|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1999
Commission file number 2-80466
Norwest Financial, Inc.
(Exact name of registrant as specified in its charter)
| Iowa | 42 1186565 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
| 206 Eighth Street, Des Moines, Iowa |
|
50309 |
| (Address of principal executive offices) | (Zip Code) |
(515) 243-2131
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock (without par value): 1,000 shares outstanding as of November 5, 1999.
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
NORWEST FINANCIAL, INC.
Consolidated Balance Sheets (Unaudited)
(Thousands of Dollars)
| |
September 30, 1999 |
December 31, 1998 |
||||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Cash and cash equivalents | $ | 184,419 | $ | 139,184 | ||
| Securities available-for-sale | 1,209,755 | 1,203,500 | ||||
| Finance receivables | 8,800,985 | 8,270,227 | ||||
| Less allowance for credit losses | 363,896 | 350,984 | ||||
| Finance receivables—net |
|
|
8,437,089 |
|
|
7,919,243 |
| Notes receivable—affiliates |
|
|
383,900 |
|
|
499,123 |
| Property and equipment (at cost, less accumulated depreciation of $150,837 for 1999 and $135,105 for 1998) |
|
|
248,086 |
|
|
187,695 |
| Deferred income taxes | 76,950 | 60,717 | ||||
| Other receivables from affiliates | 25,053 | |||||
| Other assets | 454,822 | 506,745 | ||||
| Total assets |
|
$ |
11,020,074 |
|
$ |
10,516,207 |
See accompanying notes to consolidated financial statements.
2
NORWEST FINANCIAL, INC.
Consolidated Balance Sheets (Unaudited) (Continued)
(Thousands of Dollars)
| |
September 30, 1999 |
December 31, 1998 |
||||
|---|---|---|---|---|---|---|
| Liabilities and Stockholder's Equity | ||||||
| Loans payable—short-term: | ||||||
| Commercial paper | $ | 1,985,017 | $ | 2,662,321 | ||
| Affiliates | 473,945 | 194,453 | ||||
| Other | 46,788 | 237,467 | ||||
| Unearned insurance premiums and commissions | 136,747 | 132,793 | ||||
| Insurance claims and policy reserves | 33,883 | 29,750 | ||||
| Accrued interest payable | 108,675 | 96,482 | ||||
| Other payables to affiliates | 44,173 | |||||
| Other liabilities | 370,912 | 280,737 | ||||
| Senior long-term debt | 6,277,445 | 5,272,818 | ||||
| Total liabilities | 9,433,412 | 8,950,994 | ||||
| Stockholder's equity: | ||||||
| Common stock without par value (authorized 1,000 shares, issued and outstanding 1,000 shares) | 3,855 | 3,855 | ||||
| Additional paid in capital | 196,697 | 189,438 | ||||
| Retained earnings | 1,403,436 | 1,362,370 | ||||
| Accumulated other comprehensive income (loss), net of income taxes | (17,326 | ) | 9,550 | |||
| Total stockholder's equity | 1,586,662 | 1,565,213 | ||||
| Total liabilities and stockholder's equity | $ | 11,020,074 | $ | 10,516,207 | ||
See accompanying notes to consolidated financial statements.
3
NORWEST FINANCIAL, INC.
Consolidated Statements of Income (Unaudited)
(Thousands of Dollars)
| |
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
||||||||
| Income: | ||||||||||||
| Finance charges and interest | $ | 410,163 | $ | 379,188 | $ | 1,211,569 | $ | 1,101,196 | ||||
| Insurance premiums and commissions | 99,481 | 59,719 | 253,811 | 246,009 | ||||||||
| Other income | 70,874 | 58,472 | 182,656 | 169,972 | ||||||||
| Total income | 580,518 | 497,379 | 1,648,036 | 1,517,177 | ||||||||
| Expenses: | ||||||||||||
| Operating expenses | 197,093 | 166,278 | 576,590 | 498,503 | ||||||||
| Interest and debt expense | 131,012 | 123,787 | 381,620 | 357,840 | ||||||||
| Provision for credit losses | 69,728 | 68,935 | 196,611 | 199,415 | ||||||||
| Insurance losses and loss expenses | 74,212 | 40,893 | 179,832 | 174,218 | ||||||||
| Total expenses | 472,045 | 399,893 | 1,334,653 | 1,229,976 | ||||||||
| Income before income taxes | 108,473 | 97,486 | 313,383 | 287,201 | ||||||||
| Income taxes | 38,846 | 31,952 | 112,329 | 98,671 | ||||||||
| Net income | $ | 69,627 | $ | 65,534 | $ | 201,054 | $ | 188,530 | ||||
See accompanying notes to consolidated financial statements.
4
NORWEST FINANCIAL, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Thousands of Dollars)
| |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
|||||||||
| Net income | $ | 69,627 | $ | 65,534 | $ | 201,054 | $ | 188,530 | |||||
| Other comprehensive income (loss), before income taxes: | |||||||||||||
| Unrealized gains (losses) on securities available-for-sale: | |||||||||||||
| Unrealized gains (losses) arising during the period | (17,638 | ) | 4,578 | (37,968 | ) | 16,256 | |||||||
| Reclassification adjustment for net gains included in net income | (1,578 | ) | (436 | ) | (7,424 | ) | (4,043 | ) | |||||
| (19,216 | ) | 4,142 | (45,392 | ) | 12,213 | ||||||||
| Foreign currency translation adjustment | 172 | (2,895 | ) | 3,154 | (4,606 | ) | |||||||
| Other comprehensive income (loss) before income taxes |
(19,044 | ) | 1,247 | (42,238 | ) | 7,607 | |||||||
| Income tax expense (benefit) related to unrealized gains (losses) on securities available-for-sale | (6,663 | ) | 1,451 | (15,362 | ) | 4,145 | |||||||
| Other comprehensive income (loss), net of income taxes | (12,381 | ) | (204 | ) | (26,876 | ) | 3,462 | ||||||
| Comprehensive income | $ | 57,246 | $ | 65,330 | $ | 174,178 | $ | 191,992 | |||||
See accompanying notes to consolidated financial statements.
5
NORWEST FINANCIAL, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Thousands of Dollars)
| |
Nine Months Ended September 30, |
||||||
|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
|||||
| Cash flows from operating activities: | |||||||
| Net income | $ | 201,054 | $ | 188,530 | |||
| Adjustments to reconcile net income to net cash flows from operating activities, net of effect of contributed subsidiaries: | |||||||
| Provision for credit losses | 196,611 | 199,415 | |||||
| Depreciation and amortization | 40,988 | 36,846 | |||||
| Deferred income taxes | 1,305 | 6,122 | |||||
| Other receivables from affiliates | (23,966 | ) | |||||
| Other assets | (44,530 | ) | (47,414 | ) | |||
| Unearned insurance premiums and commissions | 3,954 | (7,287 | ) | ||||
| Insurance claims and policy reserves | 4,133 | 275 | |||||
| Accrued interest payable | 12,193 | 11,180 | |||||
| Other payables to affiliates | (44,173 | ) | 31,551 | ||||
| Other liabilities | 89,187 | 126,689 | |||||
| Net cash provided by operating activities | 436,756 | 545,907 | |||||
| Cash flows from investing activities: | |||||||
| Finance receivables: | |||||||
| Principal collected | 5,554,986 | 4,832,556 | |||||
| Receivables originated or purchased | (6,259,097 | ) | (5,347,850 | ) | |||
| Proceeds from sales of securities | 111,429 | 101,348 | |||||
| Proceeds from maturities of securities | 126,267 | 145,085 | |||||
| Purchases of securities | (289,343 | ) | (331,212 | ) | |||
| Net additions to property and equipment | (75,221 | ) | (71,517 | ) | |||
| Net decrease (increase) in notes receivable—affiliates, net of effect of contributed subsidiaries | 93,699 | (236,497 | ) | ||||
| Cash and cash equivalents of contributed subsidiaries received | 1,002 | 503 | |||||
| Other | 120,182 | 40,407 | |||||
| Net cash used by investing activities | (616,096 | ) | (867,177 | ) | |||
| Cash flows from financing activities: | |||||||
| Net increase (decrease) in loans payable—short term | (588,491 | ) | 512,918 | ||||
| Proceeds from issuance of senior long-term debt | 1,673,573 | 511,960 | |||||
| Repayment of long-term debt: | |||||||
| Senior | (700,507 | ) | (425,288 | ) | |||
| Subordinated | (2,000 | ) | |||||
| Dividends paid | (160,000 | ) | (20,000 | ) | |||
| Net cash provided by financing activities | 224,575 | 577,590 | |||||
| Net increase in cash and cash equivalents | 45,235 | 256,320 | |||||
| Cash and cash equivalents beginning of period | 139,184 | 94,600 | |||||
| Cash and cash equivalents end of period | $ | 184,419 | $ | 350,920 | |||
See accompanying notes to consolidated financial statements.
6
NORWEST FINANCIAL, INC.
Consolidated Statements of Stockholder's Equity (Unaudited)
(Thousands of Dollars)
| |
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Common Stock |
Additional Paid In Capital |
Retained Earnings |
Foreign Currency Translation |
Unrealized Gains (Losses) on Securities Available- for-Sale |
Total |
|||||||||||||
| Balance, December 31, 1997 | $ | 3,855 | $ | 185,410 | $ | 1,167,418 | $ | (8,757 | ) | $ | 15,864 | $ | 1,363,790 | ||||||
| Comprehensive income (loss): | |||||||||||||||||||
| Net income | 188,530 | 188,530 | |||||||||||||||||
| Other | (4,606 | ) | 8,068 | 3,462 | |||||||||||||||
| Contributed subsidiaries | 4,028 | 6,348 | 10,376 | ||||||||||||||||
| Dividends | (20,000 | ) | (20,000 | ) | |||||||||||||||
| Balance, September 30, 1998 | $ | 3,855 | $ | 189,438 | $ | 1,342,296 | $ | (13,363 | ) | $ | 23,932 | $ | 1,546,158 | ||||||
| Balance, December 31, 1998 | $ | 3,855 | $ | 189,438 | $ | 1,362,370 | $ | (13,530 | ) | $ | 23,080 | $ | 1,565,213 | ||||||
| Comprehensive income (loss): | |||||||||||||||||||
| Net income | 201,054 | 201,054 | |||||||||||||||||
| Other | 3,154 | (30,030 | ) | (26,876 | ) | ||||||||||||||
| Contributed subsidiaries | 7,259 | 12 | 7,271 | ||||||||||||||||
| Dividends | (160,000 | ) | (160,000 | ) | |||||||||||||||
| Balance, September 30, 1999 | $ | 3,855 | $ | 196,697 | $ | 1,403,436 | $ | (10,376 | ) | $ | (6,950 | ) | $ | 1,586,662 | |||||
See accompanying notes to consolidated financial statements.
7
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with the accounting policies set forth in Norwest Financial, Inc.'s 1998 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements therein. In the opinion of management, all adjustments (none of which were other than normal recurring accruals) necessary to present fairly the financial statements for the periods presented have been included. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.
1. Principles of Consolidation.
The consolidated financial statements include the accounts of Norwest Financial, Inc. (the "Company") and subsidiaries (collectively, "Norwest Financial"). Intercompany accounts and transactions are eliminated. The Company is a wholly-owned subsidiary of Norwest Financial Services, Inc. (the "Parent") which is a wholly-owned subsidiary of Wells Fargo & Company ("Wells Fargo").
2. Dividend Restrictions.
Certain long-term debt instruments restrict payment of dividends on and acquisitions of the Company's common stock. In addition, such debt instruments and the Company's bank credit agreements contain certain requirements as to maintenance of net worth (as defined). Approximately $937 million of consolidated stockholder's equity was unrestricted at September 30, 1999.
3. Other Income.
Income from affiliates was $11.5 million and $14.7 million for the quarters ended September 30, 1999 and 1998, respectively, and $35.1 million and $47.2 million for the nine months ended September 30, 1999 and 1998, respectively.
Interest and dividends from securities available-for-sale and cash equivalents were $19.5 million and $18.1 million for the quarters ended September 30, 1999 and 1998, respectively, and $56.8 million and $54.2 million for the nine months ended September 30, 1999 and 1998, respectively.
4. Reclassifications.
Certain amounts in the 1998 financial statements have been reclassified to conform to the presentation used in the 1999 financial statements.
8
5. Finance Receivables.
Finance receivables are as follows:
| |
September 30, 1999 |
December 31, 1998 |
||||
|---|---|---|---|---|---|---|
| |
(In Thousands) |
|||||
| United States consumer finance: | ||||||
| Loans secured by real estate | $ | 2,114,848 | $ | 1,889,410 | ||
| Loans not secured by real estate | 1,173,507 | 1,124,381 | ||||
| Total loans | 3,288,355 | 3,013,791 | ||||
| Sales finance contracts | 1,172,626 | 1,191,675 | ||||
| Credit cards | 527,454 | 489,131 | ||||
| Total United States consumer finance | 4,988,435 | 4,694,597 | ||||
| Canadian consumer finance: | ||||||
| Loans secured by real estate | 81,162 | 71,011 | ||||
| Loans not secured by real estate | 417,225 | 390,612 | ||||
| Total loans | 498,387 | 461,623 | ||||
| Sales finance contracts | 489,541 | 474,924 | ||||
| Credit cards | 12,854 | 7,608 | ||||
| Total Canadian consumer finance | 1,000,782 | 944,155 | ||||
| Automobile finance | 2,169,370 | 2,022,813 | ||||
| Other | 642,398 | 608,662 | ||||
| Total finance receivables | $ | 8,800,985 | $ | 8,270,227 | ||
6. Allowance for Credit Losses.
The analysis of the allowance for credit losses is as follows:
| |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
|||||||||
| |
(In Thousands) |
||||||||||||
| Allowance for credit losses beginning of period | $ | 357,314 | $ | 332,175 | $ | 350,984 | $ | 297,800 | |||||
| Provision for credit losses charged to expense | 69,728 | 68,935 | 196,611 | 199,415 | |||||||||
| Write-offs | (75,922 | ) | (75,589 | ) | (223,718 | ) | (228,623 | ) | |||||
| Recoveries | 12,776 | 12,316 | 40,019 | 37,419 | |||||||||
| Allowance related to receivables contributed or acquired | 31,826 | ||||||||||||
| Allowance for credit losses end of period | $ | 363,896 | $ | 337,837 | $ | 363,896 | $ | 337,837 | |||||
9
7. Statements of Consolidated Cash Flows.
The Company and its subsidiaries consider highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Supplemental disclosure of certain cash flow information is presented below:
| |
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
||||||||
| |
(In Thousands) |
|||||||||||
| Cash paid for: | ||||||||||||
| Interest | $ | 109,243 | $ | 115,979 | $ | 363,722 | $ | 344,603 | ||||
| Income taxes | 2,102 | 48,087 | 135,377 | 95,276 | ||||||||
8. Segment Information.
The Company has three reportable segments: U.S. consumer finance, Canadian consumer finance, and automobile finance. The Company's operating segments are determined by product type and geography. U.S. consumer finance operations make loans to individuals and purchase sales finance contracts through 758 consumer finance branches in 46 states, Guam, Saipan, and Puerto Rico. The U.S. consumer finance segment also issues credit cards through two banking subsidiaries. Canadian consumer finance operations make loans to individuals and purchase sales finance contracts through 148 consumer finance branches in the 10 provinces. Automobile finance operations specialize in purchasing sales finance contracts directly from automobile dealers and making loans secured by automobiles through 212 branches in 32 states and Puerto Rico. Results from insurance operations are included in the appropriate segment.
Selected financial information for each segment is shown below:
| |
U.S. Consumer Finance |
Canadian Consumer Finance |
Automobile Finance |
Other* |
Eliminations |
Total |
||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
1999 |
1998 |
1999 |
1998 |
1999 |
1998 |
1999 |
1998 |
||||||||||||||||||||||||
| |
(In Thousands) |
|||||||||||||||||||||||||||||||||||
| Quarter Ended September 30,: | ||||||||||||||||||||||||||||||||||||
| Finance charges and interest | $ | 231,120 | $ | 221,263 | $ | 59,516 | $ | 54,890 | $ | 96,772 | $ | 82,736 | $ | 22,755 | $ | 20,299 | $ | $ | $ | 410,163 | $ | 379,188 | ||||||||||||||
| Intersegment income | 11,718 | 11,448 | (11,718 | ) | (11,448 | ) | ||||||||||||||||||||||||||||||
| Total income | 295,153 | 283,107 | 65,385 | 59,664 | 101,792 | 86,418 | 129,906 | 79,638 | (11,718 | ) | (11,448 | ) | 580,518 | 497,379 | ||||||||||||||||||||||
| Net income | 40,526 | 44,076 | 8,509 | 5,565 | 9,706 | 5,661 | 10,886 | 10,232 | 69,627 | 65,534 | ||||||||||||||||||||||||||
| Nine Months Ended September 30,: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
| Finance charges and interest | 681,395 | 667,645 | 176,080 | 146,086 | 288,001 | 230,475 | 66,093 | 56,990 | 1,211,569 | 1,101,196 | ||||||||||||||||||||||||||
| Intersegment income | 34,657 | 36,659 | (34,657 | ) | (36,659 | ) | ||||||||||||||||||||||||||||||
| Total income | 862,011 | 858,916 | 194,977 | 161,012 | 301,780 | 241,813 | 323,925 | 292,095 | (34,657 | ) | (36,659 | ) | 1,648,036 | 1,517,177 | ||||||||||||||||||||||
| Net income | 110,519 | 117,436 | 25,031 | 17,730 | 35,295 | 17,044 | 30,209 | 36,320 | 201,054 | 188,530 | ||||||||||||||||||||||||||
10
9. Recent Accounting Standards.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities. In July 1999, the FASB issued FAS 137, Deferring Statement 133's Effective Date, which defers the effective date for implementation of FAS 133 by one year, making FAS 133 effective no later than January 1, 2001 for the Company's financial statements. The Company has not yet determined when it will implement the Statement nor has it completed the analysis required to determine the impact on the financial statements.
10. Business Combinations.
Effective January 1, 1999, the Parent made a capital contribution, without consideration, to the Company of the issued and outstanding shares of capital stock of Aman Collection Service, Inc. and Aman Collection Service 1, Inc. (collectively referred to as "Aman"). This capital contribution was accounted for as a merger of interests under common control. Aman's headquarters are in Aberdeen, South Dakota and its principal business is collection services.
Effective January 21, 1999, the Parent made a capital contribution, without consideration, to the Company of the assets (along with and subject to the liabilities) and other related leasehold or property interests or rights formerly held by Mid-Penn Consumer Discount Company ("Mid-Penn"). Immediately preceding the capital contribution, Mid-Penn had merged with and into the Parent, and the Parent was the surviving corporation. This capital contribution was accounted for as a merger of interests under common control. Mid-Penn's headquarters were in Philadelphia, Pennsylvania and its principal business was consumer finance. Mid-Penn had finance receivables outstanding of $10 million at the time of the merger into the Parent.
11
NORWEST FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Statements made in Management's Discussion and Analysis may be forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements address management's present expectations about future performance and involve inherent risks and uncertainties. A number of important factors (some of which are beyond the Company's control) could cause actual results to differ materially from those in the forward-looking statements. Those factors include the economic environment, competition, products and pricing in the geographic and business areas in which the Company conducts its operations, prevailing interest rates, changes in government regulations and policies affecting financial services companies, credit quality and credit risk management, acquisitions, and integration of acquired businesses.
Norwest Financial's performance for the third quarter of 1999 closely paralleled performance for the first nine months of 1999. The discussion and analysis that follows, therefore, is limited to a discussion of the first nine months as a whole and does not include a separate discussion of the third quarter unless otherwise noted.
Norwest Financial's total income (revenue) increased 9% for the first nine months ($1,648.0 million in the first nine months of 1999 compared with $1,517.2 million in the first nine months of 1998).
Income from finance charges and interest increased 10% for the first nine months ($1,211.6 million in the first nine months of 1999 compared with $1,101.2 million in the first nine months of 1998). Changes in income from finance charges and interest result predominantly from (1) changes in the amount of finance receivables outstanding and (2) changes in the rate of charge on those receivables. In total, average finance receivables outstanding in the first nine months of 1999 increased 15% from the first nine months of 1998; average U.S. consumer finance receivables outstanding increased 6%, average Canadian consumer finance receivables outstanding increased 22%, average automobile finance receivables outstanding increased 34%, and average other finance receivables outstanding increased 19%.
| |
Nine Months Ended September 30, |
||||
|---|---|---|---|---|---|
| |
1999 |
1998 |
|||
| Rate of charge on finance receivables: | |||||
| U.S. consumer finance |
|
18.99 |
% |
19.77 |
% |
| Canadian consumer finance | 24.90 | 25.24 | |||
| Automobile finance | 18.68 | 20.01 | |||
| Other | 14.16 | 14.49 | |||
| Total | 19.22 | 20.02 | |||
The increases in income from finance charges and interest was due predominantly to growth in average receivables outstanding. This was offset in part by the decline in the rate of charge. Growth in average receivables for all categories was due predominantly to various acquisitions combined with regular business activity. Most of the increase in Canadian consumer finance average receivables was due to the acquisition of T. Eaton Acceptance Co. Limited and National Retail Credit Services Limited, effective April 21, 1998. Substantially all of the increase in automobile finance average receivables was due to the capital contribution by the Parent to the Company, of the issued and outstanding shares of capital stock of Reliable Financial Services, Inc., effective June 30, 1998, along with the acquisition of automobile sales finance contracts from Sunstar Acceptance Corporation, a division of NationsBank, in October 1998. Substantially all of the increase in other average receivables was due to significant receivable growth of Norwest Financial Preferred Capital, Inc., a subsidiary of the Company which began rediscounting to commercial entities in 1997.
12
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 3% ($253.8 million in the first nine months of 1999 compared with $246.0 million in the first nine months of 1998.) Insurance losses and loss expenses increased 3% ($179.8 million in the first nine months of 1999 compared with $174.2 million in the first nine months of 1998.) Insurance premiums and commissions in the third quarter of 1999 increased 67% compared with the third quarter of 1998 ($99.5 million compared with $59.7 million). Insurance losses and loss expenses in the third quarter of 1999 increased 81% compared with the third quarter of 1998 ($74.2 million compared with $40.9 million). The increases were predominantly due to increases in insurance premiums and commissions and insurance losses and loss expenses on multiple peril crop insurance.
Other income increased 7% ($182.7 million in the first nine months of 1999 compared with $170.0 million in the first nine months of 1998), due predominantly to an increase in collection service income combined with a payment received due to the early termination of an information processing subscriber.
Operating expenses increased 16% ($576.6 million in the first nine months of 1999 compared with $498.5 million in the first nine months of 1998). The increase was due primarily to increases in employee compensation and benefits and other costs relating to business expansion, including various acquisitions during 1998.
In April 1998, one of the Company's Canadian subsidiaries, Norwest Financial Capital Canada, Inc. ("NFCCI"), acquired all of the issued and outstanding shares of capital stock of the T. Eaton Acceptance Co. Limited ("TEAC") and National Retail Credit Services Limited ("NRCS"). The acquisition was accounted for as a purchase. Effective January 1, 1999, NFCCI, TEAC and NRCS merged with another of the Company's Canadian subsidiaries to form National Retail Credit Services Company ("NRCSCO"). The primary business of NRCSCO is to support certain Canadian retailers, and a significant portion of its business is devoted to the support of the T. Eaton Company Limited ("Eaton's"). On August 20, 1999, Eaton's filed an intention to make a proposal under the Canadian Bankruptcy and Insolvency Act. On September 28, 1999, by order of the Court these proceedings were taken up and continued under the Companies Creditors Arrangement Act resulting in Eaton's filing a plan of compromise and arrangement under this Act. The effect of the plan is that Eaton's will be liquidated with most of the assets of Eaton's being sold and the proceeds thereof distributed to its creditors. Several courses of action affecting NRCSCO could result. Eaton's proposed plan is scheduled to be voted upon by eligible creditors on November 19, 1999. The purchase price paid for TEAC and NRCS included an amount recorded for goodwill. Sufficient information is not yet available for the Company to evaluate the goodwill for impairment because it is not yet possible to predict the ultimate outcome of the proceedings. The Company expects, however, it will be able to complete its evaluation during the fourth quarter of 1999. The analysis may result in the recognition of a non-cash after-tax charge for the impairment of goodwill in the range between zero and $30 million.
Interest and debt expense increased 7% ($381.6 million in the first nine months of 1999 compared with $357.8 million in the first nine months of 1998). Changes in interest and debt expense result predominantly from (1) changes in the amount of borrowings outstanding and (2) changes in the cost of those borrowings. Average total outstanding borrowings in the first nine months of 1999 increased 10% from the first nine months of 1998.
13
| |
Nine Months Ended September 30, |
||||
|---|---|---|---|---|---|
| |
1999 |
1998 |
|||
| Costs of funds: | |||||
| Short-term |
|
5.15 |
% |
5.64 |
% |
| Long-term | 6.56 | 6.76 | |||
| Total | 6.11 | 6.44 | |||
Changes in average debt outstanding generally correspond to changes in average finance receivables outstanding combined with the change in notes receivable—affiliates. Average finance receivables and notes receivable—affiliates increased 10% from the first nine months of 1998.
Provision for credit losses decreased 1% ($196.6 million in the first nine months of 1999 compared with $199.4 million in the first nine months of 1998). Net write-offs decreased 4% in the first nine months of 1999.
| |
Nine Months Ended September 30, |
||||
|---|---|---|---|---|---|
| |
1999 |
1998 |
|||
| Net write-offs, not annualized, as a percentage of average net receivables outstanding: | |||||
| U.S. consumer finance |
|
1.78 |
% |
2.25 |
% |
| Canadian consumer finance | 3.29 | 3.11 | |||
| Automobile finance | 2.68 | 4.17 | |||
| Other | 2.00 | .40 | |||
| Total | 2.19 | 2.61 | |||
During 1999, the provision for credit losses exceeded net write-offs by $12.9 million. At September 30, 1999, the Company had an allowance for credit losses of $363.9 million (4.13% of receivables) compared with $351.0 million (4.24% of receivables) at December 31, 1998. There were no material changes in estimation methods and assumptions during 1999 and 1998. Non-accrual finance receivables were $41.4 million at September 30, 1999 compared with $32.5 million at December 31, 1998. In addition, finance receivables outstanding which were more than three payments contractually delinquent and which were still accruing interest were $104.2 million at September 30, 1999 compared with $123.7 million at December 31, 1998. Management believes the allowance for credit losses at September 30, 1999, is adequate to absorb probable losses on existing receivables in the finance receivables portfolio.
Income taxes increased 14% ($112.3 million in the first nine months of 1999 compared with $98.7 million in the first nine months of 1998). Income before income taxes increased 9% ($313.4 million in the first nine months of 1999 compared with $287.2 million in the first nine months of 1998.) The effective tax rate was 35.8% for the first nine months of 1999 compared with 34.4% for the first nine months of 1998.
The Company maintains bank lines of credit and revolving credit agreements to provide an alternative source of liquidity to support the Company's commercial paper borrowings. At September 30, 1999, lines of credit and revolving credit agreements totaling $1,472 million were being maintained at 31 domestic and international banks; the entire amount was available on that date. Additionally, the Company's bank subsidiaries, Dial Bank and Dial National Bank, have access to federal funds borrowings.
14
At September 30, 1999, federal funds availability at the two banks was $405 million.
The Company and a Canadian subsidiary obtain long-term debt capital primarily from the issuance of debt securities to the public through underwriters on a firm-commitment basis and the issuance of debt securities to institutional investors. The Company and a Canadian subsidiary also obtain long-term debt from the issuance of medium-term notes (which have maturities ranging from nine months to 30 years) through underwriters (acting as agent or principal).
The Company anticipates the continued availability of borrowed funds, at prevailing interest rates, to provide for Norwest Financial's growth in the foreseeable future. Funds are also generated internally from payments of principal and interest on Norwest Financial's finance receivables.
During 1998 and 1999, Norwest Financial continued with its company-wide project to prepare Norwest Financial's systems for Year 2000 compliance. The Year 2000 issue relates to computer systems that use two digits rather than four to define the applicable year and whether such systems will properly process information when the year changes to 2000. "Systems" include all hardware, networks, system and application software, and commercial "off the shelf" software, and embedded technology such as properties/date impacted processors in automated systems such as elevators, telephone systems, security, heating and cooling systems and others. Priority is given to "mission critical" systems. A system is considered "mission critical" if it is vital to the successful continuation of a core business activity.
The implementation of Norwest Financial's Year 2000 readiness project is divided into four principal phases: Phase I requires a comprehensive assessment and inventory of all applicable software, system hardware devices, data and voice communication devices and other embedded technology to determine Year 2000 vulnerability and risk; Phase II requires date detection on systems intended to determine which systems must be remediated and which systems are compliant and require testing only, determination of the resources and costs, and the development of schedules and high level testing plans and schedules for the repair, replacement and/or retirement of systems that are determined not to be compliant. Phase III requires repair, replacement and/or retirement of systems that are determined not to be Year 2000 compliant, and planning the integration testing for those systems that have interfaces with other systems both internal and external to Norwest Financial, such as customers/suppliers; and Phase IV requires integration testing on applicable systems to validate that interfaces are Year 2000 compliant and contingency planning.
Norwest Financial may be affected by the Year 2000 compliance issues of governmental agencies, business and other entities who provide data to, or receive data from, Norwest Financial, and by entities, such as borrowers, vendors, customers and business partners, whose financial condition or operational capability is significant to Norwest Financial. Norwest Financial's Year 2000 project also includes assessing the Year 2000 readiness of certain customers, borrowers, vendors, business partners, counterparties and governmental entities and the testing of major external interfaces with third parties which Norwest Financial has determined are critical. Norwest Financial is primarily engaged in the consumer and automobile finance business. The average balance outstanding with any individual customer is not significant. As a result Norwest Financial does not plan to test the Year 2000 compliance of any borrowers. Norwest Financial has tested mainframe and mid-range software applications included in the company's systems. Norwest Financial is testing the Year 2000 compliance of its mission critical vendors. In addition, Norwest Financial is obtaining representations and warranties of the Year 2000 compliance of its major vendors. In addition to assessing the readiness of these external parties, Norwest Financial has developed contingency plans which include recovery plans and alternatives to mitigate the effects of counterparties whose own failure to properly address Year 2000 issues may adversely impact Norwest Financial's ability to perform mission critical functions. These contingency plans have been substantially completed. The contingency plans have been validated and subject to review by a qualified independent party. Specific plans for the turn of the century event, December 31, 1999 through January 3, 2000 were completed and tested during the third quarter of 1999. The Company has used independent verification and validation processes in determining its Year 2000 compliance.
15
The Company did not rely on automated tools for verification and validation.
Norwest Financial has substantially completed Phases I, II, III and IV of its Year 2000 project, and believes all mission critical functions are Year 2000 compliant. In the area of embedded technology, or non-information technology systems, Norwest Financial has completed Phases I, II, III, and IV of the Year 2000 project. The Company believes all mission critical embedded technology is Year 2000 compliant.
Through September 30, 1999, Norwest Financial has incurred charges of $5.4 million related to its Year 2000 project. This represents less than 10% of its information technology budget. Charges include $3.8 million related to the cost of internal staff redeployed to the Year 2000 project, as well as $.5 million for external consulting costs and $1.1 million for costs of accelerated replacement of hardware and software due to Year 2000 issues. Norwest Financial currently estimates that its total cost for the Year 2000 project will be $5.7 million. The redeployment of internal staff has not delayed other information technology projects, and thus will not have an impact on the financial condition or results of operations.
The foregoing paragraphs contain a number of forward-looking statements. These statements reflect management's best current estimates, which were based on numerous assumptions about future events, including the continued availability of certain resources, representations received from third party service providers and other third parties, and additional factors. There can be no guarantee that these estimates, including Year 2000 costs, will be achieved, and actual results could differ materially from those estimates.
A number of important factors could cause management's estimates and the impact of the Year 2000 issue to differ materially from what is described in the forward-looking statements contained in the above paragraphs. Those factors include, but are not limited to, uncertainties in the costs of hardware and software, the availability and cost of programmers and other systems personnel, inaccurate or incomplete execution of the phases, ineffective remediation of computer code and the ability of Norwest Financial's customers, vendors, competitors and counterparties to effectively address the Year 2000 issue.
If Year 2000 issues are not adequately addressed by Norwest Financial and significant third parties, Norwest Financial's business, results of operations and financial position could be materially adversely affected. Failure of certain vendors to be Year 2000 compliant could result in disruption of important services upon which Norwest Financial depends, including, but not limited to, such services as telecommunications, electrical power and data processing. The failure of loan customers to properly prepare for the Year 2000 could also result in increases in problem loans and credit losses in future years. Notwithstanding Norwest Financial's efforts, there can be no assurance that Norwest Financial or significant third party vendors or other significant third parties will adequately address their Year 2000 issues. Norwest Financial is continuing to assess the Year 2000 readiness of third parties but does not know at this time whether the failure of third parties to be Year 2000 compliant will have a material effect on results of operations, liquidity and financial condition.
The forward-looking statements made in the foregoing Year 2000 discussion speak only as of the date on which such statements are made, and Norwest Financial undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events.
16
NORWEST FINANCIAL, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges of Norwest Financial, Inc. and its subsidiaries for the periods indicated:
| |
Years Ended December 31, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Nine Months Ended September 30, 1999 |
||||||||||
| 1998 |
1997 |
1996 |
1995 |
1994 |
||||||
| 1.80 | 1.72 | 2.00 | 2.11 | 2.13 | 2.26 | |||||
The ratios of earnings to fixed charges have been computed by dividing net earnings plus fixed charges and income taxes by fixed charges. Fixed charges consist of interest and debt expense plus one-third of rentals (which is deemed representative of the interest factor).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
| Exhibit (12) | Computation of ratios of earnings to fixed charges for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 and the nine months ended September 30, 1999. |
(b) Reports on 8-K
No reports on Form 8-K were filed during the quarter for which this report is filed.
17
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
NORWEST FINANCIAL, INC. |
||
| Date: November 5, 1999 |
|
|
|
|
| |
|
By |
|
/s/ ERIC TORKELSON Eric Torkelson Senior Vice President and Controller (Principal Accounting Officer) |
18
Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
|
|