<PAGE> 1
PART I
Item 1. Business.
THE COMPANY
Norwest Financial, Inc. (the "Company") is an Iowa corporation organized on
August 19, 1982, as the successor to a business founded in 1897, and is a
wholly-owned subsidiary of Norwest Financial Services, Inc. (the "Parent").
The Parent is a wholly-owned subsidiary of Norwest Corporation ("Norwest"),
an $80.2 billion diversified financial services organization. (Unless the
context otherwise requires, any reference to "Norwest Financial" shall
include the Company and its subsidiaries.)
Norwest Financial is primarily engaged in the consumer finance business.
Consumer finance receivables consist of loans made to individuals and sales
finance contracts arising from the sale of goods and services (including the
sale of new and used automobiles). Norwest Financial also has credit card
receivables and insurance premium finance receivables in its consumer
portfolio. At December 31, 1996, the Company and its consumer finance
subsidiaries had 1,073 branch offices in 47 states, Guam, Puerto Rico, and
the ten Canadian provinces. For a summary of total income, earnings before
income taxes and total assets by country, see note 8 to the consolidated
financial statements.
The Company also has insurance subsidiaries which are primarily engaged in
the business of providing, directly or through reinsurance arrangements,
credit life and credit disability insurance as a part of Norwest Financial's
consumer finance business and the consumer finance business of certain
affiliates. Credit property, involuntary unemployment and non-filing
insurance are provided as part of Norwest Financial's consumer finance
business. Such business is written, directly or through reinsurance
agreements, by the Company's insurance subsidiaries, or it is offered on an
agency basis by Norwest Financial. Information services are provided to
Norwest Financial and other financial services companies by subsidiaries of
the Company. The Company also has subsidiaries engaged in the commercial
finance business, including lease financing and accounts receivable
financing.
<PAGE> 2
Effective January 1, 1995, the Parent made a capital contribution, without
consideration, to the Company of the outstanding common stock of Community
Credit Co. and Dial National Bank (the "Contributed Subsidiaries"). These
capital contributions to the Company have been accounted for as a merger of
interests under common control. Community Credit Co. is primarily engaged
in consumer finance including loans secured by real estate and not secured
by real estate and sales finance contracts arising from the sale of
automobiles. Community Credit Co. had 55 branch offices and assets of
$213.6 million at January 1, 1995. Net earnings in 1994 were $6.3 million.
Unless otherwise noted, Community Credit Co. is included when discussing the
consumer finance operations of the Company. Dial National Bank is primarily
engaged in the credit card business and had assets of $112.2 million at
January 1, 1995 and net earnings of $4.0 million for the year ended December
31, 1994.
Effective May 4, 1995, Norwest purchased Island Finance, a group of eight
consumer finance companies headquartered in San Juan, Puerto Rico which
currently has 131 branch offices located in Puerto Rico, Panama, the
Netherlands Antilles, the U.S. Virgin Islands, Aruba, and Costa Rica.
Island Finance's principal business is making direct loans to individuals.
Although Island Finance is not included in the Company's financial results,
the Company manages Island Finance and provided approximately $500 million
of its funding at December 31, 1996. In conjunction with the Island Finance
acquisition, the Company also acquired the net assets of seven offices in
Puerto Rico which are engaged in purchasing sales finance contracts. The
acquisition of the net assets of those offices was accounted for as a
purchase.
The common stock of one of the Company's consumer finance subsidiaries was
transferred by way of a non-cash dividend to the Parent on November 1, 1994
(said subsidiary being hereinafter called the "Transferred Subsidiary").
The Transferred Subsidiary had assets totaling $147.1 million and 39 branch
offices at the time of the transfer.
Effective November 17, 1992, the Company expanded its consumer finance
operations into Canada with the purchase of the consumer finance business
of Trans Canada Credit Corporation Limited. This acquisition was accounted
for as a purchase and, accordingly, Norwest Financial's financial statements
were not restated to reflect the accounts and operations of the business
prior to acquisition. Canadian financial information in this document is
shown in United States dollars unless otherwise indicated. Assets and
liabilities in Canadian dollars are translated at the exchange rate as of
the balance sheet date. Canadian operating results are translated at the
average exchange rates for the period covered by the income statement.
<PAGE> 3
CONSUMER OPERATIONS
At December 31, 1996, consumer receivables accounted for 92% of Norwest
Financial's total finance receivables outstanding. The amount and type of
consumer receivables outstanding in the United States and Canada is shown
below:
Consumer Receivables Outstanding
(In Thousands)
United States Canada
Total
Loans:
Secured by real estate $1,519,556 $ 59,214 $1,578,770
Not secured by real estate 1,365,311 380,574 1,745,885
Total loans 2,884,867 439,788 3,324,655
Sales finance contracts 1,577,785 105,870 1,683,655
Total consumer finance 4,462,652 545,658 5,008,310
Other consumer receivables 447,021 447,021
Total consumer receivables $4,909,673 $545,658 $5,455,331
Loans had an average balance per account of $3,431. Sales finance contracts
had an average balance per account of $1,104. Other consumer receivables
include credit card receivables and insurance premium finance receivables.
<PAGE> 4
Geography
At December 31, 1996, Norwest Financial had consumer finance branch offices
in 47 states, Guam, Puerto Rico, and the ten Canadian provinces. The number
of consumer finance branch offices and percentage of consumer finance
receivables in the United States or Canada at December 31, 1996, is shown
below. Community Credit Co. branch offices are shown separately from the
rest of the United States finance business.
<TABLE>
<CAPTION>
Number of Branch Offices and Percent of Receivables
United States Consumer Finance
Percent of Percent of
Consumer Consumer
Branch Finance Branch Finance
Location Offices Receivables Location Offices Receivables
<S> <C> <C> <C> <C> <C>
Alaska 6 1.0% Nebraska 10 1.1%
Arizona 17 1.8 Nevada 15 1.5
California 103 11.2 New Hampshire 1 .1
Colorado 15 1.7 New Jersey 11 1.1
Connecticut 3 .3 New Mexico 20 2.0
Delaware 2 .2 New York 14 3.4
Florida 46 5.5 North Carolina 19 3.0
Georgia 22 2.8 North Dakota 5 .7
Guam 2 .3 Ohio 29 4.0
Hawaii 17 1.5 Oklahoma 18 2.0
Idaho 13 1.3 Oregon 13 1.4
Illinois 28 4.1 Pennsylvania 28 3.4
Indiana 16 1.6 Puerto Rico 7 .9
Iowa 15 1.9 Rhode Island 4 .6
Kansas 8 .8 South Carolina 25 2.8
Kentucky 25 2.5 South Dakota 4 .3
Louisiana 41 3.6 Tennessee 29 2.9
Maine 1 .1 Texas 54 5.6
Maryland 21 3.9 Utah 13 1.6
Massachusetts 12 1.6 Virginia 11 .9
Michigan 2 .2 Washington 23 2.9
Minnesota 12 1.7 West Virginia 7 .7
Mississippi 24 1.8 Wisconsin 14 1.0
Missouri 27 3.3 Wyoming 4 .3
Montana 7 1.1
863 100.0%
</TABLE>
<PAGE> 5
Number of Branch Offices and Percent of Receivables, continued
<TABLE>
<CAPTION>
Canadian Consumer Finance
Percent of Percent of
Consumer Consumer
Branch Finance Branch Finance
Location Offices Receivables Location Offices Receivables
<S> <C> <C> <C> <C> <C>
Alberta 9 5.7% Nova Scotia 16 12.7%
British Columbia 19 12.3 Ontario 41 32.0
Manitoba 4 3.0 Prince Edward Island 2 1.4
New Brunswick 12 7.7 Quebec 21 13.7
Newfoundland 12 8.0 Saskatchewan 4 3.5
140 100.0%
</TABLE>
<TABLE>
<CAPTION>
Community Credit Co.
Percent of Percent of
Consumer Consumer
Branch Finance Branch Finance
Location Offices Receivables Location Offices Receivables
<S> <C> <C> <C> <C> <C>
Arizona 5 8.4% Nebraska 1 .8%
California 1 .5 Nevada 1 .7
Colorado 4 7.6 Ohio 2 3.1
Illinois 10 18.3 Oregon 1 1.1
Indiana 3 2.7 Pennsylvania 2 1.9
Minnesota 21 31.0 Washington 1 .5
Missouri 2 2.6 Wisconsin 16 20.8
70 100.0%
</TABLE>
<PAGE> 6
Growth and Volume of Consumer Finance Receivables
The following tables present the growth and volume of Norwest Financial's
loans and sales finance contracts for the five years ended December 31,
1996:
<TABLE>
<CAPTION>
Consumer Finance Receivables
and Number of Accounts Outstanding
Percentage Percentage Average Number
At Consumer Increase Increase Balance of
December Finance From Previous Number of From Previous Per Branch
31, Receivables Year Accounts Year Account Offices
<S> <C> <C> <C> <C> <C> <C>
1996 $5,008,310,000 6% 2,494,000 2% $2,008 1,073
1995 4,740,524,000 16 2,443,000 11 1,940 1,029
1994 4,080,360,000 9 2,193,000 6 1,861 942
1993 3,746,230,000 12 2,066,000 8 1,813 942
1992 3,356,832,000 21 1,906,000 15 1,761 882
</TABLE>
Loans Made and Acquired and Sales Finance Contracts Purchased
<TABLE>
<CAPTION>
Number of Average Sales Average
Loans Made Size Loan Finance Number of Size
Year Ended Loans Made and Made and Contracts Contracts Contract
December 31, and Acquired* Acquired Acquired Purchased Purchased Purchased
<S> <C> <C> <C> <C> <C> <C>
1996 $2,731,413,000 910,000 $3,002 $2,129,043,000 1,931,000 $1,103
1995 2,534,194,000 873,000 2,903 2,073,026,000 1,916,000 1,082
1994 2,460,522,000 877,000 2,806 1,825,917,000 1,825,000 1,001
1993 2,169,132,000 775,000 2,799 1,553,022,000 1,591,000 976
1992 1,944,225,000 733,000 2,652 1,257,919,000 1,350,000 932
</TABLE>
*Includes balances renewed of $874,050,000, $794,796,000, $759,775,000,
$680,357,000, and $480,030,000 for the years 1996 through 1992, respectively.
Regulation
Norwest Financial's consumer finance lending operations in the United States
are, for the most part, regulated by consumer finance laws or similar
legislation in each of the states where Norwest Financial has branch
offices. Although consumer finance laws have been in effect many years,
amending and new legislation is frequently enacted. In those states which
have enacted legislation in recent years that affects the maximum permitted
amount of loan and the maximum allowable rate of charge, the trend has been
to increase such amounts and rates of charge, or to deregulate the same
altogether. With respect to the foregoing, Norwest Financial's consumer
lending operations in Canada are, for the most part, essentially
deregulated.
<PAGE>7
Consumer finance laws generally require that each branch office be licensed
to conduct its business. In most jurisdictions the granting of licenses is
dependent on a finding of financial responsibility, character and fitness
of the applicant and, in some jurisdictions, public convenience and
advantage. Each licensed branch office is subject to state or provincial
regulation and examination. In nearly all states a report of the activities
of licensed branch offices must be made annually to the appropriate state
department. Licenses are revocable for cause and their continuance depends
upon compliance with the provisions of the applicable state or provincial
law. Norwest Financial has never had any of its licenses revoked.
The Federal Consumer Credit Protection Act (the "Act") requires a written
statement showing the annual percentage rate of finance charge and other
information to be given to borrowers when consumer credit contracts are
made. When a closed-end loan (a loan which does not allow additional
borrowings) with rates or fees above a certain percentage or amount is
secured by the borrower's principal dwelling, additional disclosures must
be given at least three business days before the loan is consummated, and
limits on prepayment penalties apply to the loan. The Act also requires
certain disclosures to applicants concerning credit reports that are used
as a basis for denying or increasing the charge for credit.
The Real Estate Settlement Procedures Act requires creditors to provide
consumers with estimates of closing costs and other disclosures before loans
secured by residential real estate are made and disclosures of the actual
closing costs at the time the loan is made.
The Federal Equal Credit Opportunity Act prohibits discrimination against
applicants with respect to any aspect of a credit transaction on the basis
of sex, marital status, race, color, religion, national origin, age
(provided the applicant has the capacity to contract), or because all or
part of the applicant's income derives from any public assistance program,
or because the applicant has in good faith exercised any right under the
Federal Consumer Credit Protection Act.
By virtue of a Federal Trade Commission rule, sales finance contracts and
certain loans (those made for the borrower's purchase of personal property
from a seller having a relationship with the lender) contain a provision
that the lender is subject to all claims and defenses which the borrower
could assert against the seller. However, the borrower's recovery under
such provision cannot exceed the amount paid under the contract.
A Federal Trade Commission trade regulation rule on creditor practices
prohibits, among other things, the taking of a security interest (other than
a purchase money security interest) in certain of a borrower's household
goods.
In Canada, there are similar laws regarding the granting of credit.
Regulation of the Company's insurance subsidiaries is described under
"Insurance Operations."
<PAGE> 8
Business Methods
Loans are generally repayable in monthly installments and are made for
periods of 180 months or less. Sales finance contracts may be either open-
end (revolving) or closed-end. An open-end sales finance contract
establishes an account that can be used from time to time for repeated
purchases. A closed-end sales finance contract covers only a single
purchase. At December 31, 1996, open-end sales finance contracts accounted
for 55% of Norwest Financial's total sales finance receivables outstanding.
Open-end sales finance contracts do not have an original maturity because
the accounts created by these contracts may be used for repeated
transactions. The minimum monthly payment of open-end sales finance
contracts generally ranges from 1/12 to 1/30 of the highest unpaid balance
of the account. Closed-end sales finance contracts are repayable in equal
monthly instalments and generally have original maturities of 60 months or
less.
In order to make a careful selection of credit risks, Norwest Financial
reviews credit information concerning each applicant to determine income,
living expenses, payment obligations, indebtedness, paying habits, and
length and stability of employment. The information is obtained from the
applicants, the applicants' employers, creditors of the applicants and
credit reporting agencies. Norwest Financial believes that any risk to its
business which may be created by unfavorable local conditions is minimized
by the large number of customers, their broad range of occupations and
geographical distribution.
In many cases the loans are secured by liens on household goods,
automobiles, other personal property or real estate. Of the total loans
made during 1996, approximately 90% of the amount and 75% of the number were
secured by security agreements or other forms of security. The decision to
record a lien or to appraise or examine the title to collateral depends upon
the size of loan and the type of collateral. As an alternative to recording
liens on personal property securing certain loans, Norwest Financial
purchases non-filing insurance, the cost of which is borne by the borrowers.
Generally, Norwest Financial institutes legal proceedings on its loans,
including foreclosure on collateral, only when it appears that a recovery
is likely which will justify the cost of bringing suit.
Generally, Norwest Financial carries only one loan with a borrower at any
one time. When a borrower wishes to obtain additional money from Norwest
Financial before the loan is fully repaid, a new loan is made sufficient to
pay the balance on the old loan and supply the new money, provided the
borrower's credit is satisfactory. Of the total amount of loans made during
1996, 63.8% represented funds lent to borrowers who requested additional
money while still owing Norwest Financial. In the years 1995 through 1992,
this figure was 63.6%, 63.5%, 64.1%, and 64.4%, respectively. In 1996, of
the 910,000 loans made by Norwest Financial, 421,000 were to borrowers who
requested additional money while still owing a balance to Norwest Financial.
The average amount of additional money lent to such borrowers was $2,065;
the average amount of the old balance was $2,078. Norwest Financial's
policy is that loans are not made to present customers to cure a default in
principal or interest.
<PAGE> 9
Through its network of branch offices, the Company buys sales finance
contracts from retail merchants across the United States, Canada, and Puerto
Rico. The contracts may finance a consumer's purchase of new furniture,
appliances, personal computers or, in the case of contracts bought by
Community Credit Co., an automobile. Credit approvals are made by the
branch office before the contracts are purchased.
For consumer finance offices other than Community Credit Co., sales finance
contracts are the primary source of new customers for direct loans; of new
loans made in 1996, 72% were to current or former sales finance customers.
Norwest Financial began marketing VISA and MasterCard credit cards to
certain of its customers through its United States branch offices in 1987.
These credit cards are issued by Dial Bank, the Company's state chartered
bank subsidiary located in Sioux Falls, South Dakota. Dial Bank had 247,000
VISA or MasterCard accounts at December 31, 1996; credit card receivables
outstanding were $255.1 million.
Dial Bank entered the insurance premium financing business through the
purchase of the receivables of Coast Program, Inc. in February 1991. Dial
Bank finances liability and material damage auto insurance in California and
Texas. In addition, Norwest Financial Coast, Inc. provides insurance
premium financing in Arizona and 10 states located throughout the
southeastern section of the United States. Business is generated through
over 2,200 independent insurance agents. At December 31, 1996,
approximately 85,000 accounts totaling $68.7 million were outstanding; $40.4
million of these receivables were owned by Dial Bank.
Effective January 1, 1995, the Parent contributed Dial National Bank to the
Company. Dial National Bank is a federally-chartered bank located in Des
Moines, Iowa. The bank issues private label credit cards and dual-line Co-
Branded MasterCard credit cards for several national companies. The dual
line credit card serves as a private label credit card for use at any of the
Co-Branders' retail locations, as well as a traditional MasterCard credit
card for use at locations around the world. Dial National Bank had 84,000
accounts at December 31, 1996; credit card receivables were $123.2 million.
Norwest Financial's average earned rates of charge on the average amount of
consumer receivables outstanding during each of years 1996 through 1992 were
21.22%, 21.56%, 21.76%, 22.55%, and 22.49%, respectively.
Loss Experience
The allowance for losses on consumer receivables is based on loss experience
in relation to consumer receivables outstanding. All such receivables which
appear to be uncollectible or to require inordinate collection costs are
written off. Consumer receivables, other than finance receivables in
Canada, those owned by Community Credit Co., and other consumer receivables,
comprise 74% of outstanding consumer receivables. These receivables, other
than loans secured by real estate over $25,000, are written off for
financial reporting if no payment is applied during the three-month period
immediately preceding the balance sheet date and the receivable is three or
more payments contractually delinquent. The remaining 26% of consumer
receivables are written off for financial reporting when certain delinquency
criteria are met.
<PAGE> 10
Information concerning consumer loss experience and allowance for losses is
shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Allowance, beginning
of period $152,108 $126,802 $114,876 $106,024 $77,562
Write-offs:
Loans (120,443) (93,549) (75,124) (74,835) (57,582)
Sales finance (61,184) (37,118) (23,920) (21,221) (17,684)
Other (26,163) (14,299) (8,552) (5,491) (6,496)
Total write-offs (207,790) (144,966) (107,596) (101,547) (81,762)
Recoveries:
Loans 13,089 11,598 11,877 11,226 8,153
Sales finance 4,233 2,997 2,528 2,224 2,438
Other 1,739 1,312 850 501 737
Total recoveries 19,061 15,907 15,255 13,951 11,328
Provision for credit losses
charged to expense 195,952 143,467 107,931 96,448 78,591
Allowance related to
receivables acquired,
contributed or
(transferred) - net 3,652 10,898 (3,664) 20,305
Allowance, end of period:
Loans 85,646 81,193 76,256 71,809 68,212
Sales finance 62,167 54,365 40,696 35,417 28,912
Other 15,170 16,550 9,850 7,650 8,900
Total allowance $162,983 $152,108 $126,802 $114,876 $106,024
Ending receivables as
a percent of total
consumer receivables:
Loans 61% 60% 66% 67% 70%
Sales finance 31 29 28 28 26
Other 8 11 6 5 4
100% 100% 100% 100% 100%
Allowance as a percent of
ending receivables 2.99% 2.86% 2.92% 2.90% 3.02%
Write-offs after recoveries
as a percent of average
consumer receivables 3.55% 2.66% 2.24% 2.41% 2.37%
Consumer receivables
outstanding more
than three payments
contractually delinquent $123,961 $101,693 $ 77,233 $ 73,541 $ 70,938
</TABLE>
<PAGE> 11
Insurance Operations
The credit insurance operations have a close relationship with Norwest
Financial's consumer operations. Generally, where applicable laws permit,
Norwest Financial makes credit life, credit disability, property, and
involuntary unemployment insurance available to borrowers. If the customer
decides to purchase insurance, an additional charge is made. Credit life
insurance generally provides, at a minimum, for the repayment of the
indebtedness upon the death of the insured borrower. Credit disability
coverage provides for the monthly payment of the indebtedness while the
borrower is disabled because of accident or illness. Property insurance
provides for the payment of the value or cost of repairs or replacement of
covered property of the borrower if the property is damaged, destroyed or
stolen. Involuntary unemployment insurance provides for the monthly payment
of the indebtedness while the borrower is unemployed, if the borrower
becomes unemployed due to layoff, termination, lockout, labor disputes or
strike. Non-filing insurance is an alternative to perfecting a security
interest in property used as collateral. Payment is provided, up to a
specified limit, when there is a loss with this coverage which resulted from
the failure to perfect a security interest.
The Company's insurance subsidiaries provide, directly or through
reinsurance arrangements, credit life, credit disability, property, and
involuntary unemployment insurance as a part of Norwest Financial's consumer
finance business and the consumer finance business of certain affiliates.
The Company also offers involuntary unemployment insurance and non-filing
insurance on an agency basis in certain states. Under the Bank Holding
Company Act of 1956, the insurance underwriting activities of the Company's
insurance subsidiaries (other than the Company's foreign insurance
subsidiary and insurance subsidiaries that are subsidiaries of the Company's
state chartered bank subsidiary) are limited generally to the underwriting
(directly or through reinsurance arrangements) of insurance that (i) is
directly related to an extension of credit by Norwest or any of its
subsidiaries, and (ii) is limited to assuring the repayment of the
outstanding balance due on the extension of credit in the event of the
death, disability or involuntary unemployment of the borrower. The
Company's casualty insurance subsidiaries are permitted under this Act to
underwrite non-filing insurance policies issued to Norwest or any of its
subsidiaries. In addition, the Company's foreign insurance subsidiary also
reinsures credit life or disability insurance written by non-affiliated
companies.
The laws of most of the states in which Norwest Financial operates regulate
the sale of insurance to borrowers by prescribing, among other things, the
maximum amount and term thereof and by fixing the permissible premium rates
or authorizing the state insurance commissioner or other state official to
fix the maximum premium rates on such insurance. In several states such
rates have been reduced in recent years.
<PAGE> 12
Insurance premiums, claim and underwriting expenses and income from
underwriting for life and disability insurance underwritten by the Company's
insurance subsidiaries are summarized for the periods indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Premiums earned:
Life $43,725 $39,174 $28,414 $26,141 $26,806
Disability 48,170 47,732 37,060 34,932 31,724
Claim expense:
Life 13,964 13,528 10,074 10,381 8,903
Disability 15,458 16,715 13,773 14,048 11,785
Underwriting expense:
Life 2,729 2,994 1,853 1,961 3,564
Disability 3,770 4,462 2,998 3,618 4,594
Income before income
taxes from underwriting:
Life 27,032 22,652 16,487 13,799 14,339
Disability 28,942 26,555 20,289 17,266 15,345
</TABLE>
Income before income taxes from the underwriting (as principal), or the sale
(as agent), of property insurance, involuntary unemployment insurance and
non-filing insurance for the years 1996 through 1992 was $42,378,000,
$34,707,000; $31,838,000; $24,949,000; and $22,204,000, respectively.
<PAGE> 13
COMMERCIAL FINANCE OPERATIONS
At December 31, 1996, commercial finance receivables accounted for 8% of
Norwest Financial's total finance receivables outstanding. The following
table presents Norwest Financial's commercial finance receivables
outstanding for the five years ended December 31, 1996:
Commercial Finance Receivables Outstanding
(In Thousands)
Total
At Accounts Commercial Percentage
December Leasing Receivable Finance Increase (Decrease)
31, and Other Financing Receivables From Previous Year
1996 $419,062 $ 75,042 $494,104 (3)%
1995 409,882 97,598 507,480 1
1994 407,513 92,757 500,270 (2)
1993 381,129 130,983 512,112 (13)
1992 442,331 147,570 589,901 (7)
Norwest Financial's average earned rates of charge on the average amount of
commercial finance receivables outstanding during each of the years 1996
through 1992 were 14.97%, 14.69%, 14.58%, 13.46%, and 14.06%, respectively.
Loss Experience
The allowance for losses on commercial finance receivables is based on loss
experience in relation to commercial finance receivables outstanding. All
such receivables which appear to be uncollectible or to require inordinate
collection costs are written off. In addition, such receivables are
automatically written off for financial reporting when certain delinquency
criteria are met.
<PAGE> 14
Information concerning commercial loss experience and allowance for losses is
shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Allowance, beginning
of period $6,510 $9,150 $10,250 $11,550 $11,100
Write-offs:
Leasing and other (2,761) (2,706) (1,790) (3,726) (3,750)
Accounts receivable
financing (1,320) (1,261) (1,497) (1,870) (2,522)
Total write-offs (4,081) (3,967) (3,287) (5,596) (6,272)
Recoveries:
Leasing and other 528 851 547 757 1,416
Accounts receivable
financing 665 625 701 807 634
Total recoveries 1,193 1,476 1,248 1,564 2,050
Provision for credit losses
charged (credited) to expense 2,528 (149) 939 2,732 4,672
Allowance, end of period:
Leasing and other 5,150 5,050 7,850 8,350 9,550
Accounts receivable
financing 1,000 1,460 1,300 1,900 2,000
Total allowance $6,150 $6,510 $ 9,150 $10,250 $11,550
Ending receivables as
a percent of total
commercial receivables:
Leasing and other 85% 81% 81% 74% 75%
Accounts receivable
financing 15 19 19 26 25
100% 100% 100% 100% 100%
Allowance as a percent of
ending receivables 1.24% 1.28% 1.83% 2.00% 1.96%
Write-offs after recoveries
as a percent of average
commercial finance
receivables .59% .50% .43% .73% .71%
</TABLE>
<PAGE> 15
Non-accrual commercial receivables totaled $3,189,000, $3,299,000;
$2,606,000; $5,349,000; and $6,864,000 at December 31, 1996 through 1992,
respectively. During 1996, the finance charges and interest that would have
been recorded had non-accrual receivables been current in accordance with
their original terms would have been $377,000. The amount of finance
charges and interest actually recorded on these receivables during 1996
totaled $279,000.
Commercial receivables outstanding which were more than three payments
contractually delinquent and which were still accruing interest totaled
$916,000; $1,025,000; $1,202,000; $1,443,000; and $2,586,000 at
December 31, 1996 through 1992, respectively.
Lease Financing and Other
Norwest Financial Leasing, Inc. ("NFLI") operates under two separate
divisions. Each division provides a different type of financing and focuses
on a different market. Receivables are generated from business production
offices and a sales force that operates nationwide.
NFLI - Division I is headquartered in Des Moines, Iowa and also has business
production offices in Riverside, California and Charlotte, North Carolina.
Division I specializes in financing commercial equipment such as office
copiers, telephone systems, small computers, and light industrial equipment.
The cost of this equipment ranges from $2,000 to $50,000. Finance
receivables are generated primarily from equipment distributors ranging from
small independently-owned vendors to large equipment manufacturers.
Generally, an end-user will enter into a lease or rental agreement with a
vendor; after approving credit, Division I purchases the contract from the
vendor and collects the lease payments from the end-user. Billing is often
done in the vendor's name, as are any customer service functions that might
become necessary in connection with the lease or rental agreement (thus
providing the vendor with a "private label" financing service). In some
instances, Division I purchases the equipment and leases it to the end-user,
with billing and other customer contacts being done in the name of NFLI.
Leases and other commercial finance receivables acquired by Division I
generally provide for equal monthly payments and normally have an initial
term of 60 months or less.
NFLI - Division II is headquartered in St. Louis, Missouri. This division
leases a variety of health care equipment from blood chemistry analyzers,
sterilizers, and fluoroscopes to ultrasound equipment. Cost of the
equipment can range from $10,000 to above $200,000. Marketing efforts are
directed primarily toward manufacturers and distributors of such equipment.
NFLI also holds a portfolio of loans generally secured by commercial real
estate. At December 31, 1996, these loans totaled $34.6 million, a decrease
of $4.1 million for the year.
<PAGE> 16
Accounts Receivable Financing
Norwest Financial Business Credit, Inc. ("NFBC") is engaged in the accounts
receivable financing business from its headquarters in Des Moines, Iowa.
NFBC provides customized financial services for retailers and manufacturers
of consumer products across the country. Over 400 high-quality furniture
stores, a nationally-known manufacturer of household heating and cooling
systems, and several consumer product suppliers utilize NFBC's services.
Generally, NFBC extends credit to a retailer which is secured by the
retailer's accounts receivable. NFBC provides credit approval for the
retailer's accounts, collects payments on these accounts and applies the
amounts collected toward the repayment of the loan to the retailer.
Customer contacts, including billing, collection and customer inquiries, are
generally done in the retailer's name, thereby providing a "private label"
revolving credit program.
<PAGE> 17
INFORMATION SERVICES OPERATIONS
Norwest Financial Information Services Group, Inc. ("NFISG") has developed
and installed an on-line real-time information processing and communications
system called SWIFT , which connects, over leased telecommunication
facilities, equipment located in branch offices to the computer center in
Norwest Financial's home office. Branch employees use the computer to
process loans and payments, to write checks, and to perform bookkeeping
functions. The system provides information services to consumer finance
branch offices of Norwest Financial. In addition, as of December 31, 1996,
NFISG had contracts to supply information services to 28 other finance
companies. On that date, approximately 3,000 branch offices were being
served and 6.4 million accounts were being maintained on the system.
NFISG developed an enhancement to the system called SUPREME which replaced
the paper ledger card with video display units. SUPREME provides greater
efficiencies and enhanced customer service by adding a number of new
capabilities to the existing system. For example, delinquency lists, daily
collection work lists, solicitation lists, automated advertising, complete
application processing including retrieval of credit bureau reports, and
company-wide access of account records are a few of the automated features
provided by SUPREME. Twenty-five subscribing companies were utilizing
SUPREME at December 31, 1996. Norwest Financial has installed SUPREME in
all of its consumer finance branch offices in the United States and Canada.
Overall, 6.3 million accounts in over 2,800 locations were being maintained
on SUPREME at December 31, 1996.
NFISG has also developed an on-line real-time information system designed
to meet the processing demands of a broad range of leasing products
including true leases, rentals, conditional sales contracts, and third-party
leases. Named SUCCESS, this system processes such variables as property,
sales, use and transit taxes; depreciation; vendor fees; residuals; and
participation. NFLI and one non-affiliate subscriber were utilizing
SUCCESS at December 31, 1996.
In March 1994, the Company acquired Allied Business Systems, Inc., a
computer software company headquartered in Macon, Georgia. Since 1979,
Allied Business Systems has been providing computer systems and services to
the consumer finance industry and currently serves over 1,300 locations for
over 325 companies.
NFISG continues to offer such services for sale, although there can be no
assurance of future sales, or that existing contracts will be renewed upon
expiration.
<PAGE> 18<PAGE>
ASSETS UNDER MANAGEMENT
Island Finance, a group of eight consumer finance companies headquartered
in San Juan, Puerto Rico, was acquired by Norwest in May 1995. Norwest
Financial manages Island Finance. Island Finance provides direct loans to
individuals through 131 consumer finance offices located in Puerto Rico,
Panama, the Netherlands Antilles, the U.S. Virgin Islands, Aruba, and Costa
Rica. Receivables outstanding on December 31, 1996, totaled $1.3 billion.
Island Finance's financial results and receivables are not included in the
Company's 1996 or 1995 statements of consolidated earnings or consolidated
balance sheets, however, Norwest Financial provides a portion of the
funding for Island Finance. At December 31, 1996, Norwest Financial had
term loans totaling $500 million with Island Finance Puerto Rico, Inc.
("IFPR"), one of the companies in the Island Finance group. The loans have
a weighted average interest rate of 8.80% and mature in 2000. IFPR is also
a direct issuer of commercial paper in the United States. At December 31,
1996, IFPR's commercial paper outstanding totaled $693.9 million. Other
entities in the Island Finance group obtain funding by borrowing from
commercial banks and other affiliates.
The number of consumer finance offices and percent of consumer finance
receivables are shown below:
Percent of
Consumer
Branch Finance
Location Offices Receivables
Aruba 3 1.9%
Costa Rica 3 .1
Netherlands Antilles 8 4.1
Panama 15 2.7
Puerto Rico 94 86.7
U.S. Virgin Islands 8 4.5
131 100.0%
In conjunction with the Island Finance acquisition, the Company also
purchased seven offices in Puerto Rico which are engaged in purchasing sales
finance contracts.
<PAGE> 19
SOURCES OF FUNDS
Norwest Financial funds its operations through payments of principal and
interest from finance receivables, capital funds, the sale of debt
securities, and borrowings from banks and affiliates. Fixed rate borrowings
with original maturities of more than one year comprise 66% of the Company's
total indebtedness at December 31, 1996. The remaining 34% includes
commercial paper with maturities of nine months or less (28%), and short-term
debt to affiliates and other short-term debt (6%).
The effective interest rate on commercial paper debt is higher than the
stated rates due to commitment fees paid in connection with Norwest
Financial's bank credit agreements (lines of credit and revolving credit
agreements). These agreements provide an alternative source of liquidity
to support the Company's commercial paper borrowings.
The weighted average annual interest cost of the total average daily
borrowings outstanding in each of the respective years 1996 through 1992
without giving effect to commitment fees relating to bank credit agreements
were 6.44%, 6.74%, 6.22%, 6.41%, and 7.29%, respectively. The
corresponding figures after giving effect to commitment fees were 6.46%,
6.76%, 6.25%, 6.45%, and 7.33%, respectively. Norwest Financial has
obtained and continues to obtain, at prevailing rates, funds sufficient to
conduct its business.
The following table contains certain information regarding short-term
borrowings (except short-term borrowings from affiliates) during the periods
indicated:
<TABLE>
Years Ended December 31,
(Dollars in Thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Bank credit agreements
at December 31 $1,327,680 $1,456,633 $1,147,700 $1,007,690 $737,500
Number of credit agreements 33 38 34 35 34
Daily average outstanding:
Commercial paper $1,713,937 $1,523,898 $1,180,649 $1,065,491 $862,620
Other loans 5,199 6,211 4,962 87,761 1,368
Less excess funds
investments 18,884 41,331 26,097 15,436 10,181
Net average short-term
borrowings $1,700,252 $1,488,778 $1,159,514 $1,137,816 $853,807
Ratio of bank credit
agreements to above 78% 98% 99% 89% 86%
</TABLE>
See note 6 to the consolidated financial statements for a listing of the
amounts and maturities of the Company's outstanding long-term debt at
December 31, 1996, and 1995.
<PAGE> 20
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges of
Norwest Financial for the periods indicated:
Years Ended December 31,
1996 1995 1994 1993 1992
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).
COMPETITION
The business in which Norwest Financial is engaged is highly competitive.
In addition to competition from other consumer and commercial finance
companies, competition comes from sales finance companies, commercial banks,
savings and loan associations, credit card companies, credit unions and
retail establishments offering revolving credit plans. The principal method
of competition is service to customers, although interest rates and other
financing charges are adjusted from time to time to reflect market
conditions. Generally, Norwest Financial's interest rates or other
financing charges are comparable to those of other companies engaged in the
consumer finance, commercial finance or lease financing business, sales
finance companies, credit card companies and retail establishments offering
revolving credit plans. They are usually higher than those of commercial
banks, savings and loan associations and credit unions. Norwest Financial
is ranked among the 25 largest finance companies in the United States in
terms of total capital funds, but is substantially smaller than the largest
concerns. Trans Canada Credit Corporation has been ranked among the largest
finance companies in Canada.
EMPLOYEE RELATIONS
As of December 31, 1996, the Company and its subsidiaries employed
approximately 6,900 persons. Norwest Financial believes its employee
relations are excellent.
<PAGE> 21
Item 2. Properties.
The Company owns an eleven-story building in Des Moines, Iowa, where its
principal executive offices are maintained. The Company also owns an
adjacent five-story building where other facilities of the Company are
maintained. The Company's life insurance subsidiary owns a three-story
building in Des Moines which is used by the Company for administrative
purposes. Dial Bank owns a one-story building in Sioux Falls, South Dakota,
where its office is maintained. All of Norwest Financial's other business
offices (consisting of consumer branch offices, commercial finance executive
and business production offices, and other administrative offices) are
located in rented office space. Norwest Financial believes its facilities
are suitable and adequate for its business needs. These facilities are
generally fully occupied and utilized, although in some instances, office
space has been reserved for anticipated business expansion; otherwise,
additional office space or facilities are leased only when they are needed.
The equipment used in the information processing system (located at branch
offices, relay communication sites, and home office facilities) is leased
or owned by Norwest Financial. Telecommunication lines used in the
information processing system are leased on a monthly basis.
Item 3. Legal Proceedings.
Norwest Financial is a defendant in various matters of litigation generally
incidental to their business. Although it is difficult to predict the
ultimate outcome of these cases, management believes, based on discussions
with counsel, that any ultimate liability will not materially affect the
financial position and
results of operations of the Company and its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted in accordance with General Instructions J(2)(c).
<PAGE> 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
All of the outstanding common stock of the Company is and was, at all times
during 1996 and 1995, owned beneficially and of record by a single
stockholder, the Parent.
The aggregate amount of dividends paid by the Company on its common stock
(1,000 shares) each quarter during 1996 and 1995 was as follows:
(In Thousands) 1996 1995
First quarter $75,000 $50,000
Second quarter 75,000 35,000
Third quarter 50,000 45,000
Fourth quarter 50,000 15,000
Certain long-term debt instruments restrict payment of dividends on and
acquisitions of the Company's common stock. In addition, such debt
instruments and many of the Company's bank credit agreements contain certain
requirements as to maintenance of net worth (as defined). Approximately
$408 million of consolidated retained earnings was unrestricted at December
31, 1996.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating revenues $1,546,557 $1,419,358 $1,175,285 $1,079,719 $924,348
Net earnings 276,331 267,941 223,340 203,297 164,204
December 31,
(In Thousands) 1996 1995 1994 1993 1992
Total assets $7,760,845 $7,539,259 $6,124,742 $5,261,599 $4,804,062
Long-term debt 4,132,894 4,081,531 3,092,623 2,741,692 2,406,186
</TABLE>
<PAGE> 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Effective January 1, 1995, the Parent made a capital contribution, without
consideration, to the Company of the outstanding common stock of Community
Credit Co. and Dial National Bank (the "Contributed Subsidiaries"). These
capital contributions to the Company have been accounted for as a merger of
interests under common control. Community Credit Co. is primarily engaged
in consumer finance including loans secured by real estate and not secured
by real estate and sales finance contracts arising from the sale of
automobiles. Community Credit Co. had 55 branch offices and assets of
$213.6 million at January 1, 1995. Net earnings in 1994 were $6.3 million.
Dial National Bank is primarily engaged in the credit card business and had
assets of $112.2 million at January 1, 1995, and net earnings of $4.0
million for the year ended December 31, 1994.
The common stock of one of the Company's consumer finance subsidiaries (the
"Transferred Subsidiary") was transferred by way of a non-cash dividend to
the Parent on November 1, 1994. The Transferred Subsidiary had assets
totaling $147.1 million and 39 branch offices at the time of the transfer.
The transfer did not have a significant impact on the results of operations.
Norwest Financial's total income (revenue) increased 9% in 1996 and 21% in
1995 ($1,546.6 million in 1996 compared with $1,419.4 million in 1995 and
$1,175.3 million in 1994). Total income increased 15% in 1995 excluding the
Contributed Subsidiaries.
Income from finance charges and interest increased 8% in 1996 and 16% in
1995 ($1,208.8 million in 1996 compared with $1,118.3 million in 1995 and
$965.4 million in 1994). Income from finance charges and interest increased
9% in 1995 excluding the Contributed Subsidiaries. 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.
Increase (decrease) in average
finance receivables outstanding: 1996 1995
Consumer 10% 18%
Commercial (1) 6
Total 9 16
Rate of charge on finance receivables: 1996 1995 1994
Consumer 21.22% 21.56% 21.76%
Commercial 14.97 14.69 14.58
Total 20.69 20.92 21.02
<PAGE> 24
Increases in income from finance charges and interest in both 1996 and 1995
were due primarily to growth in average consumer receivables outstanding.
This was offset in part by the decline in the consumer rate of charge.
Average consumer receivables outstanding comprise 92% of total average
finance receivables outstanding. Growth in average consumer receivables in
1996 and 1995 was due to regular business activity combined with the
increase due to the Contributed Subsidiaries. Excluding the Contributed
Subsidiaries, average consumer finance receivables increased 10% in 1995.
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 increased 10% in 1996 and 21% in 1995
($140.4 million in 1996 compared with $128.1 million in 1995 and $105.7
million in 1994). Changes in insurance premiums and commissions are
generally expected to correspond to changes in average consumer finance
loans outstanding (those secured by real estate and not secured by real
estate). Average consumer finance loans outstanding increased 5% in 1996
and 11% in 1995. In addition, one of the Company's insurance subsidiaries
began providing credit insurance as part of the consumer finance business
of several affiliates in the second quarter of 1995 and a non-related
company in the fourth quarter of 1995. Insurance premiums and commissions
on this business were $18.6 million and $10.4 million in 1996 and 1995,
respectively. Insurance losses and loss expenses decreased 9% in 1996 and
increased 22% in 1995 ($35.9 million in 1996 compared with $39.2 million in
1995 and $32.2 million in 1994). The 1996 decrease was primarily due to
lower insurance losses incurred on Canadian business. The increase in 1995
was related to the increase in insurance premiums and commissions. The
Contributed Subsidiaries did not have a significant effect on insurance
premiums and commissions and insurance losses and loss expenses.
Other income increased 14% in 1996 and 66% in 1995 ($197.3 million in 1996
compared with $173.0 million in 1995 and $104.3 million in 1994). In 1995,
other income would have increased 62% excluding the Contributed
Subsidiaries. Income from affiliates combined with an increase in
investment income accounted for the majority of the increases. Income from
affiliates was $54.4 million in 1996 compared to $43.3 million in 1995 and
$2.1 million in 1994. The increases in income from affiliates corresponds
with the increase in notes receivable - affiliates combined with increased
management fees charged to affiliates. Average investments held increased
11% in 1996 and 29% in 1995.
Operating expenses increased 11% in 1996 and 6% in 1995 ($514.9 million in
1996 compared with $461.9 million in 1995 and $434.4 million in 1994).
Operating expenses increased 2% excluding the Contributed Subsidiaries in
1995. The increase in 1996 is primarily due to increases in employee
compensation and benefits and other costs resulting from business expansion.
Norwest Financial was operating 1,073 consumer finance branches at December
31, 1996 compared with 1,029 and 942 at December 31, 1995, and 1994,
respectively.
<PAGE> 25
Interest and debt expense increased 4% in 1996 and 38% in 1995 ($372.9
million in 1996 compared with $359.1 million in 1995 and $259.6 million in
1994). 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.
Increase in average debt outstanding: 1996 1995
Short-term 12% 26%
Long-term 8 27
Total 9 26
Cost of funds: 1996 1995 1994
Short-term 5.36% 6.12% 4.65%
Long-term 6.90 7.00 6.87
Total 6.44 6.74 6.22
Changes in average debt outstanding result primarily from the change in
average finance receivables outstanding combined with the change in average
notes receivable - affiliates. Average finance receivables and average
notes receivable - affiliates, combined, increased by 10% in 1996 and 22%
in 1995.
Provision for credit losses increased 38% in 1996 and 32% in 1995 ($198.5
million in 1996 compared with $143.3 million in 1995 and $108.9 million in
1994). Provision for credit losses increased 26% in 1995 excluding the
Contributed Subsidiaries. Increases in average finance receivables
outstanding contributed to the increase in the provision for credit losses.
Average finance receivables increased 9% in 1996 and 16% in 1995. During
the past two years Norwest Financial, along with the consumer finance
industry, has experienced an increase in net write-offs. Net write-offs as
a percentage of average net receivables outstanding were 3.30% in 1996
compared with 2.46% in 1995 and 2.06% in 1994. Management believes the
allowance for credit losses at December 31, 1996 and 1995, is adequate to
absorb expected losses in the finance receivables portfolio.
Income taxes remained unchanged in 1996 and increased 26% in 1995. Earnings
before income taxes increased 2% in 1996 and 22% in 1995. The effective tax
rates were 34.9% in 1996, 35.6% in 1995, and 34.4% in 1994.
<PAGE> 26
Borrowings constitute the largest part of Norwest Financial's
capitalization. At December 31, 1996, 85% of the Company's capital had been
obtained from borrowings and 15% from stockholder's equity. Sixty-six
percent of Norwest Financial's borrowings was in fixed-rate term borrowings
with original maturities of more than one year. The remaining 34% includes
commercial paper with maturities of nine months or less (28%), and other
short-term debt (6%). At December 31, 1995, short-term borrowings comprised
32% of total borrowings. This consisted of commercial paper with maturities
of nine months or less (29%) and short-term debt to affiliates and other
short-term debt (3%). Short-term borrowings as a percent of total
borrowings averaged 30% in 1996 and 29% in 1995.
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 December 31, 1996, lines of credit and
revolving credit agreements totaling $1,328 million were being maintained
at 33 unaffiliated banks; the entire amount was available on that date.
The Company and a Canadian subsidiary obtain its 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 also obtains 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).
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.
<PAGE> 27
Item 8. Financial Statements and Supplementary Data.
NORWEST FINANCIAL, INC.
Consolidated Financial Statements
<PAGE> 28
This page was intentionally left blank.
<PAGE> 29
Deloitte &
Touche LLP
(logo) Two Prudential Plaza Telephone:(312) 946-3000
180 North Stetson Avenue Facsimile:(312) 946-2600
Chicago, Illinois 60601-6779
INDEPENDENT AUDITORS' REPORT
Norwest Financial, Inc.
We have audited the accompanying consolidated balance sheets of Norwest
Financial, Inc. (a wholly-owned subsidiary of Norwest Financial Services,
Inc. which is a wholly-owned subsidiary of Norwest Corporation) and
subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings and retained earnings and of cash
flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Norwest Financial, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
\s\Deloitte & Touche LLP
January 14, 1997
Deloitte Touche
Tohmatsu
International
<PAGE> 30
NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
Assets 1996 1995
<S> <C> <C>
Cash and cash equivalents $ 141,692 $ 72,991
Available-for-sale securities (note 2) 816,980 757,291
Finance receivables (note 3):
Consumer:
Loans 3,324,655 3,172,895
Sales finance contracts 1,683,655 1,567,629
Other 447,021 586,840
Commercial 494,104 507,480
Total finance receivables 5,949,435 5,834,844
Less allowance for credit losses (note 4) 169,133 158,618
Finance receivables - net 5,780,302 5,676,226
Notes receivable - affiliates (note 19) 574,344 552,005
Property and equipment (at cost, less
accumulated depreciation of $89,373 for
1996 and $94,334 for 1995) 75,068 63,888
Deferred income taxes (note 11) 34,456 40,072
Other receivables from affiliate (note 11) 31,643
Other assets 338,003 345,143
Total assets $7,760,845 $7,539,259
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 31
NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
Liabilities and
Stockholder's Equity 1996 1995
<S> <C> <C>
Loans payable - short-term (note 5):
Commercial paper $1,732,095 $1,739,683
Other 195,000 218,800
Affiliates 173,006
Unearned insurance premiums and commissions (note 3) 136,564 140,020
Insurance claims and policy reserves (note 3) 35,893 34,683
Accrued interest payable 75,765 76,916
Other payables to affiliates (note 11) 5,565
Other liabilities 216,031 210,029
Long-term debt (note 6) 4,132,894 4,081,531
Total liabilities 6,702,813 6,501,662
Commitments and contingencies
(notes 9 and 11)
Stockholder's equity:
Common stock without par value
(authorized 1,000 shares,
issued 1,000 shares) 3,855 3,855
Additional paid in capital 90,766 90,766
Retained earnings (notes 10 and 11) 959,697 933,366
Foreign currency translation adjustment (5,991) (5,393)
Net unrealized holding gain on
available-for-sale securities,
net of income taxes (note 2) 9,705 15,003
Total stockholder's equity 1,058,032 1,037,597
Total liabilities and
stockholder's equity $7,760,845 $7,539,259
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 32
NORWEST FINANCIAL, INC.
Statements of Consolidated Earnings and Retained Earnings
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Income:
Finance charges and interest $1,208,794 $1,118,265 $ 965,355
Insurance premiums and commissions 140,418 128,093 105,672
Other income (note 2) 197,345 173,000 104,258
Total income 1,546,557 1,419,358 1,175,285
Expenses:
Operating expenses (note 14) 514,890 461,910 434,383
Interest and debt expense (note 7) 372,859 359,079 259,605
Provision for credit losses (note 4) 198,480 143,318 108,870
Insurance losses and loss expenses 35,901 39,237 32,187
Total expenses 1,122,130 1,003,544 835,045
Earnings before income taxes 424,427 415,814 340,240
Income taxes (note 11) 148,096 147,873 116,900
Net earnings 276,331 267,941 223,340
Retained earnings - January 1 933,366 764,295 634,626
1,209,697 1,032,236 857,966
Dividends (250,000) (145,000) (93,671)
Contributed Subsidiaries (note 1) 46,130
Retained earnings - December 31 $ 959,697 $ 933,366 $ 764,295
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 33
NORWEST FINANCIAL, INC.
Statements of Consolidated Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 276,331 $ 267,941 $ 223,340
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Provision for credit losses 198,480 143,318 108,870
Depreciation and amortization 27,613 25,404 27,339
Deferred income taxes 8,632 10,882 (38,843)
Other receivables from affiliate 31,643 (31,643)
Other assets 30,925 (51,263) (30,942)
Unearned insurance premiums and commissions (3,456) 9,655 18,899
Insurance claims and policy reserves 1,210 1,479 3,438
Accrued interest payable (1,151) 22,380 10,185
Other payables to affiliates 5,565 (7,170) (1,663)
Other liabilities 6,002 (3,946) 70,284
Net cash flows from operating activities 581,794 387,037 390,907
Cash flows used for investing activities:
Finance receivables:
Principal collected 5,587,314 4,897,983 4,650,536
Receivables originated or purchased (5,889,870) (5,728,651) (5,116,657)
Proceeds from sales of securities 145,791 99,959 81,945
Proceeds from maturities of securities 65,296 60,216 69,005
Purchase of securities (279,090) (269,315) (270,864)
Net additions to property and equipment (25,626) (18,013) (14,399)
Net increase in notes receivable - affiliates (22,339) (356,325) (343,011)
Cash and cash equivalents of contributed
subsidiaries received 2,477
Other (37,763) (7,689) (22,728)
Net cash flows used for investing activities (456,287) (1,319,358) (966,173)
Cash flows from financing activities:
Net increase in loans payable -
short-term 141,618 171,493 281,740
Proceeds from long-term debt:
Senior 525,000 1,229,411 955,961
Subordinated 45,000
Repayments of long-term debt:
Senior (308,424) (233,438) (637,530)
Subordinated (165,000) (80,650) (12,500)
Additional paid in capital 19,000
Dividends paid (250,000) (145,000) (93,671)
Net cash flows from (used for) financing activities (56,806) 941,816 558,000
Net increase (decrease) in cash and cash equivalents 68,701 9,495 (17,266)
Cash and cash equivalents beginning of period 72,991 63,496 80,762
Cash and cash equivalents end of period $ 141,692 $ 72,991 $ 63,496
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 34
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements
1. Significant Accounting Policies.
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. Effective January 1, 1995, the Parent made a
capital contribution, without consideration, to the Company of the
outstanding common stock of Community Credit Co. and Dial National Bank (the
"Contributed Subsidiaries"). These capital contributions to the Company
have been accounted for as a merger of interests under common control. The
common stock of one of the Company's consumer finance subsidiaries, (the
"Transferred Subsidiary"), was transferred by way of a non-cash dividend to
the Parent on November 1, 1994.
Available-for-sale Securities. Debt and equity securities are classified
as available for sale. Debt and equity securities classified as available
for sale are reported at fair value with net unrealized gains and losses,
net of deferred income taxes, excluded from earnings and recorded as a
separate component of stockholder's equity until realized. If a decline in
the security's fair value is deemed to be other than temporary, the amount
of the write-down is recognized as a reduction in earnings.
Finance Charges and Interest:
Consumer. Finance charges and interest are earned primarily using the
interest method.
Commercial:
Accounts Receivable Financing. Dealer discounts are deferred at
the time receivables are recorded and taken into income as
payments are received. Finance charges are recognized on the
interest method as accounts are billed. When a loan is delinquent
and in management's opinion the collectibility of interest is
doubtful, interest income is no longer accrued for financial
purposes.
Leasing and Other. Finance charges and interest are earned using
the interest method. No income is accrued on receivables which
are more than three payments contractually delinquent.
Loan Origination Fees and Costs. Fees received and certain direct costs
incurred for the origination of receivables are deferred and amortized to
interest income over the contractual lives of the receivables using the
interest method. Unamortized amounts are recognized at the time receivables
are paid in full. Material discounts and premiums on purchased receivables
are recognized over the contractual life of the purchased receivable using
a method that approximates the interest method.
<PAGE> 35
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
1. Significant Accounting Policies, Continued:
Allowance for Credit Losses. The allowance for credit losses is based on
loss experience in relation to finance receivables outstanding and is
established through a provision for credit losses charged to expense. The
allowance is an amount that management believes will be adequate to absorb
possible losses on existing receivables that may become uncollectible based
on evaluations of collectibility of receivables and prior credit loss
experience.
Finance receivables which appear to be uncollectible or to require
inordinate collection costs are written off. Consumer receivables, other
than finance receivables in Canada, those owned by Community Credit Co., and
other consumer receivables comprise 74% of outstanding consumer receivables.
These receivables, other than loans secured by real estate over $25,000, are
written off for financial reporting if no payment is applied during the
three-month period immediately preceding the balance sheet date and the
receivable is three or more payments contractually delinquent. The
remaining 26% of consumer receivables and commercial finance receivables are
written off for financial reporting when certain delinquency criteria are
met.
Derivative Instruments. The company does not use derivative instruments as
a means of asset and liability managment.
Property and Equipment. Depreciation is provided for property and equipment
on a straight-line basis over their estimated useful lives, which are: 19
to 39 years for buildings, 5 to 39 years for building equipment and
improvements, and 3 to 8 years for furniture, fixtures and equipment.
Generally, leasehold improvements are amortized over five years.
Maintenance and repairs of building and office equipment (not significant
in the aggregate) are charged to expense. At the time assets are disposed
of or are retired, the related asset and accumulated depreciation or
amortization are removed from the respective accounts. Gains and losses on
dispositions are included in earnings.
Deferred Income Taxes. Deferred income taxes reflect the impact of
temporary differences between the amounts of assets and liabilities recorded
for financial reporting from the basis used for income tax purposes (note
11).
Retirement Plan. Retirement plans cover substantially all employees who
meet certain age and service requirements. Norwest Financial's funding
policy is to contribute no more than the maximum amount that can be deducted
for federal income tax purposes (note 12).
<PAGE> 36
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
1. Significant Accounting Policies, Continued:
Insurance Income and Expense. Insurance premiums are recognized as income
over the terms of the policies. Premiums for credit life insurance are
recognized as revenue using a method that approximates the interest method.
Premiums for credit disability insurance and involuntary unemployment
insurance are recognized as revenue in relationship to anticipated claims.
Premiums and commissions from property insurance and non-filing insurance
are recognized as revenue on a pro-rata basis. Policy acquisition expenses
(principally agents' commissions) are deferred and charged to expense over
the terms of the related policies in proportion to premium income
recognition.
Foreign Currency Translation. Assets and liabilities of the Canadian
operations are translated at the exchange rate as of the balance sheet date.
Canadian operating results are translated at the average exchange rates for
the period covered by the income statement. The resulting translation
adjustments are recorded as a separate component of stockholder's equity.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE> 37
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
2. Available-for-sale Securities
The amortized cost and market value of available-for-sale securities were:
December 31, 1996 December 31, 1995
Amortized Market Amortized Market
(In Thousands) Cost Value Cost Value
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $397,754 $401,343 $337,193 $344,368
States and political subdivisions 84,926 85,717 102,374 103,704
Other (corporate bonds, stocks,
and collateralized mortgage
obligations) 319,531 329,920 294,642 309,219
Total $802,211 $816,980 $734,209 $757,291
The gross unrealized gains and losses of available-for-sale securities were:
December 31, 1996 December 31, 1995
Gross Unrealized Gross Unrealized
(In Thousands) Gains Losses Gains Losses
U.S. Treasury and federal agencies $ 5,276 $1,687 $ 7,548 $ 373
States and political subdivisions 864 73 1,371 41
Other (corporate bonds, stocks,
and collateralized mortgage
obligations) 13,218 2,829 16,282 1,705
Total $19,358 $4,589 $25,201 $2,119
The amortized cost and market values of available-for-sale securities by maturity
were:
December 31, 1996 December 31, 1995
Amortized Market Amortized Market
(In Thousands) Cost Value Cost Value
In one year or less $ 92,943 $ 93,641 $ 85,855 $ 87,674
After one year through five years 408,079 413,762 396,102 407,092
After five years through ten years 174,950 177,134 180,556 185,048
After ten years 126,239 132,443 71,696 77,477
Total $802,211 $816,980 $734,209 $757,291
</TABLE>
Norwest Financial computes realized gains and losses using the specific
identification method. Total gross realized gains and losses from the sale
of marketable securities were $10,057,000 and $781,000, respectively, in
1996; $8,057,000 and $1,260,000, respectively, in 1995; $4,032,000 and
$2,036,000, respectively, in 1994.
The carrying amounts of securities on deposit under statutory or other
requirements at December 31, 1996 and 1995, were $9,654,000 and $7,664,000,
respectively.
<PAGE> 38
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
2. Available-for-sale Securities, Continued:
Interest and dividends from available-for-sale securities and cash
equivalents were $52,791,000, $49,613,000, and $38,298,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
3. Finance Receivables.
Loans are generally repayable in monthly installments over a period of 180
months or less. Sales finance contracts can be either open-end (revolving)
or closed-end. Open-end sales finance contracts do not have an original
maturity because the accounts created by these contracts can be used for
repeated transactions. The minimum monthly payment of open-end sales
finance contracts generally ranges from 1/12 to 1/30 of the highest unpaid
balance of this account. Closed-end sales finance contracts purchased are
repayable in equal monthly instalments and generally have original
maturities of 60 months or less.
The amounts of cash payments applied to consumer finance receivables during
the years ended December 31, 1996, 1995 and 1994, approximated
$4,510,330,000, $4,130,253,000, and $3,959,755,000, respectively. These
amounts exceeded the amount contractually due because a substantial portion
of such receivables are renewed, converted, or paid in full prior to
maturity. Unearned insurance premiums and insurance claims and policy
reserves which pertain to Norwest Financial's consumer finance receivables
were approximately $146,313,000 and $150,292,000 at December 31, 1996, and
1995, respectively.
At December 31, 1996, contractual maturities of commercial receivables were
as follows: $215,025,000 were due in one year or less; $259,500,000 were due
after one year through five years, and $19,579,000 were due after five
years. Substantially all commercial receivables have fixed interest rates.
Contractual maturities are not presented for the consumer receivables as it
is the Company's experience that a substantial portion of the consumer
receivable portfolio is renewed or repaid before contractual maturity dates.
Consumer finance receivables include Canadian receivables of $545,658,000
and $489,220,000 at December 31, 1996, and 1995, respectively.
<PAGE> 39
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
4. Allowance for Credit Losses.
The analysis of the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1996 1995 1994
<S> <C> <C> <C>
Allowance for credit losses beginning of year $158,618 $135,952 $125,126
Provision for credit losses charged to expense 198,480 143,318 108,870
Write-offs: United States (187,274) (127,689) (93,089)
Canada (24,597) (21,244) (17,794)
Recoveries: United States 16,451 13,860 12,968
Canada 3,803 3,523 3,535
Allowance related to receivables contributed,
acquired, or transferred 3,652 10,898 (3,664)
Allowance for credit losses end of year $169,133 $158,618 $135,952
</TABLE>
5. Loans Payable - Short-term.
Commitment fees are paid to support bank credit agreements (lines of credit
and revolving credit agreements). The bank credit agreements amounted to
$1,327,680,000 at December 31, 1996; the entire amount was available at that
date. Unused bank credit agreements are available to support outstanding
commercial paper. If all credit agreements in effect at December 31, 1996,
were to remain in effect and unused throughout 1997, the Company would pay
approximately $956,000 in commitment fees.
<PAGE> 40
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
5. Loans Payable - Short-term, Continued:
Weighted average annual interest rates and average debt outstanding for
commercial paper and other short-term debt excluding short-term debt from
affiliates are shown below:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Weighted average annual interest
rate on commercial paper and
other short-term debt:
During December 5.15% 5.87% 5.86%
During December after considering
the effect of commitment fees 5.21 5.93 5.94
For the year 5.36 6.10 4.53
For the year after considering
the effect of commitment fees 5.42 6.16 4.64
Average daily amount of commercial
paper and other short-term debt
outstanding during the year $1,719,136,000 $1,530,109,000 $1,185,611,000
Maximum amount of commercial paper
and other short-term debt
outstanding at any month-end
during the year $2,100,101,000 $1,958,483,000 $1,751,044,000
</TABLE>
The weighted average annual interest rate was computed by dividing total
interest expense on commercial paper and other short-term debt by the
average daily amount of such debt outstanding. The weighted average annual
interest rate on short-term debt from affiliates for the years 1996, 1995,
and 1994 was 5.30%, 8.91%, and 4.95%, respectively.
<PAGE> 41
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
6. Long-term Debt.
Long-term debt outstanding:
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1996 1995
<S> <C> <C>
Senior - United States:
7.10 % due 1996 $ $ 150,000
8.60 % due 1996 1,400
8.85 % due 1996 2,000
8-7/8% due 1996 100,000
6 % due 1997 150,000 150,000
6-1/4% due 1997 150,000 150,000
6-1/2% due 1997 150,000 150,000
6-1/2% due 1997 150,000 150,000
8.95 % due 1997 1,000 2,200
9.00 % due 1997 2,000 4,000
10.13% due 1997 550 1,100
5-1/2% due 1998 150,000 150,000
6.23 % due 1998 150,000 150,000
7.34 % due 1998 2,000 2,000
8-1/2% due 1998 100,000 100,000
6.20 % due 1999 75,000 75,000
6-1/4% due 1999 150,000 150,000
6-7/8% due 1999 100,000 100,000
6.99 % due 1997-99 7,000 10,200
9.50 % due 1997-99 10,000 10,000
5-1/8% due 2000 150,000 150,000
6-7/8% due 2000 150,000 150,000
7-1/4% due 2000 150,000 150,000
8-3/8% due 2000 150,000 150,000
6-3/8% due 2001 150,000
7-3/4% due 2001 100,000 100,000
6-1/4% due 2002 200,000 200,000
7-7/8% due 2002 150,000 150,000
7.95 % due 2002 100,000 100,000
8.56 % due 1997-2002 10,000 10,000
6-1/8% due 2003 150,000 150,000
6-3/8% due 2003 150,000
6.93 % due 1998-2003 15,000 15,000
7 % due 2003 150,000 150,000
6 % due 2004 150,000 150,000
6-3/4% due 2005 150,000 150,000
7-1/2% due 2005 150,000 150,000
6-1/4% due 2007 100,000 100,000
Medium-term notes* 225,000
Total senior - United States 3,897,550 3,632,900
</TABLE>
* Senior medium term notes have maturities ranging from 1999 to 2001 and
interest rates from 6.375% to 6.68%.
<PAGE> 42
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
6. Long-term Debt, Continued:
Long-term debt outstanding, continued
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1996 1995
<S> <C> <C>
Senior - Canada:
5.40 % due 1996 $ $ 7,332
5.96 % due 1996 21,995
8.26 % due 1996 14,663
8.38 % due 1997 21,888 21,995
6.25 % due 1998 72,960 73,316
8.65 % due 1998 3,648 3,666
8.50 % due 1999 54,720 54,987
7.80 % due 2000 7,296 7,332
Total senior - Canada 160,512 205,286
Total senior 4,058,062 3,838,186
Senior subordinated - United States:
8.375% due 1996 25,000
7.34 % due 1998 2,000 2,000
Medium-term notes* 50,000 190,000
Total senior subordinated 52,000 217,000
Other 22,832 26,345
Total long-term debt outstanding $4,132,894 $4,081,531
</TABLE>
* Senior subordinated medium-term notes outstanding mature in 1997 and have
interest rates from 5.20% to 7.875%.
Other debt represents senior debt secured by lease receivables and related
equipment under lease. At December 31, 1996, other debt had a weighted
average rate of 9.0% and a final contractual maturity in 1998.
Contractual maturities of long-term debt for the years 1997 through 2001 are
$683,963,000; $512,149,000; $589,487,000; $611,463,000; and $279,167,000,
respectively.
<PAGE> 43
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
7. Interest and Debt Expense.
Interest and debt expense is summarized as follows:
Years Ended December 31,
(In Thousands) 1996 1995 1994
Short-term - affiliates $ 83 $ 1,142 $ 626
Short-term - commercial paper & other 92,352 93,780 54,027
Long-term 274,586 258,376 200,245
Amortization of debt expense 5,838 5,781 4,707
Total interest and debt expense $372,859 $359,079 $259,605
8. Operations by Country.
The following is a summary of total income, earnings before income taxes, and
total assets by country: (Results for Puerto Rico sales finance branches and
Guam are included in United States amounts.)
(In Thousands) 1996 1995 1994
Total income:
United States $1,371,044 $1,265,937 $1,050,069
Canada 175,513 153,421 125,216
Total $1,546,557 $1,419,358 $1,175,285
Earnings before income taxes:
United States $ 358,667 $ 362,581 $ 303,817
Canada 65,760 53,233 36,423
Total $ 424,427 $ 415,814 $ 340,240
Total assets at December 31:
United States $7,128,734 $6,982,254 $5,655,594
Canada 632,111 557,005 469,148
Total $7,760,845 $7,539,259 $6,124,742
9. Leased Assets and Lease Commitments.
Lease terms are generally for three to seven years. Commitments at
December 31, 1996, under operating leases having initial or remaining lease
terms in excess of one year are estimated to approximate $50 million.
10. Dividend Restrictions.
Certain long-term debt instruments restrict payment of dividends on and
acquisitions of the Company's common stock. In addition, such debt instru-
ments and many of the Company's bank credit agreements contain certain
requirements as to maintenance of net worth (as defined). Approximately
$408 million of consolidated retained earnings was unrestricted at December
31, 1996.
<PAGE> 44
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
11. Income Taxes.
The Company and its subsidiaries are included in the consolidated federal
income tax return of Norwest Corporation. Federal income taxes are
allocated to the Company and its subsidiaries at the approximate amount
which would have been computed on a separate return basis. Current income
taxes payable of $5.6 million was included in other payables to affiliates
at December 31, 1996. Current income taxes receivable of $31.6 million was
included in other receivables from affiliate at December 31, 1995. The
Company's Canadian subsidiaries file separate federal and provincial returns
in Canada.
At December 31, 1996, no federal income taxes had been provided on
approximately $44 million of one of the United States life insurance
subsidiary's retained earnings since such taxes become payable only to the
extent such retained earnings are distributed as dividends or to the extent
prescribed by tax laws. This life insurance subsidiary does not contemplate
distributing dividends from these retained earnings. The amount of
unrecognized deferred tax liability at December 31, 1996, was $15.4 million.
Income taxes for the years, 1996, 1995, and 1994 are composed of the
following elements:
Years Ended December 31,
(In Thousands) 1996 1995 1994
Current:
Federal $110,569 $113,452 $113,168
State 2,529 2,043 2,625
Foreign 26,300 21,915 11,601
Deferred:
Federal and state 10,776 13,239 (13,572)
Foreign (2,078) (2,776) 3,078
Total income taxes $148,096 $147,873 $116,900
Income before taxes from operations outside the United States was $65.8
million, $53.2 million, and $33.4 million for years ended December 31,
1996, 1995, and 1994, respectively.
Deferred income taxes are primarily due to leasing and lease financing, the
allowance for credit losses, accrued employee benefits and the net
unrealized holding gain (loss) on available-for-sale securities.
<PAGE> 45
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
12. Retirement Plans.
The Company has a defined benefit pension plan which covers United States
employees who meet certain age and service requirements (the "NFI Plan").
Pension benefits provided are based on the employee's highest compensation
in three consecutive calendar years during the last ten calendar years of
employment. Benefits accrue under this plan at a rate of 1-1/4% for each
year of service.
The Company's Canadian subsidiary, Trans Canada Credit Corporation ("TCC"),
has a non-contributory defined benefit pension plan (the "TCC Plan") which
covers employees who meet certain service requirements. Pension benefits
under the TCC Plan are based on the employee's highest compensation in five
consecutive calendar years during the last ten calendar years of employment.
Benefits generally accrue under the TCC Plan at a rate of 1% of such highest
average compensation up to the average Canada/Quebec Pension Plan Earnings
Ceiling (an amount based on the maximum amount of the annual compensation
used to calculate the employee's Canada/Quebec Pension Plan benefits) plus
1.5% of such highest average compensation in excess of the average
Canadian/Quebec Pension Plan Earnings Ceiling for each year of service (not
to exceed 35 years of service).
<PAGE> 46
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
12. Retirement Plans, Continued:
The funded status and reconciliation to the balance sheet of the NFI Plan
and the TCC Plan, combined, for the years ended December 31, 1996 and
December 31, 1995 are presented below:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $54,800 and $49,518 at
December 31, 1996, and 1995, respectively $(64,468) $(58,500)
Projected benefit obligation for service
rendered to-date $(89,290) $(87,244)
Plan assets at fair value* 103,066 84,574
Plan assets greater (less) than projected
benefit obligation 13,776 (2,670)
Unrecognized net assets being
amortized through 2000 (1,485) (1,690)
Unrecognized prior service costs (773) (920)
Unrecognized net loss from past experience
different from that assumed and effects
of changes in assumptions 635 6,042
Prepaid pension cost at December 31 $ 12,153 $ 762
</TABLE>
* Consists primarily of marketable bonds and debentures and obligations
of the United States Government and its agencies and includes
$3,057,000 invested in the Norwest Short Term Investment Fund at
December 31, 1996.
Assumptions used in the accounting for the NFI Plan were:
As of December 31,
1996 1995
Weighted average discount rate 7.0% 7.0%
Expected long-term rate of return on assets 8.0 6.0
Rate of increase in future compensation levels 5.0 6.0
Assumptions used in the accounting for the TCC Plan were:
As of December 31,
1996 1995
Weighted average discount rate 8.0% 8.0%
Expected long-term rate of return on assets 8.0 8.0
Rate of increase in future compensation levels 6.5 6.5
<PAGE> 47
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
12. Retirement Plans, Continued:
The components of net pension expense for the NFI Plan and TCC Plan,
combined, for 1996 and 1995 and for the NFI Plan for 1994 are presented
below:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1996 1995 1994
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 4,204 $ 4,605 $ 3,216
Interest cost on projected benefit obligation 6,045 5,944 4,168
Actual return on plan assets (9,645) (12,474) (1,912)
Net amortization and deferral* 3,544 10,292 1,602
Net periodic pension expense $ 4,148 $ 8,367 $ 7,074
* Consists of the net effects of delayed recognition of certain events
(for example, unanticipated investment performance) arising during the
current period and amortization (recognition) of the net unrecognized
effects of past similar events over a five year period.
The NFI Plan holds single premium annuity contracts issued by one of the
Company's life insurance subsidiaries. Annual benefits paid to retirees
covered by the contracts were approximately $1.8 million and $1.9 million
in 1996 and 1995, respectively.
The Company also has a defined contribution thrift and profit sharing plan
whereby each eligible United States employee may make basic contributions
up to 6% of his or her compensation and supplemental contributions up to an
additional 4%. The Company makes a matching contribution of $.25 for every
dollar of the basic employee contribution made during the year and not
withdrawn. The Company may also make a profit sharing contribution on the
basic employee contribution with the amount determined by the percentage
return on consolidated equity (as defined) of Norwest Financial Services,
Inc. and its subsidiaries. Contribution expense for the Company was
$13,694,000, $10,842,000, and $11,500,000 for the years ended December 31,
1996, 1995, and 1994, respectively.
<PAGE> 48
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
13. Postretirement Benefits.
The Company provides certain health care and life benefits for substantially
all of its retired United States employees (the "NFI Plan"). In accordance
with SFAS 106, the Company has elected to recognize the transition
obligation of approximately $22.2 million over a period of twenty years.
The Company's Canadian subsidiary, Trans Canada Credit Corporation ("TCC")
provides certain health and life insurance benefits to its retirees (the
"TCC Plan").
The accumulated postretirement benefit obligation, funded status, and
reconciliation to the balance sheet for the NFI Plan and the TCC Plan,
combined, are presented below:
(In Thousands) Years ended December 31,
1996 1995
Retirees $(11,150) $ (8,798)
Fully eligible plan participants (243) (57)
Other active plan participants (35,695) (28,063)
Accumulated post-retirement benefit
obligation (47,088) (36,918)
Plan assets at fair value 10,100
Accumulated post-retirement benefit
obligation in excess of plan assets (36,988) (36,918)
Unrecognized transition obligation 17,790 18,901
Unrecognized net loss 5,634 2,483
Unrecognized prior service cost 759 802
Accrued postretirement benefit liability $(12,805) $(14,732)
The Company began funding the accumulated postretirement benefit obligation
of the NFI Plan during 1996. Plan assets consist primarily of obligations
of state and local governments and mutual funds invested in obligations of
state and local governments.
Net postretirement benefit expense for the NFI Plan and the TCC Plan,
combined, consisted of the following components:
</TABLE>
<TABLE>
<CAPTION>
(In Thousands) Years ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Service cost - benefits earned
during the year $3,361 $2,733 $2,085
Interest cost on accumulated
postretirement benefit obligation 3,116 2,439 2,018
Amortization of transition obligation 1,112 1,112 1,112
Amortization of unrecognized net loss 1,189 545 383
Amortization of unrecognized prior
service cost 43 44
Net periodic postretirement
benefit expense $8,821 $6,873 $5,598
</TABLE>
<PAGE> 49
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
13. Postretirement Benefits, Continued:
The assumed health care cost trend rate used in measuring the NFI Plan's
accumulated postretirement benefit obligation as of December 31, 1996 was
10% for 1997 decreasing each successive year until it reaches 8% in 2000,
after which it remains constant. The TCC Plan assumed a 1997 health care
trend of 14% decreasing each sucessive year until it reaches 6% in 2006.
A one percent increase in the assumed health care cost trend rate for each
year would increase the combined accumulated postretirement benefit
obligation as of December 31, 1996 by approximately $9.9 million and
combined net postretirement benefit expense by $1.7 million for the year.
The assumed discount rate used in determining the accumulated postretirement
benefit obligation was 7% at both December 31, 1996, and December 31, 1995.
14. Summary of Operating Expenses.
Following is a summary of operating expenses for the years 1996, 1995, and
1994:
<TABLE>
<CAPTION>
Years Ended December 31,
<S> <C> <C> <C>
(In Thousands) 1996 1995 1994
Salaries $250,788 $226,165 $195,903
Other employee benefits 32,390 25,773 37,649
Depreciation and amortization 27,613 25,404 27,339
Rent - real estate leases 26,599 24,691 22,686
Payroll taxes 19,908 17,680 16,360
Data and voice communication 16,390 16,118 15,884
Collection and credit information 16,147 14,487 14,343
Postage 14,593 13,770 11,912
Advertising 14,271 13,404 12,731
Travel 11,030 8,825 8,646
Stationery and supplies 9,263 7,497 7,319
Taxes other than income taxes 6,663 7,785 6,656
Rent - data processing
equipment leases 5,644 5,636 6,556
Management fees paid to Norwest
Corporation 5,230 3,835 2,321
Equipment repairs and maintenance 4,815 4,835 4,929
Retirement plan 4,148 8,367 8,434
Other 49,398 37,638 34,715
Total operating expenses $514,890 $461,910 $434,383
</TABLE>
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
15. Statements of Consolidated Cash Flows.
The Company and its subsidiaries consider highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
Supplemental disclosure of certain cash flow information is presented below:
Years Ended December 31,
(In Thousands) 1996 1995 1994
Cash paid for:
Interest $370,144 $328,255 $242,386
Income taxes 110,026 181,022 118,907
16. Concentrations of Credit Risk.
The Company and its subsidiaries are primarily engaged in the consumer
finance business. The average balance outstanding with any individual
customer is not significant. At December 31, 1996, the Company had 1,073
consumer finance offices in 47 states, Guam, Puerto Rico, and all ten
Canadian provinces compared with 1,029 consumer finance offices in 46
states, Guam, Puerto Rico, and ten Canadian provinces at December 31, 1995.
Credit cards are issued by Dial Bank to customers located nationwide. Dial
National Bank issues private label and dual-line Co-Branded credit cards
nationwide. Insurance premium financing is provided for liability and
material damage auto insurance in California, Arizona, Texas, and 10 states
located throughout the southeastern United States.
A subsidiary of the Company also provides accounts receivable financing
primarily to high quality furniture stores across the country. In addition,
another subsidiary of the Company provides lease financing and other leasing
services nationwide for a variety of commercial equipment with an emphasis
on health care equipment.
<PAGE 51>
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
17. Selected Quarterly Financial Data (Unaudited).
Selected quarterly financial data for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(In Thousands) Interest Provision
Total and Debt for Credit
Quarter Ended Income Expense Losses Net
Earnings
<S> <C> <C> <C> <C>
March 31, 1995 $322,275 $79,431 $30,314 $56,977
June 30, 1995 353,991 92,545 31,497 68,756
September 30, 1995 361,940 92,165 39,680 64,286
December 31, 1995 381,152 94,938 41,827 77,922
March 31, 1996 374,328 94,704 45,952 61,999
June 30, 1996 378,110 92,703 43,884 66,998
September 30, 1996 383,332 92,557 49,295 67,557
December 31, 1996 410,787 92,895 59,349 79,777
</TABLE>
18. Fair Value of Financial Instruments.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents. Due to the relatively short period of time
between the origination of these instruments and their expected realization,
the carrying value of cash and cash equivalents is a reasonable estimate of
fair value.
Available-for-sale Securities. Fair values of these financial instruments
were estimated using quoted market prices, when available. If quoted market
prices were not available, fair value was estimated using quoted market
prices for similar assets (note 2).
Finance Receivables and Notes Receivable - Affiliates. The interest rates
on the receivables outstanding at December 31, 1996, and 1995, are
consistent with the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
As a result, the carrying value is a reasonable estimate of fair value.
Loans Payable - Short-term and Accrued Interest Payable. Carrying value is
a reasonable estimate of fair value. The carrying amount approximates fair
value due to the short maturity of these instruments.
<PAGE> 52
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Concluded
18. Fair Value of Financial Instruments, Continued:
Other Receivables from Affiliate and Other Payables to Affiliates. Due to
the relatively short period of time between the origination of these
instruments and the expected realization, the carrying value of other
receivables from affiliate and other payables to affiliates is a reasonable
estimate of fair value.
Long-term Debt. Based on quoted market rates for the same or similar issues
or on current rates offered to the Company for similar debt of the same
remaining maturities, the fair value of long-term debt is $4,147,816,000 as
of December 31, 1996 and $4,195,715,000 as of December 31, 1995.
19. Notes Receivable - Affiliates.
Notes receivable - affiliates were $574,344,000 and $552,005,000 at
December 31, 1996, and 1995, respectively. Notes receivable - affiliates
include a combination of short-term and long-term notes receivable.
Effective May 4, 1995, Norwest Financial, Inc. made term loans totaling
$500 million to an affiliate, Island Finance Puerto Rico, Inc. The loans
have a weighted average interest rate of 8.80% and mature in 2000. The
remainder of notes outstanding at December 31, 1996 and December 31, 1995,
earn interest at rates that approximate the cost of borrowings of the
Company.
<PAGE> 53
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted in accordance with General Instruction J(2)(c).
Item 11. Executive Compensation.
Omitted in accordance with General Instruction J(2)(c).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted in accordance with General Instruction J(2)(c).
Item 13. Certain Relationships and Related Transactions.
Omitted in accordance with General Instruction J(2)(c).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
a. Consolidated balance sheets as of December 31, 1996, and 1995.
b. Statements of consolidated earnings and retained earnings for
the years ended December 31, 1996, 1995, and 1994.
c. Statements of consolidated cash flows for the years ended
December 31, 1996, 1995, and 1994.
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the
information is given in consolidated financial statements or notes
thereto.
(3) Exhibits:
3(a) Articles of Incorporation of the Company (Exhibit 3(a) of the
Company's Form 10-K Annual Report for 1983, which is hereby
incorporated by reference).
3(b) By-laws of the Company (Exhibit 3(b) of the Company's Form 10-K
Annual Report for 1983, which is hereby incorporated by
reference).
<PAGE> 54
4(a) Conformed copy of Indenture dated as of May 1, 1986, between
the Company and The Chase Manhattan Bank (National
Association), Trustee (Exhibit 4(o) of the Company's Form 10-K
Annual Report for 1986, which is hereby incorporated by
reference).
4(b) Conformed copy of Indenture dated as of May 1, 1986, between
the Company and Harris Trust and Savings Bank, Trustee (Exhibit
4(p) of the Company's Form 10-K Annual Report for 1986, which
is hereby incorporated by reference).
4(c) Copy of Norwest Financial, Inc. Standard Multiple-Series
Indenture Provisions dated May 1, 1986, (Exhibit 4(q) of the
Company's Form 10-K Annual Report for 1986, which is hereby
incorporated by reference).
4(d) Conformed copy of First Supplemental Indenture dated as of
February 15, 1991, between the Company and The Chase Manhattan
Bank (National Association), Trustee (Exhibit 4.3 of the
Company's Form 8-K Current Report dated February 25, 1991,
which is hereby incorporated by reference).
4(e) Conformed copy of First Supplemental Indenture dated as of
February 15, 1991, between the Company and Harris Trust and
Savings Bank, Trustee (Exhibit 4.4 of the Company's Form 8-K
Current Report dated February 25, 1991, which is hereby
incorporated by reference).
4(f) Conformed copy of Indenture dated as of November 1, 1991,
between the Company and The First National Bank of Chicago,
Trustee (Exhibit 2(a) of the Company's Form 8-A Registration
Statement dated May 24, 1993, which is hereby incorporated by
reference).
*(12) Computation of ratios of earnings to fixed charges for the
years ended December 31, 1996, 1995, 1994, 1993, and 1992.
*(23) Consent of Deloitte & Touche LLP.
Certain instruments with respect to long-term debt publicly issued,
privately placed or borrowed from banks are not filed herewith as exhibits
as the total amount of securities or indebtedness authorized under any of
such instruments does not exceed 10% of the total assets of the Company and
its subsidiaries on a consolidated basis. In accordance with subsection
(4)(iii) of paragraph (b) of Item 601 of Regulation S-K, the Company hereby
agrees to furnish a copy of any such instrument to the Securities and
Exchange Commission upon request. The list of subsidiaries exhibit required
by Item 601 of Regulation S-K has been omitted in accordance with General
Instruction J(2)(b).
*Filed herewithin.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter
of the period covered by this report.
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the
20th day of March 1997.
NORWEST FINANCIAL, INC.
By \s\James R. Berens
James R. Berens
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities indicated, on the 20th day of March 1997.
\s\David C. Wood
David C. Wood
Chairman of the Board
(Principal Executive Officer)
\s\James R. Berens
James R. Berens
President and Director
\s\Patricia J. McFarland
Patricia J. McFarland
Vice President, General Counsel and
Secretary and Director
Stanley S. Stroup
Director
\s\Dennis E. Young
Dennis E. Young
Senior Vice President, Chief Financial
Officer, Treasurer and Director
(Principal Financial Officer)
\s\Eric Torkelson
Eric Torkelson
Vice President and Controller
(Principal Accounting Officer)
NORWEST FINANCIAL, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Exhibit (12)
Years Ended December 31,
(Thousands of Dollars)
1996 1995 1994 1993 1992
Net earnings $276,331 $267,941 $223,340 $203,297 $164,204
Add:
Fixed charges:
Interest including
amortization of
debt expense 372,859 359,079 259,605 242,440 236,337
One-third of
rentals* 10,748 10,317 9,747 10,146 8,207
Total fixed
charges 383,607 369,396 269,352 252,586 244,544
Provision for
income taxes 148,096 147,873 116,900 104,228 84,334
Total net earnings,
fixed charges and
income taxes -
"Earnings" $808,034 $785,210 $609,592 $560,111 $493,082
Ratio of earnings
to fixed charges 2.11 2.13 2.26 2.22 2.02
*One-third of rentals is deemed representative of the interest factor.
EXHIBIT 23
Deloitte &
Touche LLP
(logo) Two Prudential Plaza Telephone:(312) 946-3000
180 North Stetson Avenue Facsimile:(312) 946-2600
Chicago, Illinois 60601
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-62635 and No. 33-52157 of Norwest Financial, Inc. on Form S-3 of our report
dated January 14,1997, appearing in the Annual Report on Form 10-K of Norwest
Financial, Inc.
for the year ended December 31, 1996.
\s\ Deloitte & Touche LLP
March 20, 1997
Deloitte Touche
Tohmatsu
International
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM NORWEST FINANCIAL
INC AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 141,692
<SECURITIES> 816,980
<RECEIVABLES> 5,949,435
<ALLOWANCES> 169,133
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 164,441
<DEPRECIATION> 89,373
<TOTAL-ASSETS> 7,760,845
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 6,232,995<F2>
0
0
<COMMON> 3,855
<OTHER-SE> 1,054,177
<TOTAL-LIABILITY-AND-EQUITY> 7,760,845
<SALES> 0
<TOTAL-REVENUES> 1,546,557
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 514,890
<LOSS-PROVISION> 198,480
<INTEREST-EXPENSE> 372,859
<INCOME-PRETAX> 424,427
<INCOME-TAX> 148,096
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,331
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>NORWEST FINANCIAL INC HAS A NON-CLASSIFIED
BALANCE SHEET SO THIS INFORMATION IS UNAVAILABLE.
<F2>INCLUDES $2.1 BILLION OF SHORT-TERM LOANS.
</FN>
</TABLE>
