Annual Report (Form 10-K), fiscal year 1994

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"), a $59.3 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. Norwest Financial also has credit card receivables and insurance premium finance receivables in its consumer portfolio. 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 this 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. At December 31, 1994, the Company and its consumer finance subsidiaries had 942 branch offices in 45 states, Guam, 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 an affiliate. Previously, one of the company's insurance subsidiaries had been providing credit life and credit disability insurance to customers of Norwest banks. As of December 1, 1992, this business was ceded to another insurance subsidiary of Norwest. Effective January 1, 1995, the Company's insurance subsidiary discontinued providing this insurance. 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 one of the Company's insurance subsidiaries, or it is offered on an agency basis by Norwest Financial. Information services is 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.
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. CONSUMER OPERATIONS
At December 31, 1994, consumer receivables accounted for 90% 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 $1,294,326 $ 41,462 $1,335,788 Not secured by real estate 1,186,279 332,904 1,519,183
Total loans 2,480,605 374,366 2,854,971
Sales finance contracts 1,171,950 53,439 1,225,389
Total consumer finance 3,652,555 427,805 4,080,360
Other consumer receivables 258,469 258,469
Total consumer receivables $3,911,024 $427,805 $4,338,829
Loans had an average balance per account of $3,215. Sales finance contracts had an average balance per account of $939. Other consumer receivables include credit card receivables and insurance premium finance receivables.
Geography
At December 31, 1994, Norwest Financial had consumer finance branch offices in 45 states, Guam, 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, 1994, is shown on the following page:
Number of Branch Offices and Percent of Receivables
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, 1994:
Consumer Finance Receivables and Number of Accounts Outstanding
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.
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 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. It also requires certain disclosures to applicants concerning credit reports that are used as a basis for denying or increasing the charge for credit.
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."
Business Methods
Loans are generally repayable in monthly installments and are made for periods of 180 months or less. Sales finance contracts can 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, 1994, open-end sales finance contracts accounted for 64% 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 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 the account. Closed-end sales finance contracts purchased 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 1994, approximately 91% of the amount and 81% 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 1994, 63.5% represented funds lent to borrowers who requested additional money while still owing Norwest Financial. In the years 1993 through 1990, this figure was 64.1%, 64.4%, 63.7%, and 62.3%, respectively. In 1994, of the 877,000 loans made by Norwest Financial, 416,000 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 $1,932; the average amount of the old balance was $1,828. Norwest Financial's policy is that loans are not made to present customers to cure a default in principal or interest.
Sales finance contracts are purchased not only because they are profitable in themselves, but also because they provide a major source of new loan customers. During 1994, approximately 74% of the number of new loans were made to present and 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 bank subsidiary located in Sioux Falls, South Dakota. Dial Bank had 192,000 VISA or MasterCard accounts at December 31, 1994; credit card receivables outstanding were $185.2 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. 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 2,300 independent insurance agents. Processing is performed by Norwest Financial Coast, Inc. from production offices located in Signal Hill and San Francisco, California, and Columbia, South Carolina. At December 31, 1994, approximately 118,000 accounts totaling $73.2 million were outstanding; $60.9 of these receivables were owned by Dial Bank.
Norwest Financial's average earned rates of charge on the average amount of consumer receivables outstanding during each of years 1994 through 1990 were 21.76%, 22.55%, 22.49%, 21.97%, and 21.92%, 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. In addition, consumer finance receivables in the United States 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. However, on loans over $25,000, those portions of the balances determined to be fully secured by real estate are excluded from write-offs. Consumer finance receivables in Canada are written off in the month following a six-month period in which no full payment is applied and if the receivable is one or more payments contractually delinquent. Other consumer receivables are written off for financial reporting when certain delinquency criteria are met.
Information concerning consumer loss experience and allowance for losses is shown below:
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 an affiliate. Under the Bank Holding Company Act of 1956, the insurance underwriting activities of the Company's insurance subsidiaries (other than insurance subsidiaries that are subsidiaries of the Company's state banking 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. In addition, the Company's casualty insurance subsidiary is permitted under this Act to underwrite non- filing insurance policies issued to Norwest or any of its subsidiaries.
The Company's insurance subsidiaries insure or reinsure credit life or disability insurance in 46 states, Guam, and the ten Canadian provinces, and property insurance in 42 states. Property insurance is offered on an agency basis in nine Canadian provinces. Prior to 1992, property insurance in the United States was offered by Norwest Financial on an agency basis. Involuntary unemployment insurance is offered on an agency basis in 25 states and nine Canadian provinces and is written directly by one of the Company's insurance subsidiaries in 14 states. Non-filing insurance is offered on an agency basis in 20 states and is underwritten by one of the Company's insurance subsidiaries in 25 states.
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.
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:
Income from the underwriting (as principal), or the sale (as agent), of property insurance, involuntary unemployment insurance and non-filing insurance for the years 1994 through 1990 were $31,838,000; $24,949,000; $22,204,000; $18,169,000; and $17,252,000, respectively.
COMMERCIAL FINANCE OPERATIONS
At December 31, 1994, commercial finance receivables accounted for 10% of Norwest Financial's total finance receivables outstanding. The following table presents Norwest Financial's commercial finance business for the five years ended December 31, 1994:
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
1994 $407,513 $ 92,757 $500,270 (2)% 1993 381,129 130,983 512,112 (13) 1992 442,331 147,570 589,901 (7) 1991 476,443 155,315 631,758 (5) 1990 477,344 188,992 666,336 8
Norwest Financial's average earned rates of charge on the average amount of commercial finance receivables outstanding during each of the years 1994 through 1990 were 14.58%, 13.46%, 14.06%, 14.74%, and 14.68%, 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.
Information concerning commercial loss experience and allowance for losses is shown below:
Non-accrual commercial receivables totaled $2,606,000; $5,349,000; $6,864,000; $17,125,000; and $14,666,000 at December 31, 1994 through 1990, respectively. During 1994, 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 $312,000. The amount of finance charges and interest actually recorded on these receivables during 1994 totaled $190,000.
Commercial receivables outstanding which were more than three payments contractually delinquent and which were still accruing interest totaled $1,202,000; $1,443,000; $2,586,000; $2,612,000; and $2,116,000 at December 31, 1994 through 1990, 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 was formed when the Company entered the lease financing business in 1977. Headquartered in Des Moines, Iowa, this division 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 $25,000. 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 was formed by the purchase of the net assets of a lease financing company in December 1988. Prior to November 1992, NFLI operated a third division which was formed from the purchase of the net assets of a lease financing company by Dial Bank and another subsidiary in June 1989. This division was merged with Division II to form one health care equipment financing division. 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, 1994, these loans totaled $44.3 million, a decrease of $19.7 million for the year.
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.
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, terminals 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, 1994, NFISG had contracts to supply information services to 24 other finance companies. On that date, approximately 2,600 branch offices were being served and 5.8 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 an elevated level of customer service by adding a number of new capabilities to the existing system; for example, delinquency lists and daily collection work lists, solicitation lists (categorized by credit limit, age, occupation, or any of many other characteristics from which branch employees choose), automated advertising generated from those lists or for individual accounts, complete application processing including retrieval of credit bureau reports, and company-wide access of account records.
Since SUPREME is an enhancement of the existing SWIFT system, subscribing companies may continue to use the existing system, or they may choose to add SUPREME. Sixteen subscribing companies were utilizing SUPREME at December 31, 1994. Norwest Financial has installed SUPREME in all of its branch offices in the United States and Canada. Overall, 5.3 million accounts in over 2,100 locations were being maintained by SUPREME at December 31, 1994.
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 two non-affiliate subscribers were utilizing SUCCESS at December 31, 1994.
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 1,000 locations for over 250 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.
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 63% of the Company's total indebtedness at December 31, 1994. The remaining 37% includes commercial paper with maturities of nine months or less (32%), and short-term debt to affiliates and other short-term debt (5%).
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 1994 through 1990 without giving effect to commitment fees relating to bank credit agreements were 6.22%, 6.41%, 7.29%, 8.33%, and 9.20%, respectively. The corresponding figures after giving effect to commitment fees were 6.25%, 6.45%, 7.33%, 8.36%, and 9.23%, respectively. Norwest Financial has obtained and continues to obtain, at prevailing rates, funds sufficient for the conduct of its business.
The following table contains certain information regarding short-term borrowings (except short-term borrowings from affiliates) during the periods indicated:
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, 1994, and 1993.
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,
1994 1993 1992 1991 1990
2.26 2.22 2.02 1.74 1.70
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, 1994, the Company and its subsidiaries employed approximately 6,100 persons. Norwest Financial believes its employee relations are excellent.
Item 2.



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 offices 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.

Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
Omitted in accordance with General Instructions J(2)(c).
PART II
Item 5.

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 1994 and 1993, 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 1994 and 1993 was as follows:
(In Thousands) 1994 1993
First quarter $40,000 $50,000 Second quarter 32,368 40,000 Third quarter 20,000 35,000 Fourth quarter 1,303 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 $116 million of consolidated retained earnings was unrestricted at December 31, 1994.
Item 6.

Item 6. Selected Financial Data.
Years Ended December 31,
(In Thousands) 1994 1993 1992 1991 1990
Operating revenues $1,175,285 $1,079,719 $924,348 $839,506 $742,074
Net earnings 223,340 203,297 164,204 130,880 115,366
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 Trans Canada Credit Corporation Limited consumer finance business prior to acquisition. In addition, on November 1, 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.
Norwest Financial's total income (revenue) increased 9% in 1994 and 17% in 1993 ($1,175.3 million in 1994 compared with $1,079.7 million in 1993 and $924.3 million in 1992).
Income from finance charges and interest increased 8% in 1994 and 19% in 1993 ($965.4 million in 1994 compared with $892.8 million in 1993 and $751.8 million in 1992). 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: 1994 1993
Consumer 13% 22% Commercial (14) (7) Total 10 17
Rate of charge on finance receivables: 1994 1993 1992
Consumer 21.76% 22.55% 22.49% Commercial 14.58 13.46 14.06 Total 21.02 21.36 21.09
Increases in income from finance charges and interest in both 1994 and 1993 were due primarily to growth in average consumer receivables outstanding. In 1994, this was offset in part by the decline in the consumer rate of charge. Average consumer receivables outstanding comprise 90% of total average finance receivables outstanding. Growth in average consumer receivables in 1994 and 1993 was due to a combination of regular business activity and purchases. Canadian consumer finance receivables totaling $370 million were purchased in November 1992. Other consumer finance purchases totaled $104 million in 1994 and $142 million in 1993.
The decline in average commercial finance receivables in 1994 and 1993 was a result of a decision to discontinue pursuing certain large leases combined with a decline in accounts receivable financing receivables.
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 16% in 1994 and 9% in 1993 ($105.7 million in 1994 compared with $91.0 million in 1993 and $83.4 million in 1992). 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 10% in 1994 and 25% in 1993. However, insurance premiums and commissions were also impacted by a change in insurance underwritten on customers of Norwest banks. Effective December 1, 1992, this business was ceded to another subsidiary of Norwest Corporation. Insurance premiums from business written on customers of Norwest banks were $8.9 million in 1992. Insurance losses and loss expenses increased 1% in 1994 and 3% in 1993 ($32.2 million in 1994 compared with $31.9 million in 1993 and $30.9 million in 1992). Lower insurance losses in Canada due to a change in Canadian reinsurance agreements impacted insurance loss and loss expenses in 1994. 1993 was impacted by the change in insurance underwritten on customers of Norwest banks.
Other income increased 9% in 1994 and 8% in 1993 ($104.3 million in 1994 compared with $95.9 million in 1993 and $89.2 million in 1992). The increase in 1994 is due primarily to an increase in other fee income combined with an increase in investment income. An increase in investment income, combined with other income generated by the Canadian operations, accounted for the majority of the increase in 1993. Average investments held increased 13% in 1994 and 18% in 1993.
Operating expenses increased 9% in 1994 and 23% in 1993 ($434.4 million in 1994 compared with $398.7 million in 1993 and $325.3 million in 1992). The increases were due primarily to increases in employee compensation and benefits, postage, rent for office facilities, data and voice communication expense, and other costs of business expansion. Norwest Financial was operating 942 consumer finance branches at both December 31, 1994, and 1993, and 882 at December 31, 1992. However, expenses for the 39 branches of the Transferred Subsidiary were included in 1994 until the date of the transfer on November 1. The purchase of the assets of Trans Canada Credit Corporation added 122 offices in November 1992.
Interest and debt expense increased 7% in 1994 and 3% in 1993 ($259.6 million in 1994 compared with $242.4 million in 1993 and $236.3 million in 1992). Changes in interest and debt expense result primarily from (1) changes in the amount of borrowings outstanding due to funding requirements for receivables and dividends and (2) changes in the cost of those borrowings.
Increase in average debt outstanding: 1994 1993
Short-term 3% 28% Long-term 17 13 Total 13 17
Cost of funds: 1994 1993 1992
Short-term 4.65% 3.92% 4.15% Long-term 6.87 7.57 8.59 Total 6.22 6.41 7.29
Changes in average debt outstanding correspond to changes in average finance receivables outstanding. Average finance receivables increased 10% in 1994 and 17% in 1993.
Provision for credit losses increased 10% in 1994 and 19% in 1993 ($108.9 million in 1994 compared with $99.2 million in 1993 and $83.3 million in 1992). The increases in the provision for credit losses were due primarily to increases in average finance receivable outstanding. Average finance receivables increased 10% in 1994 and 17% in 1993. Net write-offs as a percentage of average net receivables outstanding were 2.06% in 1994 compared with 2.19% in 1993 and 2.09% in 1992.
Income taxes increased 12% in 1994 and 24% in 1993. The increases were due primarily to increases in earnings before income taxes. The effective tax rates were 34.4% in 1994, and 33.9% in 1993, and 33.9% in 1992.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS 106 requires the company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits, which are principally health care, as claims were incurred. In 1992, the Company recognized $661,000 as an expense for postretirement health care and life insurance benefits.
SFAS 106 allows recognition of the cumulative effect of the liability in the year of the adoption or the amortization of the obligation over a period of up to twenty years. The Company has elected to recognize this obligation of approximately $22.2 million over a period of twenty years. The Company's cash flows are not affected by implementation of this Statement, however, implementation decreased income before income taxes by $4.9 million in 1994 and $4.0 million in 1993.
Effective January 1, 1994, the Company adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities". Upon adoption, the Company classified all of its debt and equity securities as available for sale in accordance with SFAS 115. Debt and equity securities classified as available for sale are to be reported at fair value with unrealized gains and losses excluded from earnings and recorded as a separate component of stockholder's equity. If a decline in security's fair value is deemed to be other than temporary, the amount of the write-down is recognized as a reduction in earnings.
The effect of SFAS 115 at December 31, 1994 was to decrease marketable securities by $22.2 million and decrease stockholder's equity by $14.5 million, the decrease in marketable securities net of the income tax effect of $7.7 million. The net unrealized holding loss on available-for-sale securities increased by $30.9 million since January 1, 1994.
Borrowings constitute the largest part of Norwest Financial's capitalization. At December 31, 1994, 86% of the Company's capital had been obtained from borrowings and 14% from stockholder's equity. Sixty-three percent of Norwest Financial's borrowings was in fixed-rate term borrowings with original maturities of more than one year. The remaining 37% includes commercial paper with maturities of nine months or less (32%), and short-term debt to affiliates and other short-term debt (5%). At December 31, 1993, short-term borrowings comprised 35% of total borrowing. This consisted of commercial paper with maturities of nine months of less (28%) and short-term debt to affiliates and other short-term debt (7%). Short-term borrowings as a percent of total borrowings averaged 29% in 1994 and 32% in 1993. Norwest Financial generally follows a guideline of funding between 25% to 30% of borrowings with short-term debt. The short-term borrowing percentage was higher in 1993 as a result of the funding for Norwest Financial's Canadian operations. For the first eleven months of 1993, all borrowings for these operations were short-term, either borrowings from banks or commercial paper borrowings. In December 1993, the Company's Canadian subsidiary issued $130 million (Canadian) of long-term debt. The Company's Canadian subsidiary issued an additional $110 million (Canadian) in long-term debt in 1994.
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, 1994, lines of credit and revolving credit agreements totaling $1,148 million were being maintained at 34 unaffiliated banks; $65 million was unavailable on that date.
The Company obtains 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 medium-term notes (which may have maturities ranging from nine months to 30 years) through underwriters (acting as agent or principal) (iii) the issuance of debt securities to institutional investors, and (iv) term borrowings from commercial banks.
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.
The common stock of 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. Management believes that the transfer will not have a significant impact on the 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. These capital contributions to the Company have been accounted for in a manner similar to a pooling of interests, except that results of prior periods have not been restated. Community Credit Co. is primarily engaged in automobile and consumer finance and had 55 branch offices and assets of $213.6 million at January 1, 1995. Community Credit Co. was acquired by Norwest Corporation in March 1994 and immediately contributed to the Parent. Net earnings from the acquisition date to December 31, 1994 were $6.3 million. Dial National Bank is primarily engaged in 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. Item 8.


Item 8. Financial Statements and Supplementary Data.
NORWEST FINANCIAL, INC.
Consolidated Financial Statements
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, in accordance with generally accepted auditing standards, the 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, Inc.) and subsidiaries as of December 31, 1994 and 1993, 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, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
\s\Deloitte & Touche LLP
January 13, 1995
Deloitte Touche Tohmatsu International
NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
See accompanying notes to consolidated financial statements.
NORWEST FINANCIAL, INC.
Consolidated Balance Sheets
(Thousands of Dollars)
See accompanying notes to consolidated financial statements. NORWEST FINANCIAL, INC.
Statements of Consolidated Earnings and Retained Earnings
(Thousands of Dollars)
See accompanying notes to consolidated financial statements.
NORWEST FINANCIAL, INC. Statements of Consolidated Cash Flows Increase (Decrease) in Cash and Cash Equivalents (Thousands of Dollars)
See accompanying notes to consolidated financial statements.
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. 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.
Marketable Securities. Effective January 1, 1994, the Company adopted Statement of Financial Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Upon adoption, the Company classified all of its debt and equity securities as available for sale in accordance with SFAS 115. Debt and equity securities classified as available for sale are to be reported at fair value with unrealized gains and losses excluded from earnings and recorded as a separate component of stockholder's equity. 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.
The effect of SFAS 115 at December 31, 1994 was to decrease marketable securities by $22.2 million and decrease stockholder's equity by $14.5 million, the decrease in marketable securities net of the income tax effect of $7.7 million. The net unrealized holding loss on available for sale securities increased by $30.9 million since January 1, 1994.
In 1993, investments in marketable securities were carried at amortized cost.
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.
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
1. Significant Accounting Policies, Continued:
Finance Charges and Interest, Continued:
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.
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. In addition, consumer finance receivables in the United States 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. However, on loans over $25,000, those portions of the balances determined to be fully secured by real estate, are excluded from write-offs. Consumer finance receivables in Canada are written off in the month following a six- month period in which no full payment is applied and if the receivable is one or more payments contractually delinquent. Other consumer receivables and commercial finance receivables are written off for financial reporting when certain delinquency criteria are met.
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 have been provided in accordance with SFAS 109 which reflect the impact of temporary differences between the amounts of assets and liabilities recorded for financial reporting on a basis different from that used for income tax purposes (note 11).
Retirement Plan. Retirement plans cover substantially all employees who meet certain age and service requirements. The Company's funding policy is to contribute no more than the maximum amount that can be deducted for federal income tax purposes (note 12). 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.
Reclassifications. Certain amounts in the 1993 and 1992 financial statements have been reclassified to conform to the presentation used in the 1994 financial statements.
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
2. Marketable Securities.
The amortized cost and market value of marketable securities were:
December 31, 1994 December 31, 1993 Amortized Market Amortized Market (In Thousands) Cost Value Cost Value
U.S. Treasury and federal agencies $297,597 $279,519 $264,192 $272,369 States and political subdivisions 95,895 92,734 89,730 92,806 Other (corporate bonds, stocks, and collateralized mortgage obligations) 199,078 198,061 118,734 133,200
Total $592,570 $570,314 $472,656 $498,375
The gross unrealized gains and losses of marketable securities were:
December 31, 1994 December 31, 1993 Gross Unrealized Gross Unrealized (In Thousands) Gains Losses Gains Losses
U.S. Treasury and federal agencies $ 345 $18,423 $ 8,882 $ 705 States and political subdivisions 297 3,458 3,101 25 Other (corporate bonds, stocks, and collateralized mortgage obligations) 5,950 6,967 15,250 784
Total $ 6,592 $28,848 $27,233 $1,514
The amortized cost and market values of marketable securities by maturity were:
December 31, 1994 December 31, 1993 Amortized Market Amortized Market (In Thousands) Cost Value Cost Value
In one year or less $ 48,355 $ 46,371 $221,538 $236,093 After one year through five years 315,513 302,533 166,043 173,973 After five years through ten years 159,036 150,465 76,833 79,969 After ten years 69,666 70,945 8,242 8,340
Total $592,570 $570,314 $472,656 $498,375
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 $4,032,000 and $2,036,000, respectively, in 1994; $3,311,000 and $1,063,000, respectively, in 1993; and $4,089,000 and $738,000, respectively, in 1992.
The carrying amounts of securities on deposit under statutory or other requirements at December 31, 1994 and 1993, were $5,775,000 and $5,523,000, respectively. NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
2. Marketable Securities, continued:
Interest and dividends from marketable securities and cash equivalents was $38,298,000, $36,562,000, and $33,939,000 for the years ended December 31, 1994, 1993 and 1992, 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, 1994, 1993 and 1992, approximated $3,959,755,000, $3,320,575,000 and $2,556,106,000, 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 $143,249,000 and $119,551,000 at December 31, 1994, and 1993, respectively.
At December 31, 1994, contractual maturities of commercial receivables were as follows: $192,250,000 were due in one year or less; $287,399,000 were due after one year through five years, and $20,621,000 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 $427,805,000 and $397,267,000 at December 31, 1994, and 1993, respectively.
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:
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 $1,147,700,000 at December 31, 1994; $65,000,000 was unavailable at that date. Unused bank credit agreements are available to support outstanding commercial paper. If all credit agreements in effect at December 31, 1994, were to remain in effect and unused throughout 1995, the Company would pay approximately $1,050,200 in commitment fees.
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:
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 to affiliates for the years 1994, 1993, and 1992 was 4.95%, 4.65%, and 9.35%, respectively.
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
6. Long-term Debt.
Long-term debt outstanding:
December 31,
(In Thousands) 1994 1993
Senior - United States: 4-7/8% due 1994 $ $ 100,000 7.95 % due 1994 150,000 8-1/4% due 1994 150,000 8.90 % due 1994 100,000 9.206% due 1994 30,000 9.75 % due 1994 100,000 4-5/8% due 1995 75,000 75,000 7-1/4% due 1995 150,000 150,000 7.10 % due 1996 150,000 150,000 8-7/8% due 1996 100,000 100,000 6 % due 1997 150,000 150,000 6-1/4% due 1997 150,000 6-1/2% due 1997 150,000 150,000 6-1/2% due 1997 150,000 5-1/2% due 1998 150,000 150,000 8-1/2% due 1998 100,000 100,000 6.20 % due 1999 75,000 75,000 6-1/4% due 1999 150,000 6-7/8% due 1999 100,000 100,000 5-1/8% due 2000 150,000 150,000 6-7/8% due 2000 150,000 7-3/4% due 2001 100,000 7.95 % due 2002 100,000 100,000 6-1/8% due 2003 150,000 150,000 7 % due 2003 150,000 150,000 6 % due 2004 150,000
Total senior - United States 2,600,000 2,380,000
Senior - Canada: 5.40 % due 1996 7,135 5.96 % due 1996 21,405 22,692 8.26 % due 1996 14,270 6.25 % due 1998 71,350 75,640 8.65 % due 1998 3,567 8.50 % due 1999 53,513
Total senior - Canada 171,240 98,332
Total senior 2,771,240 2,478,332
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
6. Long-term Debt, Continued:
Long-term debt outstanding, continued:
December 31,
(In Thousands) 1994 1993
Senior subordinated: 9.16 % due 1994 $ $ 7,500 9.55 % due 1994 5,000 9.63 % due 1995 20,000 20,000 8.375% due 1996 25,000 25,000 9-5/8% due 1998 50,000 50,000 Medium-term notes* 200,000 155,000
Total senior subordinated 295,000 262,500
Other 26,383 860
Total long-term debt outstanding $3,092,623 $2,741,692
* Medium-term notes outstanding have maturities ranging from 1995 to 1997 with interest rates from 4.85% to 8.78%.
Other debt represents senior debt secured by lease receivables and related equipment under lease. At December 31, 1994, 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 1995 through 1999 are $255,000,000; $457,809,000; $654,671,000; $396,592,000; and $378,513,000, respectively.
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) 1994 1993 1992
Short-term - affiliates $ 626 $ 4,626 $ 1,432 Short-term - commercial paper & other 54,027 44,282 36,271 Long-term 200,245 188,422 193,090 Amortization of debt expense 4,707 5,110 5,544
Total interest and debt expense $259,605 $242,440 $236,337
8. Operations by Country.
The following is a summary of total income, earnings before income taxes, and total assets by country:
(In Thousands) 1994 1993 1992
Total income: United States $1,050,069 $ 955,786 $ 908,773 Canada 125,216 123,933 15,575 Total $1,175,285 $1,079,719 $ 924,348
Earnings before income taxes: United States $ 303,817 $ 267,982 $ 245,846 Canada 36,423 39,543 2,692 Total $ 340,240 $ 307,525 $ 248,538
Total assets at December 31: United States $5,655,594 $4,825,416 $4,403,538 Canada 469,148 436,183 400,524 Total $6,124,742 $5,261,599 $4,804,062
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 this business prior to acquisition.
9. Leased Assets and Lease Commitments.
Lease terms are generally for three to seven years. Commitments at December 31, 1994, under operating leases having initial or remaining lease terms in excess of one year are estimated to approximate $29 million.
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
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 instruments and many of the Company's bank credit agreements contain certain requirements as to maintenance of net worth (as defined). Approximately $116 million of consolidated retained earnings was unrestricted at December 31, 1994.
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. The current income taxes payable included in other payables to affiliates was $4.7 million and $3.4 million at December 31, 1994, and 1993, respectively. The Company's Canadian subsidiaries file separate federal and provincial returns in Canada.
At December 31, 1994, no federal income taxes had been provided on approxi-
mately $23 million 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. The life insurance subsidiary does not contemplate distributing dividends from these retained earnings. The amount of unrecognized deferred tax liability at December 31, 1994, was $7.8 million.
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
11. Income Taxes, Continued:
Income taxes for the years 1994, 1993, and 1992 are composed of the following elements:
Years Ended December 31,
(In Thousands) 1994 1993 1992
Current: Federal $113,168 $ 97,800 $86,691 State 2,625 3,044 3,049 Foreign 11,601 3,733 59 Deferred: Federal and state (13,572) (13,818) (6,443) Foreign 3,078 13,469 978
Total income taxes $116,900 $104,228 $84,334
Income before income taxes from operations outside the United States was $33.4 million and $39.1 million for the years ended December 31, 1994 and 1993, respectively. Such income was not material for the year ended December 31, 1992.
Deferred income taxes are primarily due to leasing and lease financing, the allowance for credit losses, and accrued employee benefits.
12. Retirement Plans.
The Company has a defined benefit pension plan which covers United States employees who meet certain age and service requirements. 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.
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
12. Retirement Plans, continued.
The Plan's funded status and reconciliation to the balance sheet is presented below:
Assumptions used in the accounting were: As of December 31,
1994 1993
Weighted average discount rate 7.0% 7.0% Expected long-term rate of return on assets 6.0 6.0 Rate of increase in future compensation levels 6.0 6.0
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
12. Retirement Plans, Continued:
The components of net pension cost in the United States for 1994, 1993, and 1992 are presented below:
* 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 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 $1.9 million in 1994 and $2.0 million in 1993.
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 Canada/Quebec Pension Plan Earnings Ceiling for each year of service (not to exceed 35 years of service).
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
12. Retirement Plans, Continued:
Under the agreement for the acquisition by TCC of the consumer finance business of Trans Canada Credit Corporation Limited and its affiliates (the "Predecessor Employers"), TCC was required to establish the TCC Plan, which is substantially similar to the pension plan maintained by the Predecessor Employers, and the TCC Plan is required to assume the accrued benefit obligations of the TCC employees and retirees who had previous service with the Predecessor Employers. Such agreement also requires the Predecessor Employers to cause their pension plan to transfer assets to the TCC Plan equal in value to the amount of the transferred accrued benefit obligations plus a ratable portion of the surplus attributable to such employees. Transfer of such assets and liabilities to the TCC Plan from the Predecessor Employers' pension plan is subject to the receipt of applicable governmental approvals. Upon the completion of the transfer of such assets and liabilities to it, the TCC Plan will be adequately funded. Expense for the TCC Plan was $1,360,000 in 1994 and none in 1993. No contribution was required in 1994 and 1993.
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 $1.00 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 $11,500,000, $9,330,000, and $7,912,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
13. Postretirement Benefits.
The Company provides certain health care and life benefits for substantially all of its retired United States employees. Effective January 1, 1993, the Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS 106 requires the company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits, which are principally health care, as claims were incurred. In 1992, the Company recognized $661,000 as an expense for postretirement health care and life insurance benefits.
SFAS 106 allows recognition of the cumulative effect of the liability in the year of the adoption or the amortization of the obligation over a period of up to twenty years. The Company has elected to recognize this obligation of approximately $22.2 million over a period of twenty years. The Company's cash flows are not affected by implementation of this Statement, however, implementation decreased income before taxes by $4.9 million in 1994 and $4.0 million in 1993.
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
13. Postretirement Benefits, Continued:
The plan's accumulated postretirement benefit obligation and reconciliation to the balance sheet is presented below:
(In thousands) Years ended December 31,
1994 1993 Retirees $ (8,233) $ (8,916) Fully eligible plan participants (48) (81) Other active plan participants (22,129) (21,314)
(30,410) (30,311)
Unrecognized transition obligation 20,012 21,124 Unrecognized net loss 1,532 5,185
Accrued postretirement benefit liability $ (8,866) $ (4,002)
The Company has not funded any part of the accumulated postretirement benefit obligation.
Net postretirement benefit cost consisted of the following components:
(In thousands) Years ended December 31,
1994 1993 Service cost - benefits earned during the year $ 2,085 $ 1,570 Interest cost on accumulated postretirement benefit obligation 2,018 1,882 Amortization of transition obligation 1,112 1,112 Amortization of unrecognized net loss 383
$ 5,598 $ 4,564
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1994 was 12% for 1995 decreasing each successive year until it reaches 8% in 1999, after which it remains constant. A one percent increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by approximately $5.7 million and net postretirement benefit cost by $1.1 million for the year. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7% at both December 31, 1994, and December 31, 1993.
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
14. Summary of Operating Expenses.
Following is a summary of operating expenses for the years 1994, 1993, and 1992:
Years Ended December 31,
(In Thousands) 1994 1993 1992
Salaries $195,903 $179,185 $147,927 Other employee benefits 37,649 29,951 21,044 Depreciation and amortization 27,339 26,086 21,668 Rent - real estate leases 22,686 20,854 16,919 Payroll taxes 16,360 14,129 11,862 Data and voice communication 15,884 14,331 11,226 Collection and credit information 14,343 13,765 11,845 Advertising 12,731 11,137 11,284 Postage 11,912 11,218 10,512 Travel 8,646 10,319 7,225 Retirement plan 8,434 4,184 1,100 Stationery and supplies 7,319 6,694 4,806 Taxes other than income taxes 6,656 5,636 5,207 Rent - data processing equipment leases 6,556 9,585 7,703 Equipment repairs and maintenance 4,929 4,645 4,909 Management fees paid to Norwest Corporation 2,321 2,199 1,807 Other 34,715 34,750 28,296
Total operating expenses $434,383 $398,668 $325,340
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) 1994 1993 1992
Cash paid for: Interest $242,386 $235,432 $232,949 Income taxes 118,907 130,872 74,752
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
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, 1994, the Company had 942 consumer finance offices in 45 states, Guam, and all ten Canadian provinces compared with 942 consumer finance offices in 46 states and ten Canadian provinces at December 31, 1993. Credit cards are issued by Dial Bank to customers located in 46 states; all 45 states where the Company and its subsidiaries have consumer finance branches and one additional state where consumer finance branches of an affiliate are located. Insurance premium financing is provided for liability and material damage auto insurance in California, Arizona, 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.
17. Selected Quarterly Financial Data (Unaudited).
Selected quarterly financial data for 1994 and 1993 were as follows:
(In Thousands) Interest Provision Total and Debt for Credit Quarter Ended Income Expense Losses Net Earnings
March 31, 1993 $262,555 $62,877 $26,845 $43,572
June 30, 1993 267,473 59,644 23,926 50,218
September 30, 1993 272,052 57,987 24,930 54,574
December 31, 1993 277,639 61,932 23,479 54,933
March 31, 1994 279,695 60,419 25,146 52,148
June 30, 1994 287,181 63,568 25,932 52,391
September 30, 1994 297,284 67,076 28,263 54,303
December 31, 1994 311,125 68,542 29,529 64,498
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Continued
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.
Marketable 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, 1994, and 1993, 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.
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 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 $2,922,103,000 as of December 31, 1994 and $2,828,237,000 as of December 31, 1993.
19. Notes Receivable - Affiliates.
Notes receivable from affiliates were $376,886,000 and $33,875,000 at December 31, 1994, and 1993, respectively. Notes receivable - affiliates include a combination of short-term and long-term notes receivable. The notes earn interest at rates that approximate the cost of borrowings of the Company.
NORWEST FINANCIAL, INC.
Notes to Consolidated Financial Statements, Concluded
20. Subsequent Events.
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. These capital contributions to the Company have been accounted for in a manner similar to a pooling of interests, except that results of prior periods have not been restated. Community Credit Co. is primarily engaged in automobile and consumer finance and had 55 branch offices and assets of $213.6 million at January 1, 1995. Community Credit Co. was acquired by Norwest Corporation in March 1994 and immediately contributed to the Parent. Net earnings from the acquisition date to December 31, 1994 were $6.3 million. Dial National Bank is primarily engaged in 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.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant.
Omitted in accordance with General Instruction J(2)(c).
Item 11.

Item 11. Executive Compensation.
Omitted in accordance with General Instruction J(2)(c).
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted in accordance with General Instruction J(2)(c).
Item 13.

Item 13. Certain Relationships and Related Transactions.
Omitted in accordance with General Instruction J(2)(c).
PART IV
Item 14.

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, 1994, and 1993.
b. Statements of consolidated earnings and retained earnings for the years ended December 31, 1994, 1993, and 1992.
c. Statements of consolidated cash flows for the years ended December 31, 1994, 1993, and 1992.
(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). 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, 1994, 1993, 1992, 1991, and 1990.
*(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. One report on Form 8-K was filed during the last quarter of the period covered by this report. Accordingly, the following information is furnished:
A Form 8-K Current Report dated November 8, 1994, was filed (i) to report, pursuant to Item 5 (Other Events), the commencement of Norwest Financial, Inc.'s medium-term note program and the execution and delivery of a distribution agreement in connection therewith, and (ii) to effect the filing under the Securities Exchange Act of 1934, as amended, pursuant to Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits), of such agreement, the forms of medium-term notes, and a related opinion and related consents, for incorporation by reference into Norwest Financial, Inc.'s Registration Statement on Form S-3, Registration 33-52157.
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 10th day of March 1995.
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 10th day of March 1995.
\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
\s\Stanley S. Stroup Stanley S. Stroup Director
\s\Alfred Z. Winick Alfred Z. Winick Senior Vice President and Director
\s\Dennis E. Young Dennis E. Young Senior Vice President and Treasurer and Director (Principal Financial Officer)
\s\Robert W. Bettle Robert W. Bettle Vice President and Controller (Principal Accounting Officer)