29,139
Total expenses 307,989 279,639 874,265 831,335
Earnings before
income taxes 101,644 103,693 303,261 304,435
Income taxes 34,004 36,136 104,535 107,881
Net earnings $ 67,640 $ 67,557 $ 198,726 $ 196,554
See accompanying notes to consolidated financial statements.
<PAGE 5>
NORWEST FINANCIAL, INC.
Statements of Consolidated Cash Flows (Unaudited)
Increase(Decrease) in Cash and Cash Equivalents
(Thousands of Dollars)
Nine Months Ended September 30,
1997 1996
Cash flows from operating activities:
Net earnings $ 198,726 $ 196,554
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Provision for credit losses 157,195 139,131
Depreciation and amortization 23,890 19,411
Deferred income taxes (1,509) (3,978)
Other receivables from affiliate 31,643
Other assets (60,651) 42,929
Unearned insurance premiums and
commissions 10,120 (2,711)
Insurance claims and policy reserves (12,428) 4,997
Accrued interest payable 13,795 682
Other payables to affiliates (2,297) 23,735
Other liabilities 31,095 18,593
Net cash flows from operating activities 357,936 470,986
Cash flows from investing activities:
Finance receivables:
Principal collected 4,139,548 4,171,482
Receivables originated or purchased (4,444,668) (4,365,530)
Proceeds from sales of securities 87,058 113,588
Proceeds from maturities of securities 57,868 41,374
Purchases of securities (331,273) (222,374)
Net additions to property
and equipment (25,087) (17,809)
Net increase in notes
receivable - affiliates (1,138,196) (4,642)
Cash and cash equivalents of contributed
subsidiaries received 3,258
Other 160,599 119,707
Net cash flows used for investing activities (1,490,893) (164,204)
Cash flows from financing activities:
Net (increase) decrease in loans
payable - short term 281,549 (79,357)
Proceeds from issuance of long-term debt:
Senior 1,251,882 100,000
Subordinated - affiliate 50,000
Repayment of long-term debt:
Senior (503,473) (121,610)
Subordinated (50,000) (20,000)
Dividends paid (1,729) (200,000)
Paid in capital 112,000
Net cash flows from (used for) financing
activities 1,090,229 (270,967)
Net increase (decrease) in cash and
cash equivalents (42,728) 35,815
Cash and cash equivalents beginning of period 141,692 72,991
Cash and cash equivalents end of period $ 98,964 $ 108,806
See accompany notes to consolidated financial statements.
<PAGE 6>
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. ("NFSI") 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 $489 million of consolidated retained earnings
was unrestricted at September 30, 1997.
3. Other Income.
Income from affiliates was $13.9 million for both of the
quarters ended September 30, 1997 and 1996, and $40.8
million and $42.2 million for the nine months ended
September 30, 1997 and 1996, respectively.
Interest and dividends from securities available for sale
and cash equivalents were $17.8 million and $13.2 million
for the quarters ended September 30, 1997 and 1996,
respectively and $47.7 million and $38.9 million for the
nine months ended September 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.
<PAGE 7>
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
5. Business Combinations.
Norwest, through its wholly-owned subsidiary, Fidelity
Acceptance Holding, Inc. ("FAHI"), acquired Fidelity
Acceptance Corporation on August 31, 1997. The acquisition
was accounted for as a purchase. Funding necessary for this
acquisition (totaling approximately $1.1 billion) was
provided to FAHI by the Company. On September 2, 1997,
Norwest made a capital contribution, without consideration,
of all of the issued and outstanding shares of capital stock
of FAHI to NFSI. Immediately thereafter, NFSI made a
capital contribution, without consideration, of all the
issued and outstanding shares of capital stock of FAHI to
the Company. This capital contribution was accounted for in
a manner similar to a pooling of interests, except that
results of prior periods have not been restated. The
principal business of Fidelity Acceptance Corporation and
its subsidiaries ("Fidelity") is making direct loans secured
by automobiles and purchasing sales finance contracts
directly from automobile dealers. Fidelity operated 147
branch offices in 31 states and Guam and had approximately
$1.1 billion in finance receivables outstanding at the time
of the contribution.
<PAGE 8>
NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Norwest Financial's performance for the third quarter of
1997 closely paralleled performance for the first nine
months of 1997. 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, through its wholly-owned subsidiary, Fidelity
Acceptance Holding, Inc. ("FAHI"), acquired Fidelity
Acceptance Corporation on August 31, 1997. The acquisition
was accounted for as a purchase. Funding necessary for this
acquisition (totaling approximately $1.1 billion) was
provided to FAHI by the Company. On September 2, 1997,
Norwest made a capital contribution, without consideration,
of all of the issued and outstanding shares of capital stock
of FAHI to NFSI. Immediately thereafter, NFSI made a
capital contribution, without consideration, of all the
issued and outstanding shares of capital stock of FAHI to
the Company. This capital contribution was accounted for in
a manner similar to a pooling of interests, except that
results of prior periods have not been restated. The
principal business of Fidelity Acceptance Corporation and
its subsidiaries ("Fidelity") is making direct loans secured
by automobiles and purchasing sales finance contracts
directly from automobile dealers. Fidelity operated 147
branch offices in 31 states and Guam and had approximately
$1.1 billion in finance receivables outstanding at the time
of the contribution.
Norwest Financial's total income (revenue) increased 4% for
the first nine months ($1,177.5 million in the first nine
months of 1997 compared with $1,135.8 million in the first
nine months of 1996).
Income from finance charges and interest increased 3% for
the first nine months ($922.7 million in the first nine
months of 1997 compared with $896.7 million in the first
nine 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 nine
months of 1997 increased 4% from the first nine months of
1996; average consumer receivables outstanding increased 5%
while average commercial receivables outstanding declined
4%. Excluding Fidelity, average finance receivables
outstanding in the first nine months of 1997 increased 2%
from the first nine months of 1996.
Nine Months Ended September 30,
Rate of charge on finance
receivables: 1997 1996
Consumer 21.02% 21.23%
Commercial 13.88 14.99
Total 20.46 20.70
<PAGE 9>
NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
The increase in income from finance charges and interest was
due to growth in average finance receivables outstanding
offset in part by the decline in the rate of charge. The
increase in average finance receivables was due primarily to
regular business activity and the addition of Fidelity
receivables.
Insurance premiums and commissions increased 1% ($103.8
million in the first nine months of 1997 compared with
$102.8 million in the first nine months of 1996.) Changes
in insurance premiums and commissions generally correspond
to changes in average consumer finance loans outstanding not
secured by real estate. Average consumer finance loans
outstanding not secured by real estate increased 3% in the
first nine months of 1997 compared with the first nine
months of 1996. Insurance losses and loss expenses
increased 1% ($29.4 million in the first nine months of 1997
compared with $29.1 million in the first nine months of
1996).
Other income increased 11% ($151.1 million in the first nine
months of 1997 compared with $136.3 million in the first
nine months of 1996). Other income increased 18% in the
third quarter of 1997 compared to the third quarter of 1996
($53.0 million compared with $44.9 million). The increase
in other income was due primarily to increases in investment
income.
Operating expenses increased 4% ($399.8 million in the first
nine months of 1997 compared with $383.1 million in the
first nine months of 1996). The increase was due primarily
to increases in employee compensation and benefits and other
costs resulting from business expansion including the
addition of Fidelity. At September 30, 1997, Norwest
Financial was operating 1,224 consumer finance branch
offices compared with 1,061 at September 30, 1996.
Operating expenses increased 8% in the third quarter of 1997
compared with the third quarter of 1996 ($139.0 million
compared with $128.7 million). Excluding Fidelity,
operating expenses increased 4% in the third quarter of 1997
compared with the third quarter of 1996.
Interest and debt expense increased 3% ($287.9 million in
the first nine months of 1997 compared with $280.0 million
in the first nine 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 nine months of 1997 increased 5% from the first
nine months of 1996.
<PAGE 10>
NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
Nine Months Ended September 30,
Costs of funds: 1997 1996
Short-term 5.23% 5.41%
Long-term 6.84 6.92
Total 6.36 6.46
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 5% from the first nine months of 1996.
Interest and debt expense increased 10% in the third quarter
of 1997 compared with the third quarter of 1996 ($102.0
million compared with $92.6 million). Average total
outstanding borrowings in the third quarter of 1997
increased 12% from the third quarter of 1996 primarily due
to the addition of Fidelity. The total cost of funds was
6.41% in the third quarter of 1997 compared with 6.39% in
the third quarter of 1996.
Provision for credit losses increased 13% ($157.2 million in
the first nine months of 1997 compared with $139.1 million
in the first nine months of 1996). Net write-offs as a
percentage of average net receivables outstanding increased
to 2.50% in the first nine months of 1997 compared with
2.31% in the first nine months of 1996. Excluding Fidelity,
net write-offs as a percentage of average net receivables
outstanding were 2.42% in the first nine months of 1997.
Norwest Financial, along with the consumer finance industry,
has experienced an increase in net write-offs. Management
believes the allowance for credit losses at September 30,
1997, and December 31, 1996, is adequate to absorb possible
losses in the finance receivables portfolio.
Federal and state income taxes decreased 3% ($104.5 million
in the first nine months of 1997 compared with $107.9
million in the first nine months of 1996). The effective
tax rate was 34.5% for the first nine months of 1997 and
35.4% for the first nine 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 September 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.
<PAGE 11>
NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Concluded
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.
<PAGE 12>
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, 1997 1996 1995 1994 1993 1992
2.02 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 nine
months ended September 30, 1997.
(b) Reports on 8-K
Two reports on Form 8-K were filed during the quarter for
which this report is filed. Accordingly, the following
information is furnished:
A Form 8-K Current Report dated July 8, 1997 was filed to
report, pursuant to Item 5. (Other Events), that (i)
Norwest Corporation ("Norwest") the indirect parent of
Norwest Financial, Inc. (the "Company"), had entered into a
definitive purchase agreement with BankBoston Corporation
for Norwest to acquire Fidelity Acceptance Corporation
("Fidelity"), and (ii) it was contemplated that the Company
would directly or indirectly acquire Fidelity and thereafter
own and operate Fidelity and its subsidiaries.
A Form 8-K Current Report dated September 2, 1997 was filed
to report, pursuant to Item 2. (Acquisition or Disposition
of Assets), that on August 31, 1997 Norwest had consummated
the acquisition of Fidelity through a wholly-owned
subsidiary, and on September 2, 1997, through capital
contributions, such subsidiary (along with Fidelity and its
subsidiaries) were acquired by the Company. Such report
further reported that funding necessary for this acquisition
(totaling approximately $1.1 billion) was provided by the
Company.
<PAGE 13>
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 3, 1997
By /s/ Eric Torkelson
Eric Torkelson
Vice President and Controller
(Principal Accounting Officer)