ATB recorded a net loss of $85.8 million in the third quarter after realizing a $140-million increase in ATB’s provision for potential losses on ABCP. Excluding the impact of provisions for ABCP, net income for this quarter was $54.2 million, down 25.2% from last year’s third quarter. The drop reflects the impact of decreases in the prime lending rate, Canada’s competitive deposit market and increased operating expenses.
At December 31, 2008, ATB’s results show assets of $25.7 billion (up 12.1% from last year’s third quarter), net loans of $21.4 billion (up 13.3%) and deposits, excluding wholesale of $20.2 billion (up 15.5%). Operating revenue, excluding the ABCP provision, was $226.2 million, up 7.4%.
Albertans continue to regard ATB as a trusted partner – particularly in challenging economic times – as the institution’s business loans grew to $8.6 billion (up 21.8% from last year’s third quarter), and personal loans grew to $4.8 billion (up 23.3%).
“Despite what Albertans might have heard about credit drying up or even disappearing, our loan activity demonstrates the power of 163 branches and more than 4,600 associates eager to serve our customers,” said Dave Mowat, ATB’s President and CEO.
“We are growing and we are using our experience – through 70 years of good times and bad – to meet the financial needs of more Albertans than ever. Our commitment to this province is based on our knowledge of its strengths, which don’t change with economic cycles."
Mowat also noted that ATB’s holdings in ABCP were restructured on January 21, 2009. The institution’s $1.14-billion principal investment in ABCP has been converted to longer-term notes that reach maturity in six to nine years.
“ABCP was a challenging issue for our organization, and we’re eager to move forward with the benefit of lessons learned and an even stronger emphasis on our customers and associates,” Mowat said.
– ATB’s largest line of business includes branches and agencies throughout Alberta. Assets, primarily consisting of loans, have grown $1.8 billion, or 11.7% over the last year. Operating revenue increased from the third quarter last year by $5.9 million, or 3.9%.
This line of business provides services to Alberta’s mid- and senior-market companies in three sub-lines – Energy, Commercial, and Food & Forestry. CFS’s assets have grown $1.4 billion, or 38.0% over the last year. Operating revenue increased from the third quarter last year by $17.4 million, or 68.5%.
This line of business is responsible for growing and protecting wealth for more than 45,000 customers. In the quarter ended December 31, 2008, client assets under management and administration were $3.8 billion, down $166.8 million from the third quarter last year. Net assets gathered were $110.7 million for the quarter, compared to a net decline of $13.6 million for the same quarter last year. The fund’s success is the result of a strong portfolio structure and ATB’s long-term focus on asset management.
In the past quarter, ATB raised a record $621,705 for the United Way, breaking its associate-giving goal by nearly $20,000. Through its ongoing partnership with the Edmonton Oilers, ATB raised $50,000 for the Christmas Bureau Campaign by raffling off signed Oilers jerseys in 28 Edmonton-area branches.
ATB Financial is the largest Alberta-based financial institution, with assets of $25.7 billion. It provides Personal and Business Financial Services, Investor Services, and Corporate Financial Services to more than 660,000 Albertans in 244 communities. It provides service through 163 branches and 133 agencies, telephone and Internet banking, a Customer Contact Centre, and Automated Banking Machines. ATB Financial was established in 1938 and has been a provincial Crown corporation since 1997. It was recently named one of Canada’s 50 Best Employers by Report on Business Magazine. For more information about ATB Financial, visit www.atb.com
Management's Discussion and Analysis (unaudited)
Net Income
ATB Financial has reported a net quarterly loss of $85.8 million for the third quarter ended December 31, 2008. This compares unfavourably to a net income of $5.7 million for the previous quarter and $43.1 million for the third quarter of the prior fiscal year. This loss came despite continued growth in interest earning assets. As discussed in the foregoing, there were a number of factors contributing to this loss, but the main driver was a $140.0 million provision for loss on asset-backed commercial paper (“ABCP”). Adjusting for the impact of the provision for loss on ABCP, net income was $54.2 million this quarter, compared to $61.2 million last quarter and $72.4 million for the third quarter last year. This represents a $7.1 million (or 11.56%) decrease from the previous quarter and an $18.2 million (or 25.17%) decrease from the third quarter last year.
The continued global economic slowdown and the current challenging credit environment resulted in ATB’s additional $140.0 million provision on ABCP. This compares negatively to the provision of $55.5 million recorded in the prior quarter and $29.3 million recorded in the third quarter last year. 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. Although this investment was restructured subsequent to December 31, 2008, it is possible that ATB will see further fair value adjustments on this investment in the future. Refer to “Asset-Backed Commercial Paper” below for additional detail on this topic.
Excluding the impact of this increased ABCP provision, there was a $7.1 million reduction in net income from the previous quarter. Although interest-earning assets continue to grow, declining net interest spread (from 2.78% last quarter to 2.63% in the current quarter) negatively impacted net interest income. Rather than increasing based on asset growth, net interest income declined by $4.1 million. Non-interest expenses increased by $8.2 million over the prior quarter as ATB as continues to invest in infrastructure and people, and is required to support its continued significant business growth. Partially offsetting these reductions in net income, derivative income and gains on the securitization of loans contributed to the $5.2 million (or 8.89%) increase in other income.
Net income also declined from the third quarter last year, excluding the impact of the ABCP provision. Again, this was primarily a result of the decline in net interest spread, which declined from 2.98% to 2.63%. Non-interest expenses and the allowance for credit losses increased by $25.0 million and $8.8 million, respectively, to negatively impact net income. Other income recorded a positive variance, increasing by $17.7 million, primarily due to ATB’s securitization activities initiated in the first quarter of the current fiscal year.
Net Interest Income
The current economic environment continues to have a negative impact on ATB’s net interest income. Although ATB is continuing to grow its loan and deposit volumes, net interest income decreased by $4.1 million (or 2.45%) from the prior quarter and by $2.1 million (or 1.28%) from the third quarter last fiscal year. The continued reduction in the Canadian prime rate, which has reduced from an average of 6.18% in the third quarter last fiscal year to an average of 3.99% this quarter, is a primary contributor to this reduction. Interest income is more sensitive to rate changes than interest expense, thus when interest rates decrease as they done over the past year, the result is normally a reduction in net interest income. As noted in the prior quarter, 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 picing.
Additional information on ATB’s exposure to interest rate risk as at December 31, 2008 is provided in Note 4 of the unaudited interim consolidated financial statements in the interest rate gap and the interest rate sensitivity analysis. Based on ATB’s current interest rate modeling, it is estimated that a one-percentage point decrease in prime would decrease ATB’s net interest income by $31.8 million over the following twelve month period. The prime rate reduced by one-half of a percentage point on January 21, 2009. As at February 11, 2009, ATB is anticipating another 50 basis points decrease in prime in the next quarter.
Other Income - excluding ABCP
Other income, excluding losses on ABCP, increased by $5.2 million (or 8.89%) from the prior quarter. This increase was driven by the combination of $5.2 million in gains on derivative financial instruments, compared to gains of $2.1 million in the prior quarter, and the recognition of a $2.4 million increase in securitization income over the prior quarter, primarily driven by the increase in the amount of mortgages securitized and the increase in the interest spread retained by ATB compared to the prior quarter. ATB intends to securitize another pool of mortgages in the fourth quarter.
Other income, excluding losses on ABCP, increased by $17.7 million over the third quarter last year. This increase was a result of a combination of a $10.9 million increase in securitization income (ATB commenced its securitization program in fiscal 2009), a $4.6 million increase in derivative gains, and a $3.0 million increase in card fees. These increases were partially offset by a $1.7 million reduction in foreign exchange income over the same period.
Provision for Credit Losses
ATB is significantly exposed to the economic conditions in the Alberta marketplace. Although there is evidence of a slowdown and continued uncertainty, the quality of ATB’s loan portfolio remains strong, with less than 1% of the total gross loan portfolio being classified as impaired at the end of the quarter. The total credit loss allowance in the third quarter ending December 31, 2008 exceeded gross impaired loans by $127.4 million, compared to $119.3 million and $107.5 million at September 30, 2008 and December 31, 2007, respectively.
ATB recorded a $13.9 million net provision for credit losses in the third quarter ended December 31, 2008. This is in line with the provision recorded in the prior quarter but compares unfavorably to the $5.1 million recorded in the third quarter of the prior 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 $9.4 million compared to a provision of $7.0 million last quarter and $5.1 million in the third quarter last year. This increase is the result of ATB’s growing loan portfolio.
The specific loan loss provision has increased to $4.5 million in the current quarter from $6.9 million in the prior quarter and a provision of less than $0.01 million in the third quarter of last year. This movement is driven by a change in specifically identified impaired loans this quarter compared to the prior quarters.
Non-Interest Expenses
Non-interest expenses were $158.2 million for the third quarter ended December 31, 2008, an increase of $8.2 million (or 5.47%) compared to the prior quarter and an increase of $25.0 million (or 18.74%) compared to the third quarter last year.
The increase from the prior quarter is primarily due to increased expenditures on professional and consulting costs (increased $2.2 million or 29.40%), human resource costs (increased $1.8 million or 2.23%) and marketing and supplies expense (increased $1.2 million or 16.86%).
Non-interest expenses increased by $25.0 million (or 18.74%) compared to the third quarter last year. A number of areas contributed to this increase, however, the two the main contributors were human resource expenses and professional and consulting fees. Human resource costs increased by $12.1 million (or 17.29%), primarily due to the increase in the number of staff working at ATB. Professional and consulting costs increased by $4.1 million (or 72.00%) following an increase in the number of consultants involved on ATB’s Core initiative.
An important measurement used by ATB to track its performance 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 third quarter ended December 31 2008, ATB’s efficiency ratio was 69.91% (measured excluding the impact of the ABCP provision). This compares unfavorably to the 66.62% in the prior quarter and the 63.22% achieved in the third quarter last year (both excluding the impact of the ABCP provision). The worsening of this ratio during the past quarter was driven by an increase in non-interest expenses ($8.2 million or 5.47%) and a decrease in net interest income ($4.1 million or 2.45%), partially offset by an increase in other income ($5.2 million or 8.89%). A worsening in the efficiency ratio compared to last year was expected, as significant investments are being made in growth and other improvement initiatives, but was worse than anticipated due to the significant decrease in net interest margin.
ATB management remains committed to operating efficiently, but are balancing this commitment with the goal of increasing ATB’s operating capacity through the investment in technology, processes, and people. The expectation is that these investments will result in increased operating efficiency in the future. Maintaining this balance has always been a primary focus at ATB, but it has become even more of a focus in the current interest rate environment.
Balance Sheet
As at December 31, 2008, ATB had total assets of $25.7 billion, compared to $25.2 billion last quarter and $22.9 billion in the third quarter of the prior year. This growth was driven by an increase in total loans, net of allowance for credit losses. Specifically, over the prior quarter, gross business loans grew by $740.0 million, while growth over the same quarter last year was due to a significant increase in both business (increased by $1.5 billion) and personal loans (increased by $898.9 million). The current market conditions are providing ATB an opportunity to expand its credit portfolio, particularly in the commercial market, as many competitors tighten their lending criteria. ATB continues to be focused on “being there for Albertans” while maintaining strong credit and underwriting fundamentals.
The growth discussed above has come despite the sale of a portion of ATB’s mortgage portfolio through a securitization program with Canada Housing Trust. Excluding the impact of this securitization, total performing loans grew by $1.1 billion during the quarter. This growth is up $172.2 million from the preceding quarter’s growth (of $916.3 million) and $400.2 million from the corresponding third quarter growth figure last year (of $688.3 million). As discussed earlier, a significant component of this growth occurred in the commercial performing loan portfolio. Commercial performing loans have increased by $598.7 million this quarter, compared to $374.2 million last quarter and $157.2 million in the third quarter last year.
ATB’s asset growth is funded through increased deposits. Deposits increased by $0.5 billion (or 1.98%) compared to the prior quarter and by $2.7 billion (or 13.23%) compared to the end of the third quarter of prior fiscal 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 $662.5 million (or 3.39%) over the prior quarter, which is less than the growth of $871.6 million achieved last quarter but significantly higher than the $96.3 million achieved in the third quarter last year. ATB 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 December 31, 2008, ATB has $3.2 billion in wholesale deposits. The balance of wholesale deposits is down $208.1 million (or 6.17%) from the prior quarter and up by only $13.7 million (or 0.43%) from the third quarter last year.
Accumulated other comprehensive income increased from $11.6 million last quarter to $89.7 million in the current quarter, reflecting the net temporary increase in fair value of certain financial instruments.
Asset Backed Commercial Paper
Overview
As at December 31, 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 its 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 initially restructured in the previous quarter and subsequently re-restructured in the current 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 Proposed Restructuring Plan (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 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.
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.
On December 11, 2008, the Pan-Canadian Committee announced that due to the extraordinary volatility in the credit markets that an agreement in principle had been reached to amend the certain key areas of the restructuring plan. Specifically:
- An initial moratorium period during which no collateral calls may be made;
- A widening of certain “spread-loss” triggers, which will be relevant upon expiry of the moratorium; and
- Additional margin funding facilities in the form of “back-stop” arrangements ranking senior to all other previously agreed margin funding facilities and collateral.
This agreement in principle was subject to approvals by certain key participants in the restructuring process.
On December 24, 2008, an agreement was reached with all key stakeholders, including the governments of Canada, Quebec, Ontario, and Alberta to provide $4.45 billion in additional margin funding facilities needed to bring the proposal announced on December 11, 2008 closer to completion. The Pan-Canadian Committee announced that they would be making a motion in court in early January 2009 to seek approval for these amendments and to commence the closing process.
Subsequent to December 31, 2008, the non-bank sponsored ABCP subject to the Montreal Accord was successfully restructured. Details on the expected restructuring are outlined in Note 7 Securities to the December 31, 2008 interim consolidated financial statements.
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 December 31, 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 September 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 December 31, 2008 interim consolidated financial statements.
As at September 30, 2008, the provision relative to the Montreal Accord ABCP was estimated to be $297.5 million; this has increased to $431.9 million at December 31, 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.
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. These investments restructured this fiscal year, one in the first quarter and one in the second quarter.
In December 2008, due to significant volatility in the market, one of these restructured investments breached its spread-loss trigger and was getting close to requiring additional collateral. In order to avoid the need for investors to pledge additional collateral, the trust agent agreed to restructure the investment. This was accomplished via the issuance of new notes with new terms and conditions, one of which was the removal of the spread-loss triggers and the potential requirement to pledge additional security. The exchange of the old notes for the new restructured notes occurred on December 19, 2008 and was deemed to be a transaction of substance. Consequently, the original investment was removed from the balance sheet with the new notes recognized at fair value. The resulting $5.6 million loss was recognized in the income statement and was included as a provision for loss on ABCP.
The fair value of the other restructured bank-sponsored ABCP investments has been reduced by $5.9 million based on their estimated fair value at December 31, 2008. This amount was recorded through other comprehensive income.
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.
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 (“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.
PBFS and CFS continue to achieve growth in their asset base. PBFS increased its total assets by $452.1 million (or 2.74%) during the third quarter and by $1.8 billion (or 11.68%) from a year ago, while CFS achieved quarterly asset growth of $629.0 million (or 14.20%) and annual growth of $1.4 billion (or 38.02%). This increase in assets has not resulted in increased net income for PBFS due to reduced net interest margin and increased non-interest expenses. CFS, on the other hand, have been able to translate the increased assets into increased net income – through small increases in non-interest expenses and more significant increases in operating revenue (a combination of net interest income and other income).
As was the case last quarter, Investor Services continues to be impacted by the current negativity in the equity markets, with assets under management and administration dropping to $3.8 billion as at December 31, 2008. This is a decrease of $170.1 million (or 4.28%) from last quarter and $166.8 million (or 4.20%) from a year ago. This reduction in assets under administration has a negative impact on Investors Services revenue, as evidenced by the $2.8 million loss this quarter. This is worse than the $1.4 million loss suffered last quarter and the small ($0.9 million) positive result achieved in the third quarter last year. Based on the expectation that the equity markets will not rebound significantly next year, future losses are expected.
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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