At June 30, 2008, ATB reached record highs in assets ($24.5 billion, up 14.4% from last year’s first quarter), net loans ($19.8 billion, up 11.9%) and deposits, excluding wholesale ($18.7 billion, up 8.8%).
Operating revenue for the quarter was $220.3 million, up 6.3% from the first quarter last year, while net income of $56.7 million was down 12.1%, largely due to a decrease in the margin earned on assets (net interest spread). This was driven by the decrease in the Canadian bank prime lending rate and the competitive deposit market.
“ATB continues to benefit from a strong Alberta economy, from products and services that work for Albertans, and from the passion and commitment of our more than 4,800 associates,” said Dave Mowat, ATB’s President and CEO.
“We are pleased to report continued growth in our loans, deposits, and operating revenue, but, like all Canadian financial institutions, we are well aware of the impact of lower interest rates and the current uncertainty in the marketplace. We will be monitoring those trends carefully throughout the year.”
The fair value of ATB’s asset-backed commercial paper (“ABCP”) investments improved slightly over the quarter. The financial institution’s ABCP holdings – purchased at an original cost of $1.15 billion – have an estimated fair value of $922.7 million at June 30, 2008, an improvement of $20.4 million from March 31, 2008. This is due largely to an improvement in financial market credit spreads.
The Pan-Canadian Investors Committee, which includes ATB, has been working toward an orderly restructuring of these investments during the standstill period outlined by the Montreal Accord. On August 18, a three-judge panel of the Ontario Court of Appeal ruled that the restructuring plan is fair and legal. “We are very pleased with the Court’s decision. Our intention all along has been to contribute to a resolution that is fair and amenable to Canadian investors, and in the best interests of ATB,” Mowat said.
Mowat said ATB ultimately expects to recover nearly all of its principal investment, plus interest, once the ABCP is converted to longer-term notes that reach maturity in six to nine years.
ATB’s equity position also improved at quarter’s end to $1.73 billion.
Since 2000, the Teddy for a Toonie campaign has raised $2.5 million for Alberta children’s health and wellness.
Management's Discussion and Analysis (unaudited)
Net Income
ATB Financial reported net income of $56.7 million for its first quarter ended June 30, 2008 compared to a loss of $86.1 million for the previous quarter and net income of $64.5 million for the first quarter last year. This represents a $142.8 million increase from the previous quarter's net income and a decrease of $7.8 million or 12.12% from last year’s first quarter net income.
In the current quarter, ATB recognized a recovery of $1.3 million of the loss previously recorded on asset-backed commercial paper (“ABCP”) as compared to a provision of $146.2 million recorded in the prior quarter. The provision recorded in the prior quarter was considered to represent an other-than-temporary impairment in the value of the asset-backed commercial paper investment held by ATB. During the quarter, ATB’s investment in certain bank-sponsored ABCP (approximately 3.04% of ATB’s ABCP holdings undergoing restructuring) was successfully restructured and resulted in an exchange of the original investment for two long term floating rate notes (“FRNs”). This exchange resulted in a net gain of $1.3 million, an improvement over the $146.2 provision for loss recorded in the prior quarter. This positive result, along with the $6.3 million gain on sale generated from ATB’s new mortgage securitization program, more than offset an increase in the provision for credit losses of $6.0 million and an increase in non-interest expenses of $5.4 million over the prior quarter.
The decrease in net income this quarter compared to the first quarter last year is attributable to two main factors: an $18.9 million increase in non-interest expenses and a $2.0 million increase in the provision for credit losses. These negative variances were partially offset by an increase in operating revenue, which increased by $13.1 million year over year. The relatively low growth in operating revenues is caused by a drop in net interest income due to the drop in the bank prime rate and a very competitive deposit market.
Net Interest Income
ATB’s net interest income was $167.0 million for the first quarter ended June 30, 2008. This is consistent with the amount recorded in the prior quarter and is $8.1 million (or 5.13%) greater than the amount recognized in the first quarter last year.
The year-over-year increase in net interest income has been driven by a $2.3 billion increase in average loan balances over the same period. Specifically, there has been substantial growth in residential mortgages and home equity lines of credit (“HELOCs”). The primary driver of the growth in the residential mortgage portfolio is the increased average price of homes over the last year. This increasing home value has also resulted in more customers leveraging the increased equity in their home via HELOCs. However, growth in ATB’s net interest income has been restricted by a reduction in net interest spread earned on those assets. This reduction in spread is driven by the decrease in the Canadian bank prime lending rate and the very competitive deposit market.
Other Income - excluding ABCP
Other income was $52.0 million for the first quarter ended June 30, 2008, an increase of $6.6 million (or 14.61%) compared to the prior quarter, and $3.7 million (or 7.67%) compared to the first quarter of last fiscal year. The increase over the prior quarter arose in a number of areas, with card fees, credit fees, and insurance all increasing (by $1.7 million, $1.4 million, and 1.0 million, respectively), but the majority of the change was driven by securitization income. ATB began a mortgage securitization program with Canada Housing Trust that resulted in the recognition of a $6.3 million gain on sale in the current quarter. These increases were partially offset by a $2.4 million reduction in derivative income.
The $3.7 million increase in other income from the first quarter of the prior year was similarly driven by the recognition of $6.3 million securitization gain on sale this quarter along with a $2.2 million increase in card fees. These positive variances were partially offset by a $4.2 million reduction in sundry other income. Sundry other income in the first quarter last year contained a number of non-recurring items.
Provision
for Credit Losses
ATB recorded an $8.6 million net provision for credit losses in the first quarter ended June 30, 2008. This compares unfavorably to the $2.6 million net provision last quarter and the $6.6 million net provision in the first quarter last year. The net provision consists of both a general and a specific component. The general loan loss provision is management’s best estimate of probable losses not yet specifically identified in the loan portfolio while specific allowances are recorded when loans are identified as impaired.
The general loan loss provision for the quarter was $6.2 million compared to a provision of $1.1 million last quarter and a $6.4 million provision in the first quarter last year. This increase is the result of ATB’s growing loan portfolio.
The specific loan loss provision has increased to $2.4 million in the current quarter from $1.5 million in the prior quarter and $0.2 million in the first quarter of last year. This is driven by an increase in specifically identified impaired loans this quarter over the prior quarters.
The quality of ATB’s loan portfolio remains strong, with less than one per cent of the total gross loan portfolio being classified as impaired at the end of the quarter. The total credit loss allowance in the first quarter ending June 30, 2008 exceeded gross impaired loans by $118.4 million, compared to $119.4 million and $116.4 million at March 31, 2008 and June 30, 2007, respectively.
Non-Interest Expenses
Total non-interest expenses were $155.0 million for the first quarter ended June 30, 2008. This was $5.4 million (or 3.59%) higher than the expense in the prior quarter and $18.9 million (or 13.89%) higher than the expense in the first quarter of last fiscal year.
The increase from the prior quarter is primarily due to a $7.1 million (or 9.01%) increase in human resource expenses, partially offset by decreases in “other” non-interest expenses (reduced $1.7 million) and marketing and supplies (reduced $1.3 million). The rise in human resource expenses is mainly attributable to an increase in the number of employees combined with annual salary increases.
Compared to the first quarter last fiscal year, non-interest expenses increased by $18.9 million. This increase is attributable to a number of factors, including human resource expenses, professional and consulting costs, and deposit guarantee fees. ATB’s human resource expenses increased by $10.7 million (or 14.24%), primarily because of a 7.7% increase in the amount of full time equivalents working at ATB and the increased cost of existing staff. The $2.2 million (or 33.01%) increase in professional and consulting costs is a result of ATB’s Core business transformation initiative (a long term project to replace ATB’s core banking and financial systems). The $2.2 million increase in the deposit guarantee fee is due to a combination of increasing deposits and a non-recurring adjustment.
One of ATB’s key measurements relative to non-interest expenses is the ratio of non-interest expenses to operating revenue (net interest income before provisions, plus other income). This is known as the efficiency ratio, and measures ATB’s effectiveness at generating operating revenue. In the first quarter ended June 30, 2008, ATB’s efficiency ratio was 70.76% (measured excluding the impact of the ABCP provision). This compares unfavorably to 70.46% in the prior quarter (measured excluding the impact of the ABCP provision) and 65.68% in the first quarter last fiscal year. This movement in the efficiency ratio was expected because ATB is making significant investments and net interest spread is dropping, both of which reduce revenue growth.
Balance Sheet
ATB’s balance sheet continues to grow, with profits increasing total equity to $1.7 billion, up $59.2 million from the end of the prior quarter and up $62.1 million from a year ago. Total assets of $24.5 billion increased by $1.2 billion over the prior quarter and by $3.1 billion over the first quarter of the prior year. Accumulated other comprehensive income increased from $25.1 million last quarter to $27.7 million in the current quarter, reflecting the net change in fair value of certain financial instruments (specifically investments and derivatives).
The two most significant components of ATB’s balance sheet are loans and deposits. Total loans, net of allowance for credit losses, increased by $357.1 million (or 1.84%) compared to the previous quarter and by $2.1 billion (or 11.86%) compared to the first quarter last fiscal year. Deposits increased by $1.1 billion (or 5.08%) compared to the prior quarter and by $2.9 billion (or 15.28%) compared to the end of the first quarter of prior fiscal year.
Total performing loans grew by $356.1 million over the course of the first quarter this year. This growth is down 39.21% from the preceding quarter’s growth (of $585.8 million) and down 50.27% from the corresponding first quarter growth figure last year (of $716.1 million). This growth appears to be slower than prior periods, but this is because a portion of the performing loan portfolio was securitized through the Canada Housing Trust program. Inclusive of securitized mortgages, performing loans grew $601.8 million, which compares favorably to last quarter, but remains less than the growth achieved in the first quarter last year. Significant growth continues in HELOCs. As at June 30, 2008, ATB held $3.1 billion of HELOCs, representing 15.54% of total performing loans. HELOCs grew by $251.3 million during this past quarter.
ATB has two principal sources of deposits – personal and business or commercial deposits, primarily sourced through our retail network, and wholesale deposits, which consist primarily of bearer deposit notes and mid-term notes issued on ATB’s behalf by the Government of Alberta and sold to other financial institutions. Personal and business deposits increased by $886.2 million (or 4.98%) during the current quarter, which compares favorably to the growth of $297.6 million and $574.9 million achieved in the prior quarter and the first quarter last year, respectively. Wholesale deposits are used as a source of funds to supplement retail deposits in supporting lending activities and can fluctuate significantly quarter-to-quarter. The agreement with the Government of Alberta currently limits the total volume of such deposits to $4.3 billion. As at June 30, 2008, ATB has $3.6 billion in wholesale deposits. This is up $188.8 million (or 5.58%) over the prior quarter and $1.4 billion (or 66.88%) from the first quarter last year. The increase in wholesale deposits from the prior year is a result of ATB’s requirement for additional liquidity stemming from the ABCP crisis.
Asset Backed Commercial Paper
Overview
As at June 30, 2008 ATB held a portfolio of asset backed commercial paper with a face value of $1.15 billion. This includes:
- $1.03 billion of third-party sponsored ABCP that is being restructured under the Montreal Accord. $255.0 million of this was acquired through an exchange with ATB’s Investor Services subsidiaries as of August 24, 2007. These assets were acquired at par value in exchange for cash and ATB term deposit certificates. The balance of ATB’s investments in third-party-sponsored ABCP was acquired before the mid-August market disruption through it’s short-term liquidity-management program;
- $34.8 million of third-party sponsored ABCP previously included in the Montreal Accord and successfully restructured into a long-term floating rate note on December 2007;
- $34.0 million of bank-sponsored ABCP that successfully restructured into a long-term floating rate note in May 2008;
- $51.8 million of bank-sponsored ABCP that successfully restructured subsequent to the end of the current quarter (in July 2008).
Third-Party-Sponsored ABCP Update
ATB’s holdings of third-party-sponsored ABCP being restructured under the Montreal Accord last traded in an active market in August 2007.
A Pan-Canadian Investors Committee (“Investors Committee”) was subsequently established to oversee the orderly restructuring of the third-party-sponsored ABCP impacted by the liquidity disruption of August 2007 under an agreement that has come to be known as the Montreal Accord. ATB is a signatory to the Montreal Accord, a member of the Investors Committee, and continues to actively support the restructuring process.
On March 17, 2008, the Pan-Canadian Investors Committee received an order from the Ontario Superior Court of Justice under the Companies Creditors Arrangement Act (“CCAA”). This order set out the approval process
required for the restructuring plan, specificallly that in order for the restructuring to proceed, the Plan required the support of note-holders constituting a majority in number (i.e., 50% plus 1) and representing not less than 66 2/3% of the total aggregate principal amount of affected ABCP.
On March 20, 2008, the Committee released its Proposed Restructuring Plan (the “Plan”). The Plan was to exchange the original investment for a number of new floating rate notes with varying degrees of subordination and terms up to nine years. Details on this plan are outlined in Note 7 to the June 30, 2008 interim consolidated financial statements.
On April 25, 2008, the noteholders voted in favor of the Proposed Restructuring Plan and on June 5, 2008, Justice Colin Campbell of the Ontario Superior Court ruled that the plan was fair. Certain noteholders appealed this decision and on June 25, 2008, the Appeals Court reserved judgment resulting in further extensions of the standstill under the Montreal Accord. On August 18, 2008, the Ontario Court of Appeal ruled that the restructuring agreement reached under the Montreal Accord was fair, legal, and could proceed. This judgement is subject to appeal but the current expectation is that the restructuring will be completed by December 31, 2008.
Montreal Accord Valuation
In the continued absence of an active market for the third-party-sponsored ABCP subject to the Montreal Accord, ATB has estimated the fair value of these assets as at June 30, 2008 using a probability-weighted discounted cash flow valuation model. This model incorporates management’s best estimates of multiple factors, updated to reflect market-related and other additional information that has become available since the corresponding valuation as at March 31, 2008. Details as to the assumptions underlying management’s best estimate as to the fair value of these investments are provided in Note 7 to the June 30, 2008 interim consolidated financial statements.
As at March 31, 2008, the provision relative to the Montreal Accord ABCP was estimated to be $243.0 million, this has reduced to $223.7 million at June 30, 2008 as a result of market spreads reducing during this time period. Market spreads are an input into the calculation of the representative discount rate that the market would normally attribute to assets like ABCP – a key assumption in ATB’s valuation model. This $19.3 million reduction was recorded in other comprehensive income and did not impact the income statement.
In addition to this fair value provision, ATB has accrued $2.0 million for its estimated share of restructuring costs associated with the Montreal Accord in the second quarter of fiscal 2008. This provision is considered adequate and no additional provision for such expenditures has been recorded this quarter.
Bank-Sponsored Asset-Backed Commercial Paper
During the fourth quarter of 2008, the two bank-sponsored ABCP investments held by ATB suffered a liquidity disruption and were at some risk of liquidation, which would have resulted in losses to ATB. Separate restructuring plans were announced for both of these trusts outside of the Montreal Accord. In general, these restructuring plans were similar to the Accord in that the current investments were to be restructured into long-term notes (approximately nine years) to match the maturity date of the underlying assets.
One of these investments restructured during this quarter. In exchange for the original investment with a notional value of $34.0 million and a fair value of $27.3 million, ATB received two floating rate notes with a total notional
value of $34.0 million, monthly interest at the one-month Canadian Deposit Offering Rate and maturity between December 2013 and September 2016. The fair value of this new investment was $1.3 million higher than the fair value of the original investment at March 31, 2008. This gain was recognized in the income statement as a recovery of loss on ABCP.
ATB has estimated the fair value of the remaining bank sponsored ABCP undergoing restructuring as at June 30, 2008, using a probability-weighted discounted-cash-flow-valuation model similar to that used for the Accord
holdings. Similar to the Accord provision, the provision for loss on this investment reduced from $2.8 million to $2.7 million as a result of market spreads reducing from March 31, 2008 to June 30, 2008.
This investment was successfully restructured in July 2008 – subsequent to the current quarter. In exchange for the original ABCP investment ATB received a combination of cash and a long-term floating rate note. The impact of this restructuring will be recognized in the quarter ended September 30, 2008.
Impact on ATB Operations
With the disruption of the active market for ABCP, ATB considers these investments to be illiquid. To ensure ATB maintained its strong liquidity position, additional investments were made in other liquid assets, funded through the issuance of additional short- and mid-term notes. ATB retains sufficient capacity to issue further short- and mid-term notes so as to not be constrained by this unplanned issuance. The liquidity disruption in the Canadian market for ABCP has had no other significant impact on ATB’s current or planned operations or financial position. Further, no impact on planned operations or financial position is foreseen through the next five fiscal years based on ATB’s latest strategic plans.
Measurement Uncertainty
The ongoing nature of the restructuring negotiations contributes to a lack of certainty with regards to the outcome of the restructuring process in general and the various details of the anticipated post-restructuring investment notes in particular. This lack of certainty, in turn, contributes to significant measurement uncertainty in ATB’s best estimate of the fair value of its current ABCP investments subject to restructuring. Since the eventual timing and amount of future cash flows attributable to these assets may vary significantly from management’s current best estimates, it is possible that the ultimate fair value of these assets may vary significantly from current estimates and that the magnitude of any such difference could be material to ATB’s financial results.
Segmented
Information
ATB has organized its operations and activities around three main business segments: Personal and Business Financial Services; Corporate Financial Services; and Investor Services. A fourth line is designated Other Business Units, which is comprises of business units of a corporate nature as well as expenses, general allowances, and recoveries not expressly attributed to any line of business. The provision relative to third-party ABCP and the impact of the implementation of the Financial Instruments standards are both included within Other Business Units.
On a segmented basis, total assets for Personal and Business Financial Services increased by $520.3 million (or 3.31%) during the first quarter and by $2.1 billion (or 14.74%) from a year ago. Total assets for Corporate Financial Services increased in the quarter by $74.7 million (or 1.84%) and by $585.9 million (or 16.51%) from a year ago. Investor Services’ assets under management and administration grew to $4.1 billion at June 30, 2008, an increase of $64.3 million (or 1.59%) from March 31, 2008 and a $156.6 million (or 3.97%) increase from June 30, 2007.
Operating revenues increased across the two main business segments in the first quarter ended June 30, 2008 compared to the prior quarter. Personal and Business Financial Services’ operating revenue increased 3.06% to $150.9 million and Corporate Financial Services increased 12.74% to $27.8 million. Operating revenue in Investor Services decreased slightly from the prior quarter – by 2.09% – to $11.3 million. Corporate Financial Services grew net income this quarter, with a net income of $16.6 million (a growth of 1.57%). Personal and Business Financial Services’ and Investor Services’ net income reduced compared to the prior quarter – with Investor Services experiencing a small loss.
Compared to the first quarter of the prior year, Corporate Financial Services’ net income increased by $3.6 million or 27.46% while Personal and Business Financial Services’ net income reduced by $8.7 million or 23.66%. Investor Services’ loss increased in this quarter compared to the first quarter last year – by 286.11% – to $0.7 million.
Caution Regarding Forward Looking Statements
This report may include forward-looking statements. ATB Financial from time to time may make
forward-looking statements in other written or verbal communications. These
statements may involve, but are not limited to, comments relating to ATB's
objectives or targets for the short and medium term, strategies or actions
planned to achieve those objectives, targeted and expected financial results
and the outlook for operations or the Alberta economy. Forward-looking
statements typically use the words "anticipate," "believe," "estimate,"
"expect," "intend," "may," "plan," or other similar expressions or future or
conditional verbs such as "could," "should," "would," or "will."
By their very nature,
forward-looking statements require ATB's management to make numerous
assumptions and are subject to inherent risks and uncertainties, both general
and specific. A number of factors could cause actual future results,
conditions, actions, or events to differ materially from the targets,
expectations, estimates, or intentions expressed in the forward-looking
statements. Such factors include, but are not limited to: changes in
legislative or regulatory environment; changes in ATB's markets; technological
changes; changes in general economic conditions, including fluctuations in
interest rates, currency values and liquidity conditions; and other
developments, including the degree to which ATB anticipates and successfully
manages the risks implied by such factors.
ATB cautions readers
that the aforementioned list is not exhaustive. Anyone reading and relying on
forward-looking statements should carefully consider these and other factors
that could potentially have an adverse affect on ATB's future results, as there
is a significant risk that forward-looking statements will not prove to be
accurate.
Readers should not place undue reliance on forward-looking statements, as actual
results may differ materially from plans, objectives and expectations.
ATB does not undertake to update any forward-looking statement contained in
this report.
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