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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 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 August 3, 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)
June 30, December 31,
Assets 1998 1997
Cash and cash equivalents $ 181,443 $ 94,600
Securities available-for-sale 1,122,335 1,063,600
Finance receivables:
Consumer:
Loans 3,952,734 3,893,550
Sales finance contracts 2,737,802 2,332,535
Credit cards 429,550 422,435
Commercial 510,252 465,601
Total finance receivables 7,630,338 7,114,121
Less allowance for credit losses 332,175 297,800
Finance receivables - net 7,298,163 6,816,321
Notes receivable - affiliates 603,006 646,832
Property and equipment (at cost, less
accumulated depreciation of $118,967
for 1998 and $107,435 for 1997) 136,769 102,537
Deferred income taxes 58,728 64,420
Other assets 412,707 533,614
Total assets $9,813,151 $9,321,924
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 1998 1997
Loans payable - short-term:
Commercial paper $1,960,813 $1,664,796
Affiliates 416,827 392,165
Other 67,529 170,000
Unearned insurance premiums
and commissions 136,905 143,478
Insurance claims and policy reserves 31,818 30,566
Accrued interest payable 97,941 93,344
Other payables to affiliates 35,428 13,815
Other liabilities 301,997 228,557
Long-term debt:
Senior 5,263,065 5,219,413
Subordinated 2,000
Total long-term debt 5,263,065 5,221,413
Total liabilities 8,312,323 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 189,438 185,410
Retained earnings 1,296,762 1,167,418
Accumulated other comprehensive
income 10,773 7,107
Total stockholder's equity 1,500,828 1,363,790
Total liabilities and
stockholder's equity $9,813,151 $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)
Quarter Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
Income:
Finance charges and
interest $365,545 $298,593 $722,008 $599,957
Insurance premiums
and commissions 33,487 34,679 69,262 69,857
Other income 61,365 50,166 116,278 98,079
Total income 460,397 383,438 907,548 767,893
Expenses:
Operating expenses 167,985 130,112 332,225 260,806
Interest and debt expense 119,703 92,934 234,053 185,813
Provision for credit losses 63,304 44,627 130,480 99,376
Insurance losses and
loss expenses 10,287 11,007 21,075 20,281
Total expenses 361,279 278,680 717,833 566,276
Earnings before income taxes 99,118 104,758 189,715 201,617
Income taxes 34,812 36,449 66,719 70,531
Net income $ 64,306 $ 68,309 $122,996 $131,086
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Thousands of Dollars)
Quarter Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
Net income $64,306 $68,309 $122,996 $131,086
Other comprehensive income,
before income taxes:
Unrealized gains on securities
available-for-sale:
Unrealized gains arising
during the period 3,413 18,154 11,678 8,964
Less: reclassification
adjustment for gains
included in net income 2,038 5,087 3,607 6,521
1,375 13,067 8,071 2,443
Foreign currency
translation adjustment (2,185) 308 (1,711) (890)
Other comprehensive income
(loss) before income taxes (810) 13,375 6,360 1,553
Income tax expense related to
components of other
comprehensive income 444 4,437 2,694 811
Other comprehensive income
(loss), net of income taxes (1,254) 8,938 3,666 742
Comprehensive income $63,052 $77,247 $126,662 $131,828
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,
1998 1997
Cash flows from operating activities:
Net earnings $ 122,996 $ 131,086
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Provision for credit losses 130,480 99,376
Depreciation and amortization 23,728 13,963
Deferred income taxes 2,777 (6,258)
Other assets 33,813 (21,680)
Unearned insurance premiums and
commissions (6,573) (2,215)
Insurance claims and policy reserves 1,252 340
Accrued interest payable 4,597 (6,387)
Other payables to affiliates 19,856 6,869
Other liabilities 60,964 14,725
Net cash flows from operating activities 393,890 229,819
Cash flows from investing activities:
Finance receivables:
Principal collected 3,208,816 2,767,976
Receivables originated or purchased (3,532,603) (2,936,450)
Proceeds from sales of securities 74,477 63,170
Proceeds from maturities of securities 93,770 44,372
Purchases of securities (218,911) (273,843)
Net additions to property and equipment (41,715) (15,302)
Net increase in notes
receivable - affili ates (226,793) (50,963)
Contributed subsidiary received,
net of cash 503
Other 62,641 151,890
Net cash flows used for investing activities (579,815) (249,150)
Cash flows from financing activities:
Net increase (decrease) in loans payable
- short term 218,208 (81,453)
Proceeds from issuance of long-term debt -
Senior 216,451 365,679
Repayment of long-term debt:
Senior (159,891) (348,623)
Subordinated (2,000) (50,000)
Dividends paid (1,729)
Paid in capital 112,000
Net cash flows from (used for)
financing activities 272,768 (4,126)
Net increase (decrease) in cash and
cash equivalents 86,843 (23,457)
Cash and cash equivalents beginning of period 94,600 141,692
Cash and cash equivalents end of period $ 181,443 $ 118,235
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 131,086 131,086
Other (890) 1,632 742
Paid in capital 112,000 112,000
Dividends (1,729) (1,729)
Balance, June 30, 1997 $3,855 $202,766 $1,089,054 $ (6,881) $11,337 $1,300,131
Balance, December 31, 1997 $3,855 $185,410 $1,167,418 $ (8,757) $15,864 $1,363,790
Comprehensive income:
Net income 122,996 122,996
Other (1,711) 5,377 3,666
Contributed subsidiary 4,028 6,348 10,376
Balance, June 30, 1998 $3,855 $189,438 $1,296,762 $(10,468) $21,241 $1,500,828
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
$850 million of consolidated stockholder's equity was unrestricted at
June 30, 1998.
3. Other Income.
Income from affiliates was $17.7 million and $13.2 million for the
quarters ended June 30, 1998 and 1997, respectively, and $32.5 million
and $26.9 million for the six months ended June 30, 1998 and 1997,
respectively.
Interest and dividends from securities available-for-sale and cash
equivalents were $18.3 million and $15.7 million for the quarters ended
June 30, 1998 and 1997, respectively and $36.1 million and $29.9 million
for the six months ended June 30, 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.
Notes to Consolidated Financial Statements (Unaudited)
6. Business Combinations.
Effective April 21, 1998, one of the Company's Canadian subsidiaries
acquired all of the issued and outstanding shares of capital stock of
The T. Eaton Acceptance Co. Limited ("TEAC") and National Retail
Credit Services Limited ("NRCS"). The acquisition was accounted for
as a purchase. TEAC and NRCS are headquartered in Toronto, Ontario and
are primarily engaged in purchasing sales finance contracts. TEAC and
NRCS had finance receivables outstanding of $305 million at the time of
the acquisition.
Effective June 30, 1998, the Parent made a capital contribution, without
consideration, to the Company of the issued and outstanding shares of
capital stock of Reliable Financial Services, Inc. (the "Contributed
Subsidiary" or "Reliable"). This capital contribution was accounted
for as a merger of interests under common control. Reliable's
headquarters are in San Juan, Puerto Rico and its principal business is
automobile finance. Reliable had finance receivables outstanding of
$293 million at June 30, 1998.
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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 as 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.
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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 1998 closely
paralleled performance for the first six months of 1998. 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 18% for the first
six months ($907.5 million in the first six months of 1998 compared with
$767.9 million in the first six months of 1997).
Income from finance charges and interest increased 20% for the first six
months ($722.0 million in the first six months of 1998 compared with
$600.0 million in the first six months of 1997). Income from finance
charges and interest increased 3% 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 the first six months of 1998 increased 22%
from the first six months of 1997; average consumer receivables
outstanding increased 24% while average commercial receivables
outstanding declined 1%. Excluding Fidelity, average finance
receivables outstanding in the first six months of 1998 increased 5%
from the first six months of 1997.
Six Months Ended June 30,
Rate of charge on finance receivables: 1998 1997
Consumer 20.56% 21.03%
Commercial 14.15 13.59
Total 20.13 20.41
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 acquisitions combined with regular
business activity.
Insurance premiums and commissions decreased 1% ($69.3 million in the
first six months of 1998 compared with $69.9 million in the first six
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 18% in the first six months of 1998 compared with the first
six 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 remained constant.
Insurance premiums and commissions in Fidelity during the first six
months of 1998 were $3.1 million.
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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 4% ($21.1 million in the
first six months of 1998 compared with $20.3 million in the first six
months of 1997).
Other income increased 19% ($116.3 million in the first six months of
1998 compared with $98.1 million in the first six months of 1997). The
increase is due primarily to an increase in interest and dividends from
securities available-for-sale and cash equivalents, income from
affiliates and other fee income.
Operating expenses increased 27% ($332.2 million in the first six months
of 1998 compared with $260.8 million in the first six months of 1997).
Excluding Fidelity, operating costs increased 15% in the first six
months of 1998. The increase was due primarily to increases in employee
compensation and benefits and other costs resulting from business
expansion. At June 30, 1998, Norwest Financial was operating 1,164
consumer finance branch offices compared with 1,097 at June 30, 1997.
Interest and debt expense increased 26% ($234.1 million in the first six
months of 1998 compared with $185.8 million in the first six 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 six months of 1998 increased 25% from the first six months of
1997.
Six Months Ended June 30,
Costs of funds: 1998 1997
Short-term 5.64% 5.15%
Long-term 6.76 6.84
Total 6.45 6.33
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 22% from the first six months of 1997.
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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 31% ($130.5 million in the first
six months of 1998 compared with $99.4 million in the first six months
of 1997). Net write-offs as a percentage of average net receivables
outstanding increased to 1.78% in the first six months of 1998 compared
with 1.61% in the first six months of 1997. Excluding Fidelity, net
write-offs as a percentage of average net receivables were 1.47% in the
first six months of 1998. Provision for credit losses in the second
quarter of 1998 increased 42% compared with the second quarter of 1997
($63.3 million compared with $44.6 million). Net write-offs as a
percentage of average net receivables outstanding were .85% for the
second quarter of 1998 and .74% for the second quarter of 1997.
Excluding Fidelity, net write-offs as a percentage of average net
receivables outstanding were .68% for the second quarter of 1998.
Management believes the allowance for credit losses at June 30, 1998,
and December 31, 1997, is adequate to absorb possible losses in the
finance receivables portfolio.
Federal and state income taxes decreased 5% ($66.7 million in the first
six months of 1998 compared with $70.5 million in the first six months
of 1997). The effective tax rate was 35.2% for the first six months of
1998 and 35.0% for the first six months of 1997.
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,
1998, lines of credit and revolving credit agreements totaling $1,490
million were being maintained at 34 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.
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 will continue to
maintain its 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:
Six Months Ended Years Ended December 31,
June 30, 1998 1997 1996 1995 1994 1993
1.79 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 six months ended June 30, 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: August 3, 1998
By \S\ Eric Torkelson
Eric Torkelson
Vice President and Controller
(Principal Accounting Officer)