NORWEST FINANCIAL INC, 10-Q, 2000-05-09

NORWEST FINANCIAL INC
10-Q, 2000-05-09
PERSONAL CREDIT INSTITUTIONS

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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 March 31, 2000
Commission file number 2-80466

Norwest Financial, Inc.

(Exact name of registrant as specified in its charter)

Iowa (State of incorporation)		42-1186565 (IRS Employer Identification No.)
206 Eighth Street, Des Moines, Iowa (Address of principal executive offices)		50309 (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 May 9, 2000.

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.

PART I. FINANCIAL INFORMATION

NORWEST FINANCIAL, INC.

Consolidated Balance Sheets (Unaudited)

(Thousands of Dollars)

	March 31, 2000			December 31, 1999
Assets
Cash and cash equivalents	$	110,146		$	178,970
Securities available-for-sale		1,207,244			1,224,666
Finance receivables		9,397,903			9,072,306
Less allowance for credit losses		381,978			367,712

Finance receivables—net		9,015,925			8,704,594

Notes receivable—affiliates		454,609			487,822
Property and equipment (at cost, less accumulated depreciation of $132,447 for 2000 and $130,253 for 1999)		67,714			69,374
Deferred income taxes		140,232			130,496
Other assets		443,130			487,491

Total assets	$	11,439,000		$	11,283,413

Liabilities and Stockholder's Equity
Loans payable—short-term:
Commercial paper	$	2,388,516		$	2,437,676
Affiliates		403,151			432,199
Other		115,757			256,916
Unearned insurance premiums and commissions		139,061			140,547
Insurance claims and policy reserves		34,764			34,124
Accrued interest payable		99,715			102,695
Other payables to affiliates		48,698			3,297
Other liabilities		322,483			374,558
Long-term debt:
Senior		5,795,595			5,913,837
Affiliates		500,000

Total liabilities		9,847,740			9,695,849

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		209,124			196,697
Retained earnings		1,405,712			1,407,743
Accumulated other comprehensive loss, net of income taxes		(27,431	)		(20,731	)

Total stockholder's equity		1,591,260			1,587,564

Total liabilities and stockholder's equity	$	11,439,000		$	11,283,413

See accompanying notes to consolidated financial statements.

NORWEST FINANCIAL, INC.

Consolidated Statements of Income (Unaudited)

(Thousands of Dollars)

	Three Months Ended March 31,
	2000		1999
Income:
Finance charges and interest	$	448,992	$	399,160
Insurance premiums and commissions		25,648		30,422
Other income		50,473		56,013

Total income		525,113		485,595

Expenses:
Operating expenses		205,165		189,567
Interest and debt expense		143,545		124,863
Provision for credit losses		77,359		68,082
Insurance losses and loss expenses		13,311		10,985

Total expenses		439,380		393,497

Income before income taxes		85,733		92,098
Income taxes		31,596		32,335

Net income	$	54,137	$	59,763

See accompanying notes to consolidated financial statements.

NORWEST FINANCIAL, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(Thousands of Dollars)

	Three Months Ended March 31,
	2000			1999
Net income	$	54,137		$	59,763
Other comprehensive loss, before income taxes:
Unrealized losses on securities available-for-sale:
Unrealized losses arising during the period		(7,511	)		(5,296	)
Reclassification adjustment for net gains included in income		(2,373	)		(2,764	)

		(9,884	)		(8,060	)
Foreign currency translation adjustment		(183	)		966

Other comprehensive loss before income taxes		(10,067	)		(7,094	)
Income tax benefit related to unrealized losses on securities available-for-sale		(3,367	)		(2,384	)

Other comprehensive loss, net of income taxes		(6,700	)		(4,710	)

Comprehensive income	$	47,437		$	55,053

See accompanying notes to consolidated financial statements.

NORWEST FINANCIAL, INC.

Consolidated Statements of Cash Flows (Unaudited)

(Thousands of Dollars)

	Three Months Ended March 31,
	2000			1999
Cash flows from operating activities:
Net income	$	54,137		$	59,763
Adjustments to reconcile net income to net cash flows from operating activities, net of effect of contributed subsidiaries:
Provision for credit losses		77,359			68,082
Depreciation and amortization		12,801			13,669
Deferred income taxes		(1,928	)		(4,752	)
Other receivables from affiliates					(16,709	)
Other assets		(18,921	)		(1,228	)
Unearned insurance premiums and commissions		(1,486	)		(1,104	)
Insurance claims and policy reserves		640			627
Accrued interest payable		(2,980	)		9,064
Other payables to affiliates		45,957			(44,173	)
Other liabilities		(55,810	)		49,971

Net cash provided by operating activities		109,769			133,210

Cash flows from investing activities:
Finance receivables:
Principal collected		2,039,323			1,846,342
Receivables originated or purchased		(2,197,710	)		(1,910,637	)
Proceeds from sales of securities		37,063			18,672
Proceeds from maturities of securities		32,988			43,625
Purchases of securities		(62,513	)		(90,659	)
Net additions to property and equipment		(3,655	)		(25,250	)
Net decrease (increase) in notes receivable—affiliates, net of effect of contributed subsidiaries		(18,829	)		35,556
Cash and cash equivalents of contributed subsidiaries received		477			1,002
Other		57,502			101,341

Net cash provided (used) by investing activities		(115,354	)		19,992

Cash flows from financing activities:
Net increase (decrease) in loans payable—short term		(400,683	)		(133,369	)
Proceeds from issuance of long-term debt:
Senior		68,989			350,000
Affiliates		500,000
Repayment of senior long-term debt		(186,545	)		(300,000	)
Dividends paid		(45,000	)		(40,000	)

Net cash used by financing activities		(63,239	)		(123,369	)

Net increase (decrease) in cash and cash equivalents		(68,824	)		29,833
Cash and cash equivalents beginning of period		178,970			139,184

Cash and cash equivalents end of period	$	110,146		$	169,017

See accompanying notes to consolidated financial statements.

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, 1998	$	3,855	$	189,438	$	1,362,370		$	(13,530	)	$	23,080		$	1,565,213
Comprehensive income (loss):
Net income						59,763									59,763
Other									966			(5,676	)		(4,710	)
Contributed subsidiaries				7,259		12									7,271
Dividends						(40,000	)								(40,000	)

Balance, March 31, 1999	$	3,855	$	196,697	$	1,382,145		$	(12,564	)	$	17,404		$	1,587,537

Balance, December 31, 1999	$	3,855	$	196,697	$	1,407,743		$	(9,575	)	$	(11,156	)	$	1,587,564
Comprehensive income (loss):
Net income						54,137									54,137
Other									(183	)		(6,517	)		(6,700	)
Contributed subsidiaries				12,427		(11,168	)								1,259
Dividends						(45,000	)								(45,000	)

Balance, March 31, 2000	$	3,855	$	209,124	$	1,405,712		$	(9,758	)	$	(17,673	)	$	1,591,260

See accompanying notes to consolidated financial statements.

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 1999 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 $941 million of consolidated stockholder's equity was unrestricted at March 31, 2000.

3. Other Income.

Income from affiliates was $8.7 million and $12.1 million for the three months ended March 31, 2000 and 1999, respectively.

Interest and dividends from securities available-for-sale and cash equivalents were $19.9 million and $18.6 million for the three months ended March 31, 2000 and 1999, respectively.

4. Reclassifications.

Certain amounts in the 1999 financial statements have been reclassified to conform to the presentation used in the 2000 financial statements.

5. Finance Receivables.

Finance receivables are as follows:

	March 31, 2000		December 31, 1999
	(In Thousands)
United States consumer finance:
Loans secured by real estate	$	2,339,592	$	2,137,593
Loans not secured by real estate		1,303,829		1,245,427

Total loans		3,643,421		3,383,020
Sales finance contracts		1,190,287		1,213,878
Credit cards		584,201		588,499

Total United States consumer finance		5,417,909		5,185,397

Canadian consumer finance:
Loans secured by real estate		94,211		86,848
Loans not secured by real estate		449,535		432,183

Total loans		543,746		519,031
Sales finance contracts		484,584		489,259
Credit cards		16,468		15,655

Total Canadian consumer finance		1,044,798		1,023,945

Automobile finance		2,202,165		2,165,745
Other		733,031		697,219

Total finance receivables	$	9,397,903	$	9,072,306

6. Allowance for Credit Losses.

The analysis of the allowance for credit losses is as follows:

	Three Months Ended March 31,
	2000			1999
	(In Thousands)
Allowance for credit losses beginning of period	$	367,712		$	350,984
Provision for credit losses charged to expense		77,359			68,082
Write-offs		(88,525	)		(76,101	)
Recoveries		15,589			14,248
Allowance related to receivables contributed or acquired		9,843

Allowance for credit losses end of period	$	381,978		$	357,213

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:

	Three Months Ended March 31,
	2000		1999
	(In Thousands)
Cash paid for:
Interest	$	159,977	$	116,184
Income taxes		4,310		73,140

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 800 consumer finance branches in 47 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 197 branches in 33 states and Puerto Rico. Results from insurance operations are included in the appropriate segment.

Selected financial information for each segment is shown below:

					Canadian Consumer Finance
	U.S. Consumer Finance								Automobile Finance				Other*					Eliminations				Total
Three Months Ended March 31,	U.S. Consumer Finance								Automobile Finance				Other*					Eliminations				Total
Three Months Ended March 31,	2000		1999		2000		1999		2000		1999		2000			1999		2000	1999			2000		1999
	(In Thousands)
Finance charges and interest	$	257,810	$	224,571	$	61,373	$	57,311	$	101,722	$	95,568	$	28,087		$	21,710	$	$			$	448,992	$	399,160
Intersegment income																	11,397			(11,397	)
Total income		315,294		282,577		67,890		62,932		106,284		100,021		35,645			51,462			(11,397	)		525,113		485,595
Net income (loss)		41,382		35,049		6,796		7,526		9,855		11,551		(3,896	)		5,637						54,137		59,763

*: Information from other segments below the quantitative threshold are attributable to information services operations, miscellaneous insurance companies, collection services, operations in Argentina and commercial finance operations including rediscounting. Subsidiaries engaged in information services operations were transferred to the Parent on December 15, 1999.

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, Deferral of the Effective Date of FASB Statement No. 133, that defers the effective date of implementation of FAS 133 to no later than January 1, 2001 for the Company's financial statements. The Company has not yet completed the analysis required to determine the impact on the financial statements.

10. Business Combinations.

Effective January 1, 2000, the Parent made a capital contribution, without consideration, to the Company of the issued and outstanding shares of capital stock of two of the Parent's consumer finance subsidiaries (the "Contributed Subsidiaries"). This capital contribution was accounted for as a merger of interests under common control. Accordingly, the assets acquired and liabilities assumed were recorded at historical cost. The contributed subsidiaries had assets totaling $237.8 million and 49 branch offices at the time of the contribution.

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 total income (revenue) increased 8% for the first three months ($525.1 million in the first three months of 2000 compared with $485.6 million in the first three months of 1999).

Income from finance charges and interest increased 12% for the first three months ($449.0 million in the first three months of 2000 compared with $399.2 million in the first three months of 1999). 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 three months of 2000 increased 12% from the first three months of 1999; average U.S. consumer finance receivables outstanding increased 15%, average Canadian consumer finance receivables outstanding increased 8%, average automobile finance receivables outstanding increased 7%, and average other finance receivables outstanding increased 18%.

	Three Months Ended March 31,
	2000		1999
Rate of charge on finance receivables:
U.S. consumer finance	19.04	%	19.08	%
Canadian consumer finance	24.37		24.57
Automobile finance	18.76		18.85
Other	15.67		14.30
Total	19.29		19.29

The increases in income from finance charges and interest were due predominantly to growth in average receivables outstanding. Growth in average receivables for all categories was due primarily to regular business activity. The majority of the increase in other average receivables was due to receivable growth of Norwest Financial Preferred Capital, Inc., a subsidiary of the Company which began rediscounting to consumer finance companies in 1997.

Insurance premiums and commissions decreased 16% ($25.6 million in the first three months of 2000 compared with $30.4 million in the first three months of 1999.) The decreases were predominantly due to decreases in insurance premiums and commission on multiple peril crop insurance. Insurance losses and loss expenses increased 21% ($13.3 million in the first three months of 2000 compared with $11.0 million in the first three months of 1999.) The increases were predominately due to increases in insurance losses and loss expenses on multiple peril crop insurance. The company has announced its intention, subject to regulatory approval, to transfer the multiple peril crop insurance operations to another affiliate of Wells Fargo.

Other income decreased 10% ($50.5 million in the first three months of 2000 compared with $56.0 million in the first three months of 1999). The decrease in other income was due predominantly to the elimination of income from the sale of information services in 2000 due to the transfer of this business to the Parent on December 15, 1999.

Operating expenses increased 8% ($205.2 million in the first three months of 2000 compared with $189.6 million in the first three months of 1999). The increase was due primarily to increases in employee compensation and benefits and other costs relating to business expansion.

Interest and debt expense increased 15% ($143.5 million in the first three months of 2000 compared with $124.9 million in the first three months of 1999). 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 three months of 2000 increased 10% from the first three months of 1999.

	Three Months Ended March 31,
	2000		1999
Costs of funds:
Short-term	6.15	%	5.14	%
Long-term	6.50		6.64
Total	6.40		6.14

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 11% from the first three months of 1999.

Provision for credit losses increased 14% ($77.4 million in the first three months of 2000 compared with $68.1 million in the first three months of 1999). Net write-offs increased 18% in the first three months of 2000 compared to the first three months of 1999.

	Three Months Ended March 31,
	2000		1999
Net write-offs, not annualized, as a percentage of average net receivables outstanding:
U.S. consumer finance	.62	%	.63	%
Canadian consumer finance	1.41		1.10
Automobile finance	.97		1.07
Other	.57		.05
Total	.78		.75

During 2000, the provision for credit losses exceeded net write-offs by $4.4 million. At March 31, 2000, the Company had an allowance for credit losses of $382.0 million (4.06% of receivables) compared with $367.7 million (4.05% of receivables) at December 31, 1999. There were no material changes in estimation methods and assumptions during 2000 and 1999. Non-accrual finance receivables were $46.3 million at March 31, 2000 compared with $41.3 million at December 31, 1999. In addition, finance receivables outstanding which were more than three payments contractually delinquent and which were still accruing interest were $106.7 million at March 31, 2000 compared with $110.9 million at December 31, 1999. Management believes the allowance for credit losses at March 31, 2000, is adequate to absorb probable losses on existing receivables in the finance receivables portfolio.

Income taxes decreased 2% ($31.6 million in the first three months of 2000 compared with $32.3 million in the first three months of 1999). Income before income taxes decreased 7% ($85.7 million in the first

three months of 2000 compared with $92.1 million in the first three months of 1999.) The effective tax rate was 36.9% for the first three months of 2000 compared with 35.1% for the first three months of 1999. The increase in the effective tax rate was due predominantly to an increase in state taxes.

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 March 31, 2000, lines of credit and revolving credit agreements totaling $1,821 million were being maintained at 32 domestic and international banks; the entire amount was available on that date. Additionally, the Company's bank subsidiaries, Dial Bank and Dial National Bank, have access to federal funds borrowings. At March 31, 2000, federal funds availability at the two banks was $349 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.

PART II. OTHER INFORMATION

NORWEST FINANCIAL, INC.

Item 5. Other Information.

RATIOS OF EARNINGS TO FIXED CHARGES

The following table sets forth the ratios of earnings to fixed charges of Norwest Financial, Inc. and its subsidiaries for the periods indicated:

	Years Ended December 31,
Three Months Ended March 31, 2000	Years Ended December 31,
Three Months Ended March 31, 2000	1999	1998	1997	1996	1995
1.58	1.78	1.72	2.00	2.11	2.13

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, 1999, 1998, 1997, 1996 and 1995 and the three months ended March 31, 2000.

(b): Reports on 8-K

No reports on Form 8-K were filed during the quarter for which this report is filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NORWEST FINANCIAL, INC.
Date: May 9, 2000
	By:	/s/ ERIC TORKELSON Eric Torkelson Senior Vice President and Controller (Principal Accounting Officer)

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PART I. FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
RATIOS OF EARNINGS TO FIXED CHARGES
SIGNATURES