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Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1998 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 or 15(d) 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
May 1, 1998.
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)
March 31, December 31,
Assets 1998 1997
Cash and cash equivalents $ 151,445 $ 94,600
Securities available-for-sale 1,106,703 1,063,600
Finance receivables:
Consumer:
Loans 3,902,500 3,893,550
Sales finance contracts 2,455,273 2,332,535
Credit cards 409,795 422,435
Commercial 480,179 465,601
Total finance receivables 7,247,747 7,114,121
Less allowance for credit losses 305,343 297,800
Finance receivables - net 6,942,404 6,816,321
Notes receivable - affiliates 641,282 646,832
Property and equipment (at cost, less
accumulated depreciation of
$113,210 for 1998 and $107,435
for 1997) 118,485 102,537
Deferred income taxes 60,866 64,420
Other assets 362,098 533,614
Total assets $9,383,283 $9,321,924
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
Liabilities and
Stockholder's Equity 1998 1997
Loans payable - short-term:
Commercial paper $1,625,531 $1,664,796
Affiliates 393,153 392,165
Other 25,025 170,000
Unearned insurance premiums
and commissions 134,417 143,478
Insurance claims and
policy reserves 33,060 30,566
Accrued interest payable 100,294 93,344
Other payables to affiliates 46,574 13,815
Other liabilities 307,305 228,557
Long-term debt:
Senior 5,288,524 5,219,413
Subordinated 2,000 2,000
Total long-term debt 5,290,524 5,221,413
Total liabilities 7,955,883 7,958,134
Stockholder's equity:
Common stock without par value
(authorized 1,000 shares,
issued 1,000 shares) 3,855 3,855
Additional paid in capital 185,410 185,410
Retained earnings 1,226,108 1,167,418
Accumulated other
comprehensive income 12,027 7,107
Total stockholder's equity 1,427,400 1,363,790
Total liabilities and
stockholder's equity $9,383,283 $9,321,924
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Statements of Consolidated Earnings (Unaudited)
(Thousands of Dollars)
Three Months Ended March 31,
1998 1997
Income:
Finance charges and interest $356,463 $301,364
Insurance premiums and commissions 35,775 35,178
Other income 54,913 47,913
Total income 447,151 384,455
Expenses:
Operating expenses 164,240 130,694
Interest and debt expense 114,350 92,879
Provision for credit losses 67,176 54,749
Insurance losses and loss expenses 10,788 9,274
Total expenses 356,554 287,596
Earnings before income taxes 90,597 96,859
Income taxes 31,907 34,082
Net income $ 58,690 $ 62,777
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Thousands of Dollars)
Three Months Ended March 31,
1998 1997
Net income $58,690 $62,777
Other comprehensive income,
before income taxes:
Unrealized gains(losses) on
securities available-for-sale:
Unrealized gains (losses)
arising during the period 8,265 (9,190)
Less: reclassification
adjustment for gains
included in net income 1,569 1,434
6,696 (10,624)
Foreign currency translation
adjustment 474 (1,198)
Other comprehensive income before
income taxes 7,170 (11,822)
Income tax expense (benefit) related
to components of other
comprehensive income 2,250 (3,626)
Other comprehensive income (loss),
net of income taxes 4,920 (8,196)
Comprehensive income $63,610 $54,581
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Statements of Consolidated Cash Flows (Unaudited)
(Thousands of Dollars)
Three Months Ended March 31,
1998 1997
Cash flows from operating activities:
Net earnings $ 58,690 $ 62,777
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Provision for credit losses 67,176 54,749
Depreciation and amortization 10,961 6,995
Deferred income taxes 1,304 (2,280)
Other assets 9,065 (16,436)
Unearned insurance premiums and
commissions (9,061) (5,439)
Insurance claims and policy reserves 2,494 (816)
Accrued interest payable 6,950 5,795
Other payables to affiliates 32,759 30,646
Other liabilities 78,748 17,843
Net cash flows from operating activities 259,086 153,834
Cash flows from investing activities:
Finance receivables:
Principal collected 1,535,671 1,338,642
Receivables originated or purchased (1,728,930) (1,383,042)
Proceeds from sales of securities 27,462 26,701
Proceeds from maturities of securities 37,990 18,956
Purchases of securities (101,859) (80,093)
Net additions to property and equipment (20,817) (6,262)
Net decrease (increase) in notes
receivable - affiliates 5,550 (30,276)
Other 159,222 150,229
Net cash flows from (used for)
investing activities (85,711) 34,855
Cash flows from financing activities:
Net decrease in loans
payable - short-term (183,252) (89,988)
Proceeds from issuance of senior
long-term debt 70,446 36,545
Repayments of senior long-term debt (3,724) (150,000)
Dividends paid (1,729)
Net cash flows used for financing activities (116,530) (205,172)
Net increase (decrease) in cash and
cash equivalents 56,845 (16,483)
Cash and cash equivalents beginning of period 94,600 141,692
Cash and cash equivalents end of period $ 151,445 $ 125,209
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Consolidated Statements of Stockholder's Equity (Unaudited)
(Thousands of Dollars)
Accumulated Other
Comprehensive Income
Unrealized Gains
Additional Foreign on Securities
Common Paid In Retained Currency Available-
Stock Capital Earnings Translation for-Sale Total
Balance,
December 31, 1996 $3,855 $ 90,766 $ 959,697 $(5,991) $ 9,705 $1,058,032
Comprehensive income:
Net income 62,777 62,777
Other (1,198) (6,998) (8,196)
Dividends (1,729) (1,729)
Balance,
March 31, 1997 $3,855 $ 90,766 $1,020,745 $(7,189) $ 2,707 $1,110,884
Balance,
December 31, 1997 $3,855 $185,410 $1,167,418 $(8,757) $15,864 $1,363,790
Comprehensive income:
Net income 58,690 58,690
Other 474 4,446 4,920
Balance,
March 31, 1998 $3,855 $185,410 $1,226,108 $(8,283) $20,310 $1,427,400
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 1997 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
(collectively, "Norwest Financial"). Intercompany accounts
and transactions are eliminated. The Company is a wholly-
owned subsidiary of Norwest Financial Services, Inc. (the
"Parent") which is a wholly-owned subsidiary of Norwest
Corporation ("Norwest").
2. Dividend Restrictions.
Certain long-term debt instruments restrict payment of
dividends on and acquisitions of the Company's common stock.
In addition, such debt instruments and the Company's bank
credit agreements contain certain requirements as to
maintenance of net worth (as defined). Approximately $777
million of consolidated stockholder's equity was
unrestricted at March 31, 1998.
3. Other Income.
Income from affiliates was $14.8 million and $13.7 million
for the three months ended March 31, 1998 and 1997,
respectively.
Interest and dividends from securities available-for-sale
and cash equivalents were $17.8 million and $14.2 million
for the three months ended March 31, 1998 and 1997,
respectively.
4. Reclassifications.
Certain amounts in the 1997 financial statements have been
reclassified to conform to the presentation used in the 1998
financial statements.
5. Change in Accounting Policy.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 requires
disclosures of the components of comprehensive income and
the accumulated balance of other comprehensive income with
total stockholder's equity. The adoption of FAS 130 has not
had a material effect on the Company's financial statements.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Statements made in Management's Discussion and Analysis may
be forward-looking and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements address management's
present expectations about future performance and involve
inherent risks and uncertainties. A number of important
factors (some of which are beyond the Company's control)
could cause actual results to differ materially from those
in the forward-looking statements. Those factors include
the economic environment, competition, products and pricing
in the geographic and business areas in which the Company
conducts its operations, prevailing interest rates, changes
in government regulations and policies affecting financial
services companies, credit quality and credit risk
management, acquisitions, and integration of acquired
businesses.
Effective August 31, 1997, Norwest, through its wholly-owned
subsidiary, Fidelity Acceptance Holding, Inc. ("FAHI"),
acquired Fidelity Acceptance Corporation. 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. Effective September 2,
1997, Norwest made a capital contribution, without
consideration, of all of the issued and outstanding shares
of capital stock of FAHI to the Parent. Immediately
thereafter, the Parent 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 a merger of interests under
common control. The principal business of Fidelity
Acceptance Corporation and its subsidiaries ("Fidelity") is
purchasing sales finance contracts directly from automobile
dealers and making direct loans secured by automobiles.
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 16% for
the first three months ($447.2 million in the first three
months of 1998 compared with $384.5 million in the first
three months of 1997). Excluding Fidelity, total income
increased 2% for the first three months of 1998.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
Income from finance charges and interest increased 18% for
the first three months ($356.5 million in the first three
months of 1998 compared with $301.4 million in the first
three months of 1997). Income from finance charges and
interest remained unchanged excluding Fidelity. 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 three months of 1998 increased 20% from
the first three months of 1997; average consumer receivables
outstanding increased 22% while average commercial
receivables outstanding declined 2%. Excluding Fidelity,
average finance receivables outstanding in the first three
months of 1998 increased 3% from the first three months of
1997.
Three Months Ended March 31,
Rate of charge on finance receivables: 1998 1997
Consumer 20.58% 20.96%
Commercial 13.79 13.77
Total 20.12 20.36
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
the addition of Fidelity receivables.
Insurance premiums and commissions increased 2% ($35.8
million in the first three months of 1998 compared with
$35.2 million in the first three months of 1997.) Changes
in insurance premiums and commissions generally correspond
to changes in average consumer finance loans outstanding not
secured by real estate and average credit card receivables
outstanding. Average consumer finance loans outstanding not
secured by real estate and average credit card receivables
outstanding increased 17% in the first three months of 1998
compared with the first three months of 1997. This increase
was due primarily to the addition of Fidelity. Excluding
Fidelity, average consumer finance loans not secured by real
estate and credit card receivables decreased 2%. Insurance
premiums and commissions in Fidelity during the first three
months of 1998 were $.5 million. Insurance losses and loss
expenses increased 16% ($10.8 million in the first three
months of 1998 compared with $9.3 million in the first three
months of 1997). The increase was primarily due to Canadian
business.
Other income increased 15% ($54.9 million in the first three
months of 1998 compared with $47.9 million in the first
three months of 1997). The increase in other income was due
primarily to increases in investment income, income from
affiliates, and other fee income.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
Operating expenses increased 26% ($164.2 million in the
first three months of 1998 compared with $130.7 million in
the first three months of 1997). Excluding Fidelity,
operating costs increased 13% in the first three months of
1998. The increase was due primarily to increases in
employee compensation and benefits and other costs relating
to business expansion. At March 31, 1998, Norwest Financial
was operating 1,226 consumer finance branch offices compared
with 1,094 at March 31, 1997.
Interest and debt expense increased 23% ($114.4 million in
the first three months of 1998 compared with $92.9 million
in the first three months of 1997). Average total
borrowings increased primarily due to the addition of
Fidelity. 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 three
months of 1998 increased 24% from the first three months of
1997.
Three Months Ended March 31,
Costs of funds: 1998 1997
Short-term 5.62% 5.03%
Long-term 6.74 6.85
Total 6.44 6.31
Changes in average debt outstanding generally correspond to
changes in average finance receivables outstanding combined
with the change in notes receivable - affiliates. Average
finance receivables and notes receivable - affiliates
increased 20% from the first three months of 1997.
Provision for credit losses increased 23% ($67.2 million in
the first three months of 1998 compared with $54.7 million
in the first three months of 1997). Average finance
receivables increased 20% in the first three months of 1998.
Net write-offs as a percentage of average net receivables
outstanding increased to .93% in the first three months of
1998 compared with .88% in the first three months of 1997.
Excluding Fidelity, net write-offs as a percentage of
average net receivables outstanding were .79% in the first
three months of 1998. Management believes the allowance for
credit losses at March 31, 1998, and December 31, 1997, is
adequate to absorb possible losses in the finance
receivables portfolio.
Federal and state income taxes decreased 6% ($31.9 million
in the first three months of 1998 compared with $34.1
million in the first three months of 1997). The effective
tax rate was 35.2% for both the first three months of 1998
and 1997.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Concluded
The Company and a Canadian subsidiary maintain bank lines of
credit and revolving credit agreements to provide an
alternative source of liquidity to support the commercial
paper borrowings. At March 31, 1998, lines of credit and
revolving credit agreements totaling $1,323 million were
being maintained at 33 unaffiliated banks. None of this
credit was in use at the time.
The Company and a Canadian subsidiary obtain long-term debt
capital primarily from (1) the issuance of debt securities
to the public through underwriters on a firm-commitment
basis, (2) the issuance of debt securities to institutional
investors, and (3) term borrowings from commercial banks.
The Company and a Canadian subsidiary 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.
The Company has experienced slower internal growth in
receivables and a reduction in earned rate as a result of
prepayments and competitive pressures causing industry loan
standards and pricing to fall below levels which management
considers prudent. Management now estimates that Norwest
Financial's 1998 earnings will be approximately ten percent
lower than the amount earned in 1997. Management believes
it is important to maintain financial discipline and is
confident of the Company's long-term growth prospects.
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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:
Three
Months
Ended Years Ended December 31,
March 31,
1998 1997 1996 1995 1994 1993
1.77 2.00 2.11 2.13 2.26 2.22
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,
1997, 1996, 1995, 1994 and 1993 and the three
months ended March 31, 1998.
(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: May 1, 1998
By \S\ Eric Torkelson
Eric Torkelson
Vice President and Controller
(Principal Accounting Officer)