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Form 10-Q
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 June 30, 1999 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 6, 1999.
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 (Unaudited)
(Thousands of Dollars)
June 30, December 31,
Assets 1999 1998
Cash and cash equivalents $ 127,417 $ 139,184
Securities available-for-sale 1,219,215 1,203,500
Finance receivables 8,526,840 8,270,227
Less allowance for credit losses 357,314 350,984
Finance receivables - net 8,169,526 7,919,243
Notes receivable - affiliates 421,713 499,123
Property and equipment (at cost, less
accumulated depreciation of $144,611
for 1999 and $135,105 for 1998) 236,425 187,695
Deferred income taxes 72,934 60,717
Other receivables from affiliates 48,923
Other assets 466,901 506,745
Total assets $10,763,054 $10,516,207
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Consolidated Balance Sheets (Unaudited)
(Thousands of Dollars)
June 30, December 31,
Liabilities and
Stockholder's Equity 1999 1998
Loans payable - short-term:
Commercial paper $2,505,882 $2,662,321
Affiliates 320,105 194,453
Other 49,763 237,467
Unearned insurance premiums
and commissions 136,520 132,793
Insurance claims and policy reserves 31,962 29,750
Accrued interest payable 92,488 96,482
Other payables to affiliates 44,173
Other liabilities 391,981 280,737
Senior long-term debt 5,644,937 5,272,818
Total liabilities 9,173,638 8,950,994
Stockholder's equity:
Common stock without par value
(authorized 1,000 shares, issued
and outstanding 1,000 shares) 3,855 3,855
Additional paid in capital 196,697 189,438
Retained earnings 1,393,809 1,362,370
Accumulated other comprehensive
income (loss), net of income taxes (4,945) 9,550
Total stockholder's equity 1,589,416 1,565,213
Total liabilities and
stockholder's equity $10,763,054 $10,516,207
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Consolidated Statements of Income (Unaudited)
(Thousands of Dollars)
Quarter Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
Income:
Finance charges and interest $402,246 $365,545 $ 801,406 $ 722,008
Insurance premiums and commissions 123,908 146,305 154,330 186,290
Other income 55,769 60,797 111,782 111,500
Total income 581,923 572,647 1,067,518 1,019,798
Expenses:
Operating expenses 189,930 167,985 379,497 332,225
Interest and debt expense 125,745 119,703 250,608 234,053
Provision for credit losses 58,801 63,304 126,883 130,480
Insurance losses and loss expenses 94,635 122,537 105,620 133,325
Total expenses 469,111 473,529 862,608 830,083
Income before income taxes 112,812 99,118 204,910 189,715
Income taxes 41,148 34,812 73,483 66,719
Net income $ 71,664 $ 64,306 $131,427 $ 122,996
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,
1999 1998 1999 1998
Net income $71,664 $64,306 $131,427 $122,996
Other comprehensive income (loss),
before income taxes:
Unrealized gains (losses) on
securities available-for-sale:
Unrealized gains (losses)
arising during the period (15,034) 3,413 (20,330) 11,678
Less: reclassification
adjustment for net gains
included in net income 3,082 2,038 5,846 3,607
(18,116) 1,375 (26,176) 8,071
Foreign currency
translation adjustment 2,016 (2,185) 2,982 (1,711)
Other comprehensive income
(loss) before income taxes (16,100) (810) (23,194) 6,360
Income tax expense (benefit)
related to unrealized gains
(losses) on securities
available-for-sale (6,315) 444 (8,699) 2,694
Other comprehensive income
(loss), net of income taxes (9,785) (1,254) (14,495) 3,666
Comprehensive income $61,879 $63,052 $116,932 $126,662
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Thousands of Dollars)
Six Months Ended June 30,
1999 1998
Cash flows from operating activities:
Net income $131,427 $122,996
Adjustments to reconcile net income to
net cash flows from operating activities,
net of effect of contributed subsidiaries:
Provision for credit losses 126,883 130,480
Depreciation and amortization 27,341 23,728
Deferred income taxes (2,129) 2,777
Other receivables from affiliates (47,836)
Other assets (49,516) (81,011)
Unearned insurance premiums
and commissions 3,727 (6,573)
Insurance claims and policy reserves 2,212 1,252
Accrued interest payable (3,994) 4,597
Other payables to affiliates (44,173) 19,856
Other liabilities 110,256 175,788
Net cash provided by operating activities 254,198 393,890
Cash flows from investing activities:
Finance receivables:
Principal collected 3,692,815 3,208,816
Receivables originated or purchased (4,059,635) (3,532,603)
Proceeds from sales of securities 92,857 74,477
Proceeds from maturities of securities 95,464 93,770
Purchases of securities (230,212) (218,911)
Net additions to property and equipment (57,238) (41,715)
Net decrease (increase) in notes receivable -
affiliates, net of effect of
contributed subsidiaries 55,886 (226,793)
Cash and cash equivalents of contributed
subsidiaries received 1,002 503
Other 117,943 62,641
Net cash used by investing activities (291,118) (579,815)
Cash flows from financing activities:
Net increase (decrease) in loans
payable - short term (218,491) 218,208
Proceeds from issuance of
senior long-term debt 701,834 216,451
Repayment of long-term debt:
Senior (358,190) (159,891)
Subordinated (2,000)
Dividends paid (100,000)
Net cash provided by financing activities 25,153 272,768
Net increase (decrease) in cash and
cash equivalents (11,767) 86,843
Cash and cash equivalents beginning of period 139,184 94,600
Cash and cash equivalents end of period $127,417 $ 181,443
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 (Loss)
Unrealized Gains
(Losses) on
Additional Foreign Securities
Common Paid In Retained Currency Available-
Stock Capital Earnings Translation for-Sale Total
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 subsidiaries 4,028 6,348 10,376
Balance, June 30, 1998 $3,855 $189,438 $1,296,762 $(10,468) $ 21,241 $1,500,828
Balance, December 31, 1998 $3,855 $189,438 $1,362,370 $(13,530) $ 23,080 $1,565,213
Comprehensive income:
Net income 131,427 131,427
Other 2,982 (17,477) (14,495)
Contributed subsidiaries 7,259 12 7,271
Dividends (100,000) (100,000)
Balance, June 30, 1999 $3,855 $196,697 $1,393,809 $(10,548) $ 5,603 $1,589,416
See accompanying notes to consolidated financial statements.
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NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements(Unaudited)
The accompanying unaudited consolidated financial statements
and notes have been prepared in accordance with the accounting
policies set forth in Norwest Financial, Inc.'s 1998 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.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year.
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 Wells Fargo
& Company ("Wells Fargo").
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 $939 million of consolidated
stockholder's equity was unrestricted at June 30, 1999.
3. Other Income.
Income from affiliates was $11.5 million and $17.7 million
for the quarters ended June 30, 1999 and 1998, respectively,
and $23.6 million and $32.5 million for the six months ended
June 30, 1999 and 1998, respectively.
Interest and dividends from securities available-for-sale
and cash equivalents were $18.7 million and $18.3 million
for the quarters ended June 30, 1999 and 1998, respectively,
and $37.3 million and $36.1 million for the six months ended
June 30, 1999 and 1998, respectively.
4. Reclassifications.
Certain amounts in the 1998 financial statements have been
reclassified to conform to the presentation used in the 1999
financial statements.
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NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
5. Finance Receivables.
Finance receivables are as follows:
June 30, December 31,
(In Thousands) 1999 1998
United States consumer finance:
Loans secured by real estate $2,080,778 $1,889,410
Loans not secured by real estate 1,136,422 1,124,381
Total loans 3,217,200 3,013,791
Sales finance contracts 1,144,840 1,191,675
Credit cards 489,888 489,131
Total United States consumer finance 4,851,928 4,694,597
Canadian consumer finance:
Loans secured by real estate 79,092 71,011
Loans not secured by real estate 414,888 390,612
Total loans 493,980 461,623
Sales finance contracts 451,149 474,924
Credit cards 10,552 7,608
Total Canadian consumer finance 955,681 944,155
Automobile finance 2,084,717 2,022,813
Other 634,514 608,662
Total finance receivables $8,526,840 $8,270,227
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NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
6. Allowance for Credit Losses.
The analysis of the allowance for credit losses is as follows:
Quarter Ended June 30, Six Months Ended June 30,
(In Thousands) 1999 1998 1999 1998
Allowance for credit losses
beginning of period $357,213 $305,343 $350,984 $297,800
Provision for credit losses
charged to expense 58,801 63,304 126,883 130,480
Write-offs (71,695) (74,142) (147,796) (153,034)
Recoveries 12,995 12,471 27,243 25,103
Allowance related to receivables
contributed or acquired 25,199 31,826
Allowance for credit losses
end of period $357,314 $332,175 $357,314 $332,175
7. Statements of Consolidated Cash Flows.
The Company and its subsidiaries consider highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents. Supplemental disclosure of certain cash flow information
is presented below:
Quarter Ended June 30, Six Months Ended June 30,
(In Thousands) 1999 1998 1999 1998
Cash paid for:
Interest $138,295 $119,125 $254,479 $228,624
Income taxes 60,135 49,156 133,275 47,189
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NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
8. Segment Information.
The Company has three reportable segments: U.S. consumer finance, Canadian consumer finance, and automobile finance. The Company's
operating segments are determined by product type and geography. U.S. consumer finance operations make loans to individuals and
purchase sales finance contracts through 761 consumer finance branches in 46 states, Guam, Saipan, and Puerto Rico. The U.S.
consumer finance segment also issues credit cards through two banking subsidiaries. Canadian consumer finance operations make
loans to individuals and purchase sales finance contracts through 148 consumer finance branches in the 10 provinces. Automobile
finance operations specialize in purchasing sales finance contracts directly from automobile dealers and making loans secured by
automobiles through 217 branches in 32 states and Puerto Rico. Results from insurance operations are included in the appropriate
segment.
Selected financial information for each segment is shown below:
(In Thousands)
U.S. Canadian
Consumer Consumer Automobile
Finance Finance Finance Other* Eliminations Total
Quarter Ended
June 30,: 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
Finance charges and
interest $225,704 $220,226 $ 59,253 $ 52,338 $ 95,661 $ 74,134 $ 21,628 $ 18,847 $ $ $ 402,246 $ 365,545
Intersegment income 11,542 12,538 (11,542) (12,538)
Total income 284,281 288,411 66,660 57,755 99,967 78,005 142,557 161,014 (11,542) (12,538) 581,923 572,647
Net income 34,944 41,792 8,996 5,747 14,038 5,432 13,686 11,335 71,664 64,306
Six Months Ended June 30,:
Finance charges and
interest 450,275 446,382 116,564 91,196 191,229 147,739 43,338 36,691 801,406 722,008
Intersegment income 22,939 25,211 (22,939) (25,211)
Total income 566,858 575,809 129,592 101,348 199,988 155,395 194,019 212,457 (22,939) (25,211) 1,067,518 1,019,798
Net income 69,993 73,360 16,522 12,165 25,589 11,383 19,323 26,088 131,427 122,996
* Information from other segments below the quantitative threshold are attributable to commercial finance operations, information
services operations, miscellaneous insurance companies, collection services, and operations in Argentina.
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NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
9. Business Combinations.
Effective January 1, 1999, the Parent made a capital contribution, without
consideration, to the Company of the issued and outstanding shares of capital
stock of Aman Collection Service, Inc. and Aman Collection Service 1, Inc.
(collectively referred to as "Aman"). This capital contribution was
accounted for as a merger of interests under common control. Aman's
headquarters are in Aberdeen, South Dakota and its principal business is
collection services.
Effective January 21, 1999, the Parent made a capital contribution, without
consideration, to the Company of the assets (along with and subject to the
liabilities) and other related leasehold or property interests or rights
formerly held by Mid-Penn Consumer Discount Company ("Mid-Penn").
Immediately preceding the capital contribution, Mid-Penn had merged with
and into the Parent, and the Parent was the surviving corporation. This
capital contribution was accounted for as a merger of interests under common
control. Mid-Penn's headquarters were in Philadelphia, Pennsylvania and its
principal business was consumer finance. Mid-Penn had finance receivables
outstanding of $10 million at the time of the merger into the Parent.
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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.
Norwest Financial's performance for the second quarter of 1999 closely
paralleled performance for the first six months of 1999. 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 5% for the first six
months ($1,067.5 million in the first six months of 1999 compared with
$1,019.8 million in the first six months of 1998).
Income from finance charges and interest increased 11% for the first six
months ($801.4 million in the first six months of 1999 compared with $722.0
million in the first six months of 1998). Changes in income from finance
charges and interest result predominantly 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 1999 increased 16% from the first six months of 1998;
average U.S. consumer finance receivables outstanding increased 5%, average
Canadian consumer finance receivables outstanding increased 30%, average
automobile finance receivables outstanding increased 41%, and average other
finance receivables outstanding increased 21%.
Six Months Ended June 30,
Rate of charge on finance receivables: 1999 1998
U.S. consumer finance 19.04% 19.83%
Canadian consumer finance 24.84 25.34
Automobile finance 18.76 20.46
Other 14.23 14.47
Total 19.27 20.13
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
The increases in income from finance charges and interest was due
predominantly to growth in average receivables outstanding. This was offset
in part by the decline in the rate of charge. Growth in average receivables
for all categories was due predominantly to various acquisitions combined
with regular business activity. Substantially all of the increase in
Canadian consumer finance average receivables was due to the acquisition of
T. Eaton Acceptance Co. Limited and National Retail Credit Services Limited,
effective April 21, 1998. Substantially all of the increase in automobile
finance average receivables was due to the capital contribution by the Parent
to the Company, of the issued and outstanding shares of capital stock of
Reliable Financial Services, Inc., effective June 30, 1998, along with the
acquisition of automobile sales finance contracts from Sunstar Acceptance
Corporation, a division of NationsBank, in October 1998. Most of the
increase in other average receivables was due to significant receivable
growth of Norwest Financial Preferred Capital, Inc., a subsidiary of the
Company which began rediscounting to commercial entities in 1997. Changes
in the earned rates of charge were due to changes in prevailing market rates
combined with a change in the portfolio mix.
Insurance premiums and commissions decreased 17% ($154.3 million in the
first six months of 1999 compared with $186.3 million in the first six
months of 1998.) Insurance losses and loss expenses decreased 21% ($105.6
million in the first six months of 1999 compared with $133.3 million in the
first six months of 1998.) The decreases were predominantly due to decreases
in insurance premiums and commissions and insurance losses and loss expenses
on multiple peril crop insurance.
Other income increased less than 1% ($111.8 million in the first six months
of 1999 compared with $111.5 million in the first six months of 1998).
Operating expenses increased 14% ($379.5 million in the first six months of
1999 compared with $332.2 million in the first six months of 1998). The
increase was due primarily to increases in employee compensation and benefits
and other costs relating to business expansion, including various
acquisitions during 1998.
Interest and debt expense increased 7% ($250.6 million in the first six
months of 1999 compared with $234.1 million in the first six months of 1998).
Changes in interest and debt expense result predominantly 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 1999 increased 10% from the first six months of 1998.
Six Months Ended June 30,
Costs of funds: 1999 1998
Short-term 5.07% 5.64%
Long-term 6.59 6.76
Total 6.09 6.45
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
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 10% from the first six months of 1998.
Provision for credit losses decreased 3% ($126.9 million in the first six
months of 1999 compared with $130.5 million in the first six months of 1998).
Net write-offs decreased 6% in the first six months of 1999.
Six Months Ended June 30,
Net write-offs, not annualized, as a
percentage of average net receivables
outstanding: 1999 1998
U.S. consumer finance 1.18% 1.55%
Canadian consumer finance 2.15 2.02
Automobile finance 1.84 2.94
Other 1.14 .27
Total 1.45 1.78
During 1999, the provision for credit losses exceeded net write-offs by
$6.3 million. At June 30, 1999, the Company had an allowance for credit
losses of $357.3 million (4.19% of receivables) compared with $351.0 million
(4.24% of receivables) at December 31, 1998. There were no material
changes in estimation methods and assumptions during 1999 and 1998.
Non-accrual automobile and other receivables were $41.3 million at June 30,
1999 compared with $32.5 million at December 31, 1998. In addition, finance
receivables outstanding which were more than three payments contractually
delinquent and which were still accruing interest were $99.8 million at
June 30, 1999 compared with $123.7 million at December 31, 1998. Management
believes the allowance for credit losses at June 30, 1999, is adequate to
absorb probable losses on existing receivables in the finance receivables
portfolio.
Income taxes increased 10% ($73.5 million in the first six months of 1999
compared with $66.7 million in the first six months of 1998). Income before
income taxes increased 8% ($204.9 million in the first six months of 1999
compared with $189.7 million in the first six months of 1998.) The effective
tax rate was 35.9% for the first six months of 1999 compared with 35.2% for
the first six months of 1998.
The Company maintains bank lines of credit and revolving credit agreements
to provide an alternative source of liquidity to support the Company's
commercial paper borrowings. At June 30, 1999, lines of credit and revolving
credit agreements totaling $1,817 million were being maintained at 31
domestic and international banks; the entire amount was available on that
date. Additionally, the Company's bank subsidiaries, Dial Bank and Dial
National Bank, have access to federal funds borrowings. At June 30,
1999, federal funds availability at the two banks was $379 million.
The Company and a Canadian subsidiary obtain long-term debt capital primarily
from the issuance of debt securities to the public through underwriters on a
firm-commitment basis and the issuance of debt securities to institutional
investors. The Company and a Canadian subsidiary also obtain long-term debt
from the issuance of medium-term notes (which have maturities ranging from
nine months to 30 years) through underwriters (acting as agent or principal).
The Company 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 on Norwest Financial's finance receivables.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
During 1998 and 1999, Norwest Financial continued with its company-wide
project to prepare Norwest Financial's systems for Year 2000 compliance.
The Year 2000 issue relates to computer systems that use two digits rather
than four to define the applicable year and whether such systems will
properly process information when the year changes to 2000. "Systems"
include all hardware, networks, system and application software, and
commercial "off the shelf" software, and embedded technology such as
properties/date impacted processors in automated systems such as elevators,
telephone systems, security, heating and cooling systems and others.
Priority is given to "mission critical" systems. A system is considered
"mission critical" if it is vital to the successful continuation of a core
business activity.
The implementation of Norwest Financial's Year 2000 readiness project is
divided into four principal phases: Phase I requires a comprehensive
assessment and inventory of all applicable software, system hardware devices,
data and voice communication devices and other embedded technology to
determine Year 2000 vulnerability and risk; Phase II requires date detection
on systems intended to determine which systems must be remediated and which
systems are compliant and require testing only, determination of the
resources and costs, and the development of schedules and high level testing
plans and schedules for the repair, replacement and/or retirement of systems
that are determined not to be compliant. Phase III requires repair,
replacement and/or retirement of systems that are determined not to be
Year 2000 compliant, and planning the integration testing for those systems
that have interfaces with other systems both internal and external to Norwest
Financial, such as customers/suppliers; and Phase IV requires integration
testing on applicable systems to validate that interfaces are Year 2000
compliant and contingency planning.
Norwest Financial may be affected by the Year 2000 compliance issues of
governmental agencies, business and other entities who provide data to,
or receive data from, Norwest Financial, and by entities, such as borrowers,
vendors, customers and business partners, whose financial condition or
operational capability is significant to Norwest Financial. Norwest
Financial's Year 2000 project also includes assessing the Year 2000 readiness
of certain customers, borrowers, vendors, business partners, counterparties
and governmental entities and the testing of major external interfaces with
third parties which Norwest Financial has determined are critical. Norwest
Financial is primarily engaged in the consumer and automobile finance
business. The average balance outstanding with any individual customer is
not significant. As a result Norwest Financial does not plan to test the
Year 2000 compliance of any borrowers. Norwest Financial has tested
mainframe and mid-range software applications included in the company's
systems. Norwest Financial is testing the Year 2000 compliance of its
mission critical vendors. In addition, Norwest Financial is obtaining
representations and warranties of the Year 2000 compliance of its major
vendors. In addition to assessing the readiness of these external
parties, Norwest Financial has developed contingency plans which include
recovery plans and alternatives to mitigate the effects of counterparties
whose own failure to properly address Year 2000 issues may adversely impact
Norwest Financial's ability to perform mission critical functions. These
contingency plans have been substantially completed. The contingency plans
have been validated and subject to review by a qualified independent party.
Specific plans for the turn of the century event, December 31, 1999 through
January 3, 2000 will be completed and tested during the third quarter of
1999. The Company has used independent verification and validation
processes in determining its Year 2000 compliance. The Company did not rely
on automated tools for verification and validation.
Norwest Financial has substantially completed Phases I, II, III and IV of
its Year 2000 project, and believes all mission critical functions are Year
2000 compliant. In the area of embedded technology, or non-information
technology systems, Norwest Financial has completed Phases I, II, III,
and IV of the Year 2000 project. The Company believes all mission critical
embedded technology is Year 2000 compliant.
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NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
Through June 30, 1999, Norwest Financial has incurred charges of $5.0 million
related to its Year 2000 project. This represents less than 10% of its
information technology budget. Charges include $3.4 million related to the
cost of internal staff redeployed to the Year 2000 project, as well as $.5
million for external consulting costs and $1.1 million for costs of
accelerated replacement of hardware and software due to Year 2000 issues.
Norwest Financial currently estimates that its total cost for the Year 2000
project will be $5.4 million. The redeployment of internal staff has not
delayed other information technology projects, and thus will not have an
impact on the financial condition or results of operations.
The foregoing paragraphs contain a number of forward-looking statements.
These statements reflect management's best current estimates, which were
based on numerous assumptions about future events, including the continued
availability of certain resources, representations received from third party
service providers and other third parties, and additional factors. There
can be no guarantee that these estimates, including Year 2000 costs, will be
achieved, and actual results could differ materially from those estimates.
A number of important factors could cause management's estimates and the
impact of the Year 2000 issue to differ materially from what is described in
the forward-looking statements contained in the above paragraphs. Those
factors include, but are not limited to, uncertainties in the costs of
hardware and software, the availability and cost of programmers and other
systems personnel, inaccurate or incomplete execution of the phases,
ineffective remediation of computer code and the ability of Norwest Financial's
customers, vendors, competitors and counterparties to effectively address the
Year 2000 issue.
If Year 2000 issues are not adequately addressed by Norwest Financial and
significant third parties, Norwest Financial's business, results of
operations and financial position could be materially adversely affected.
Failure of certain vendors to be Year 2000 compliant could result in
disruption of important services upon which Norwest Financial depends,
including, but not limited to, such services as telecommunications,
electrical power and data processing. The failure of loan customers to
properly prepare for the Year 2000 could also result in increases in problem
loans and credit losses in future years. Notwithstanding Norwest Financial's
efforts, there can be no assurance that Norwest Financial or significant
third party vendors or other significant third parties will adequately
address their Year 2000 issues. Norwest Financial is continuing to assess
the Year 2000 readiness of third parties but does not know at this time
whether the failure of third parties to be Year 2000 compliant will have a
material effect on results of operations, liquidity and financial condition.
The forward-looking statements made in the foregoing Year 2000 discussion
speak only as of the date on which such statements are made, and Norwest
Financial undertakes no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made to reflect the occurrence of unanticipated events.
18
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, 1999 1998 1997 1996 1995 1994
1.80 1.72 2.00 2.11 2.13 2.26
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,
1998, 1997, 1996, 1995 and 1994 and the six
months ended June 30, 1999.
(b) Reports on 8-K
One report on Form 8-K/A was filed during the quarter for which this report
is filed. Accordingly, the following information is furnished.
Norwest Financial, Inc. ("NFI") previously filed a Current Report on Form 8-K
dated March 5, 1999 to report, pursuant to Item 4 (Change in Registrant's
Certifying Accountant), that the Board of Directors of NFI dismissed
Deloitte & Touche LLP (subject to the completion of NFI's and related
entities' audits for the year ended December 31, 1998) and approved the
selection of KPMG LLP as NFI's independent accountants for the year ending
December 31, 1999. Such Form 8-K Current Report also placed on file a copy
of the March 5, 1999 letter of Deloitte & Touche LLP to the Securities and
Exchange Commission pursuant to Item 304(a)(3) of Regulation S-K. NFI's
audit for the year ended December 31, 1998 was subsequently completed by
Deloitte & Touche LLP. A Current Report on Form 8-K/A was filed (i) to
update the disclosures required by Item 304 of Regulation S-K (as set forth
in the previously filed Form 8-K Current Report) through the completion of
the 1998 audit, and (ii) to place on file a copy of the May 21, 1999 letter
of Deloitte & Touche LLP to the Securities and Exchange Commission pursuant
to Item 304(a)(3) of Regulation S-K.
19
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 6, 1999
By \S\ Eric Torkelson
Eric Torkelson
Senior Vice President and Controller
(Principal Accounting Officer)