First Quarter Results
For the period ended June 30, 1998
Distinctly Different
Message to Stakeholders
Our Commitment Continues
In this first quarter of fiscal year 1999, Alberta Treasury Branches (ATB) continued to reduce loan losses and
improve the benefit received from every dollar spent. ATB's first quarter results emphasized our commitment to the
business plan and our determination to be Albertans' first choice for financial products in ATB's chosen markets.
Highlights
Net income for the quarter of $23.5 million, an increase of 188.0% over the same period last year, reduced ATB's
cumulative deficit to $43.0 million. Total revenue of $85.8 million is up 5.0% over the previous quarter and 12.1%
over the same period last year.
Total assets grew $359.8 million, or 4.1%, in the quarter to June 30, 1998. As a result of the actions of our Credit
and Asset Management teams the quality of our loan portfolio improved in the quarter. Credit losses decreased by $10.9
million over the same period last year. Action taken on impaired loans returned approximately $134 million to earning assets.
Customer deposits increased by $300.4 million, or 3.44%, in the quarter.
Also of significance, is the work ATB began some 18 months ago in respect of circumstances surrounding the 1994 refinancing
of West Edmonton Mall (WEM). The guarantee for the WEM financing is not, and never has been, typical of the normal business
activities of ATB. A provision has been established at June 30, 1998 to reflect a potential
for loss associated with the WEM loan guarantee.
New Products and Services
New products in the individual financial services market, and mortgage and fixed date deposit campaigns were successful in
retaining customers and bringing in new business.
ATB continually looks for new ways to meet the needs of its customers. For example, ATB continues to increase the number
of automatic banking machines. The Student First program, a new product targeted at students in post-secondary institutions,
was launched June 1, 1998. Beginning this fall, equity-linked GICs will be available on an ongoing basis and home equity lines
of credit will be made more easily available.
For ATB's independent business customers, we recently introduced
life and disability insurance for their lines of credit. Seven- and 10-year terms have been added to our Agri-Term product and
we will be looking to add a contingency line of credit for agri-business customers in the coming months.
Productivity
Productivity, which measures the amount spent for every dollar earned, improved in the first quarter to 70.4%. The
lower the productivity ratio the better and our goal by the year 2001 is 64.0%. A number of projects are already active
with more planned, all aimed at reducing the administrative burden at the branch level and freeing up sales staff to
focus on customer needs.
Although our productivity ratio has improved, non-interest expense increased by 8.7% in the three months ended June 30,
1998 over the same period last year. This is largely attributable to an increase in salaries and employee benefit expenses,
and a new deposit guarantee fee, payable to the provincial government.
ATB's management and non-bargaining unit employees began participating in a new competitive performance-based compensation
plan on April 1, 1998. On June 26, bargaining unit employees ratified a new collective agreement, making their participation
in the new compensation plan retroactive to April 1.
ATB continues to invest in our employees through training. As of
June 30, 1998, 50% of the employees had completed sales training, reinforcing ATB's commitment to become a dynamic sales
organization.
Technology
To become more competitive, on April 8, 1998 we announced our intention to outsource information technology and document
processing back office functions. A request for proposal was issued on May 22, 1998, with a target date for completion of
November 1998.
ATB is making good progress towards its December 31, 1998 timeline
for becoming year 2000 compliant for all systems controlled by ATB.
We continue to encourage customers to assess and address year 2000 risks, and will be participating in public year 2000
symposiums in smaller Alberta regional centers, as well as Edmonton and Calgary, during September 1998. These symposiums
will be held in partnership with the Canadian Bankers Association and local Chambers of Commerce.
Outlook
With merger plans recently announced by the major Canadian banks,
the financial services industry is rapidly changing. These changes represent exciting market opportunities for ATB.
By bringing together our strong customer focus and a renewed emphasis on growth, we are better positioned than ever before to solidify our position to be Albertans'
first choice for financial products.
Marshall M. Williams
Chairman of the Board |
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Paul G. Haggis
President & Chief Executive Officer |
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Management's Discussion
Net Interest Income
Due primarily to continued higher interest spreads, net interest income in the first quarter, at $67.8 million,
was $7.6 million or 12.60% higher than for the same period last year. The average spread, which is net interest income expressed as a percentage of average earning assets, was 3.11%,
20 basis points higher than a year ago. ATB has been able to achieve higher spreads than the majority of other
financial institutions.
Average earning assets increased by $307.7 million to $8.7 billion from the previous quarter. This increase in earning assets also contributed to the improvement in net interest income.
Loan Quality
Loan quality continues to improve significantly. In the quarter, gross impaired loans reduced from $414.3 million to $283.6 million. After deducting the general loan loss provisions, net impaired loans now stand at 1.12% of total loans, compared to 2.23% at March 31, 1998 and 4.38% a year ago. This trend is expected to continue throughout the current year.
The incidence of new impaired loans is expected to reduce with the introduction of the Turnaround Assistance Group on April 1, 1998. This group was established to provide early intervention on potential problem loans and improve the frequency and accuracy of credit risk ratings.
Provision for credit losses charged to the Statement of Income for the quarter, of $1.9 million, reflects a current forecast for the year of
$7.4 million. The annualized ratio of provision for credit losses to average total loans is 0.10%, as compared to 0.70% for the same period last year.
Non-Interest Expenses
Non-interest expenses totaled $60.4 million, an increase of $4.8 million or 8.66% over the same quarter last year. This increase is primarily a result of a 10.27% increase in salaries and employee benefits associated with the introduction of a competitive performance-based compensation plan for all ATB employees on April 1, 1998.
The other significant change in the first quarter is a new deposit guarantee fee of $2.0 million. Beginning this fiscal year, ATB is required to pay a deposit guarantee fee to the provincial government in recognition of the value received through the government's unconditional guarantee of all ATB customer deposits and interest. This year's fee, payable after the fiscal year end, is estimated to be approximately $8 million.
Balance Sheet
Total assets at the end of the first quarter are $9.18 billion. This represents an increase in the first three months of the year of $359.8 million.
Total loans decreased in the quarter as a result of the reduction in net impaired loans of $88.6 million and a reduction of commercial loans and mortgages of $25.6 million. However, loans within ATB's three target markets increased overall by $60.7 million. The offering of new products such as the Cash Back and the 5-year Rate Capper Mortgages have contributed significantly to this increase. In the first quarter last year, total assets increased by $107.5 million and total loans decreased $14.6 million.
Deposits increased by $300.4 million or 3.44% during the first quarter. Retail fixed date deposit products, including a 15-month GIC, Cashable GIC, and a 3-year Premium Rate GIC have significantly contributed to this growth. Since April 1, 1998, the fixed date deposit portfolio grew by a total of $162.8 million compared to a decrease of $91.8 million in the same period last year.
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