ATB recorded a $5.7-million profit in the second quarter and, at September 30, 2008, reached record highs in assets ($25.2 billion, up 12.2% from last year’s second quarter), net loans ($20.5 billion, up 12.9%), and deposits, excluding wholesale ($19.6 billion, up 12.4%).
Net income of $5.7 million includes a $55.5-million increase in ATB’s provision for potential losses on holdings of asset-backed commercial paper (ABCP). This quarter’s increase is due largely to increased credit spreads and is in addition to the 2007-08 year-end ABCP provision of $253.1 million.
Excluding the impact of provisions for ABCP, net income for this quarter was $61.2 million, down 28.9% from last year’s second quarter. The decrease reflects the impact of declining margins. Also excluding ABCP, operating revenue for the quarter was $225.1 million, up 4.6% from the second quarter last year.
“Times are getting tougher, even in resilient economies such as Alberta’s, and interest rate conditions and uncertainty in the marketplace continue to impact our business. But our continued growth and positive results mean Albertans can be confident in ATB,” said Dave Mowat, ATB’s President and CEO.
Mowat said the institution’s criteria for loans and mortgages have not changed.
“The conventional wisdom is that credit for individuals and businesses is harder to come by these days, but we are sticking by Albertans, just as we have for 70 years,” he said.
ATB’s $1.14-billion principal investment in ABCP will be converted to longer-term notes that reach maturity in six to nine years. ATB will revalue the restructured ABCP investment upon closing.
ATB’s largest line of business includes branches and agencies in all corners of Alberta. PBFS’s assets have grown $1.9 billion, or 12.5% over the last year. Operating revenue increased from the second quarter last year by $5.6 million, or 3.7%. During the quarter, PBFS opened new branches in Camrose, Fort McMurray, Edmonton, and Calgary, including one at SAIT Polytechnic, the first branch opened by a major financial institution on an Alberta post-secondary campus.
This line of business provides services to Alberta’s mid- and senior-market companies in three sub-lines – Energy, Commercial, and Food & Forestry. CFS has recorded asset growth of $950.7 million, or 26.4% over the last year. Operating revenue increased from the second quarter last year by $3.8 million, or 15.4%.
This line of business is responsible for growing and protecting wealth for more than 45,000 customers. In the quarter ended September 30, 2008, client assets under management and administration were $4.0 billion, down $63.6 million from the second quarter last year. In a Leger Marketing survey, IS was rated #1 in client satisfaction in Alberta versus the Big Five Toronto-based banks.
In the past quarter, ATB continued to support a wide range of community projects and charities, including the Stollery and Alberta Children’s Hospital Foundations, Junior Achievement of Northern Alberta and Camp He Ho Ha. In September, ATB celebrated its 70th anniversary with a week of Customer Appreciation events, in which associates from across the province performed acts of kindness in their communities.
Management's Discussion and Analysis (unaudited)
Net Income
ATB Financial reported net income of $5.7 million for its second quarter ended September 30, 2008 compared to net income of $56.7 million for the previous quarter and $8.5 million for the second quarter last year. Adjusting for the impact of the provision for loss on ABCP, net income was $61.2 million this quarter, compared to $55.4 million last quarter and $86.1 million for the second quarter last year. This represents a $5.8 million (or 10.55%) increase from the previous quarter but a decrease of $24.9 million (or 28.92%) from the second quarter last year.
In the current quarter, ATB recorded a provision for loss of $55.5 million on asset-backed commercial paper (“ABCP”) compared to a recovery of $1.3 million in the prior quarter. The provision recorded in the current quarter is considered to represent an other-than-temporary impairment in the value of the asset-backed commercial paper investment held by ATB. This compares favorably to the $77.6 million recorded in the second quarter last year when this issue first arose. Refer to “Asset Backed Commercial Paper” below for additional detail on this topic.
Despite a reduction in net interest margin from 2.81% to 2.69% and a $5.3 million (or 61.08%) increase in the provision for credit losses, this quarter’s net income (excluding the impact of ABCP) increased over the prior quarter. The increase can be attributed to an improvement in other income, which increased by $6.5 million (or 12.41%), and a reduction in non-interest expenses, which decreased by $5.0 million (or 3.24%).
Negative variances in nearly all areas resulted in the reduction of net income (excluding the impact of ABCP) from the second quarter last year. The most significant impact came from the reduction in net interest margin, which decreased from 3.07% to 2.69%. Non-interest expenses and the allowance for credit losses increased by $19.5 million and $15.4 million, respectively, to negatively impact net income. Other income, an area that is not interest sensitive, increased by $12.1 million (or 25.99%) to partially offset the negative impact of these other areas.
Net Interest Income
Despite increasing loan and deposit balances (discussed in the Balance Sheet section), ATB’s net interest income has decreased by $0.3 million (or 0.21%) from the prior quarter and by $2.1 million (or 1.27%) from the second quarter last fiscal year. This has been driven by a decrease in the Canadian prime rate over this period and the current competitive deposit market. Prime has reduced from an average of 6.22% in the second quarter of fiscal 2008 to an average of 4.75% this quarter. Interest income is more sensitive to rate changes than interest expense, thus when interest rates decrease, as they have done over the last year, the result is normally a reduction in net interest income. This issue is exacerbated by the current crisis in financial markets and the impact it is having on the pricing of deposits. There is currently strong competition among financial institutions for client deposits, which has resulted in increased deposit pricing.
Other Income - excluding ABCP
Other income, excluding losses on ABCP, was $58.4 million for the second quarter ended September 30, 2008, an increase of $6.5 million (or 12.41%) compared to the prior quarter, and $12.1 million (or 25.99%) compared to the second quarter of last year. The increase over last quarter was driven by gains on derivative financial instruments and securitization income. Gains on derivative financial instruments increased by $2.9 million, from a loss of $0.8 million last quarter, while securitization income increased by $2.2 million (or 34.03%). While the carrying value of mortgages securitized this quarter was less than last, the increase in the gain was driven by the current rate environment. In addition, insurance and card fees improved over last quarter, by $1.3 million (or 40.84%) and $1.2 million (or 11.03%), respectively.
The $12.1 million increase in other income over the second quarter of last year was largely driven by the recognition of an $8.5 million securitization gain along with a $2.3 million increase in card fees and a $1.2 million increase in derivative income.
Provision
for Credit Losses
ATB recorded a $13.9 million net provision for credit losses in the second quarter ended September 30, 2008. This compares unfavorably to an $8.6 million net provision last quarter and a net recovery of $1.4 million in the second 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 provisions are recorded when loans are identified as impaired.
The general loan loss provision for the quarter was $7.0 million compared to a provision of $6.2 million last quarter and a recovery of $1.4 million in the second quarter last year. This increase is the result of ATB’s growing loan portfolio.
The specific loan loss provision has increased to $6.9 million in the current quarter from $2.4 million in the prior quarter and a recovery of less than $0.1 million in the second quarter of last year. This is driven by an increase in specifically identified impaired loans this quarter over the prior quarters.
As in last quarter, 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 second quarter ending September 30, 2008 exceeded gross impaired loans by $119.3 million, compared to $118.4 million and $97.8 million at June 30, 2008 and September 30, 2007, respectively.
Non-Interest Expenses
Total non-interest expenses were $150.0 million for the second quarter ended September 30, 2008. This was $5.0 million (or 3.24%) lower than the expense in the prior quarter and $19.5 million (or 14.92%) higher than the expense in the second quarter of last fiscal year.
The decrease from the prior quarter is primarily due to a $5.8 million (or 6.76%) reduction in human resource expenses, a $1.4 million (or 21.47%) reduction in the deposit guarantee fee, and a $1.3 million (or 14.48%) decrease in professional and consulting costs. The reduction in human resource expenses is mainly attributable to reduced employer contributions in the current quarter compared to the prior quarter. The prior quarter contributions were higher than normal due to the payout of variable pay. Despite increasing deposits, the deposit guarantee fee decreased from last quarter, as last quarter’s expense included a one-time upward adjustment. These decreases were partially offset by an increase in “other” non-interest expenses, which increased $2.0 million (or 69.05%).
Currently there is some doubt as to the long term benefit and the continuation of a specific capital project at ATB. In the absence of clarity on this issue, ATB has recorded a $4.0 million expense for a portion of the project. ATB expects that there will be certainty around this issue next quarter, with the potential for an additional expense at that time.
Non-interest expenses increased by $19.5 million (or 14.92%) compared to the second quarter last year. A number of areas contributed to this increase, however, the two main contributors were human resource costs and “other” expenses. Human resource costs increased by $7.3 million (or 10.01%), primarily due to a 10.49% increase in the number of full time equivalent staff working at ATB and the increased cost of existing staff. “Other” expenses increased by $6.8 million. Last year, this was in a recovery position due to the reversal of a prior period accounting estimate, while this year it includes an expense related to a capital project whose continuation and long term benefit is currently under review (as discussed earlier).
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 for credit losses, plus other income). This is known as the efficiency ratio and measures ATB’s effectiveness at generating operating revenue. A lower ratio indicates greater efficiency at generating income. In the second quarter ended September 2008, ATB’s efficiency ratio was 66.62% (measured excluding the impact of the ABCP provision). This compares favorably to the 70.76% in the prior quarter (also measured excluding the impact of the ABCP provision) but is worse than the 60.64% achieved in the second quarter last year (excluding the impact of the ABCP provision). The reduction in the ratio this past quarter was driven by the increase in other income and the decrease in non-interest expenses. Net interest income, the other contributor to this ratio, remained flat compared to the prior quarter due to the reduction in net interest spreads. The increase in the efficiency compared to last year was expected, as significant investments are being made in growth and other improvement initiatives, but was higher than anticipated due to the significant decrease in net interest margin.
Balance Sheet
Total assets increased by $0.7 billion over the prior quarter and by $2.7 billion over the second quarter of the prior year to finish the quarter at $25.2 billion.
Total loans, net of allowance for credit losses, increased by $738.6 million (or 3.73%) compared to the previous quarter and by $2.3 billion (or 12.91%) compared to the second quarter last fiscal year. Deposits increased by $0.7 billion (or 3.02%) compared to the prior quarter and by $2.7 billion (or 13.36%) compared to the end of the second quarter of prior fiscal year.
Excluding the impact of securitization, total performing loans grew by $916.3 million during the quarter. This growth is up $314.5 million from the preceding quarter’s growth (of $601.8 million) and $445.1 million from the corresponding second quarter growth figure last year (of $471.2 million). A significant increase in growth was observed in the commercial performing loan portfolio. In the current economic circumstances demand for commercial loans is increasing – and Corporate Financial Services (“CFS”) has benefited from this demand. Commercial performing loans have increased by $374.2 million this quarter, compared to $92.6 million last quarter and no growth in the second quarter last year.
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 $871.6 million (or 4.67%) over the prior quarter, which is close to the growth of $886.2 million achieved last quarter and significantly higher than the $237.7 million achieved in the second quarter last year. 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 September 30, 2008, ATB has $3.4 billion in wholesale deposits. The balance of wholesale deposits is down $200.3 million (or 5.61%) from the prior quarter and up $549.3 million (or 19.47%) from the second 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.
Accumulated other comprehensive income decreased from $27.7 million last quarter to $11.6 million in the current quarter, reflecting the net temporary reduction in fair value of certain financial instruments (specifically securities and derivatives).
Asset Backed Commercial Paper
Overview
As at September 30, 2008 ATB held a portfolio of asset-backed commercial paper with a face value of $1.14 billion. This included:
- $1.04 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;
$33.0 million of bank-sponsored ABCP that successfully restructured this quarter.
Third-Party-Sponsored Asset Backed Commercial Paper 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, specifically 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 September 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. On September 19, 2008, the Supreme Court of Canada upheld the Court of Appeal’s decision. The current expectation is that the restructuring will be completed in the third quarter of the current fiscal year.
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 September 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 June 30, 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 September 30, 2008 interim consolidated financial statements.
As at June 30, 2008, the provision relative to the Montreal Accord ABCP was estimated to be $223.7 million; this has increased to $297.5 million at September 30, 2008 as a result of market spreads increasing 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. $19.3 million of this increase was a reversal of last quarter’s reduction that was recorded through other comprehensive income, the remaining $54.5 million was recorded as a provision for loss on ABCP through 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 fiscal 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 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 last quarter and the other restructured during this quarter. This quarter, in exchange for the original investment with a face value of $51.8 million and a fair value of $49.2 million, ATB received $18.8 million in cash and a floating rate notes with a total face value of $33.0 million, monthly interest at the 35 basis points above the one-month Canadian Deposit Offering Rate and maturity of September 2016. The fair value of this new investment was $1.0 million lower than the fair value of the original investment at June 30, 2008. This loss was recognized in the income statement as a provision for loss on ABCP.
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 not to 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
The operations and activities of ATB have been organized around three main business segments: Personal and Business Financial Services (“PBFS”), Corporate Financial Services (“CFS”), and Investor Services. A fourth line is designated Other Business Units, which is comprised 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.
Consistent with the overall picture for ATB, the individual business segments continue to demonstrate growth. Both PBFS and CFS grew their total assets during the current quarter and over the past year. PBFS increased its total assets by $520.2 million (or 3.21%) during the second quarter and by $1.9 billion (or 12.55%) from a year ago. Total assets for CFS increased in the quarter by $413.8 million (or 10.01%) and by $950.7 million (or 26.42%) from a year ago. Investor Services has been negatively impacted by the effect that the current financial crisis has had on the equity markets, with assets under management and administration decreasing to $4.0 billion at September 30, 2008, a decrease of $124.0 million (or 3.02%) from June 30, 2008 and a $63.6 million (or 1.57%) decrease from September 30, 2007. Further decreases are expected next quarter.
Through a combination of increased operating revenue, reduced non-interest expense and a reduced provision for credit losses, PBFS recorded net income of $40.8 million this quarter, an improvement of $12.7 million over last quarter. CFS had the same positive results in operating revenue and non-interest expenses, but an increase in the provision for credit losses resulted in a net income of $12.6 million, $4.0 million less than last quarter. The poor equity markets that impacted Investor Services’ assets under management and administration also had a negative impact on net income, with Investor Services generating a net loss of $1.4 million, worse than the $0.7 million loss last quarter. However, Investor Services has performed well, relative to the industry as a whole.
Despite increasing non-interest expenses, PBFS net income this quarter was $2.8 million higher than that earned in the second quarter last year. The major reason for this was the reduced provision for credit losses this quarter. CFS, which saw an increase in non-interest expenses and provision for credit losses, generated $12.5 million less in net income than it generated last year in the second quarter. The current quarter impact of the weak equity markets contributed in Investor Services going from a $1.0 million net income in the second quarter last year to a $1.4 million net loss this year.
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.
top of
page...
Highlights