Second Quarter Results
For the period ended September 30, 1998
Distinctly Different
Message to Stakeholders
A Part of Albertans' Dreams for 60 Years
ATB celebrated its 60th anniversary on September 29, 1998.
On this date in 1938, the first Treasury Branch was opened in Rocky Mountain House, followed the next day with branches in Andrew, Edmonton, Grande Prairie, Killam and St. Paul. Today, ATB has proudly grown to 148 branches and 128 agencies, with over 3,100 employees delivering a wide range of financial services.
Highlights
ATB's net income for the second quarter was $23.5 million,
and $47.0 million for the six months ended September 30, 1998.
This is consistent with the strong financial performance reported in the first quarter and reduces ATB's cumulative deficit to $19.5 million as at September 30, 1998. With a forecast of growth in the loan
and deposit portfolios, and continued successful asset management,
ATB anticipates eliminating its deficit by the end of the fiscal year.
Total revenue for the six months ended September 30, 1998,
was $178.3 million, a 16.1% increase over the same period last year.
Total assets grew by $257.0 million, or 2.9% for this six-month period. ATB's Credit and Asset Management teams continue to make improvements in the quality of the loan portfolio. Credit losses decreased by $11.5 million over the same period last year. Since March 31, 1998, $248.9 million of impaired loans have been turned into income earning assets.
New Products and Services
As part of the 60th anniversary special products were made available for a limited time, including a 3.8% Mortgage for the first six
months of a five year mortgage, a 60 Week GIC, a 60 Month GIC,
a 38 Month GIC and RSPs.
The independent business loan portfolio saw the introduction of more flexible products, like the Pick Your Payment loan, to assist small
businesses with asset acquisitions.
The Agri-Term loan, a fixed-rate agricultural loan product line,
has been expanded to provide seven-year and ten-year terms and was introduced in June 1998 in addition to the one to five-year terms already available. The longer terms allow agri-businesses to better plan their finances in addition to providing the stability of a fixed rate over a longer period. With the additional terms, ATB's Agri-Term loan
is one of the most flexible agriculture loans in the marketplace.
In addition, ATB launched a Conditional Sales Contract program
to provide a new financing option for farm equipment purchases.
After a successful pilot of the Sales Support Centre for a centralized administration of loans and mortgages, the Centre will be extended to all branches starting in the third quarter. This will provide branch staff more time to spend with customers and less time will be spent on administration. ATB also began a restructuring of its sale force,
and will be focusing on enhancing customer service standards.
Technology
Requests for proposal were issued in the first quarter for outsourcing information technology and document processing back office
functions. Suppliers have been selected and contract negotiations
are scheduled to be completed in the third quarter.
ATB expects to achieve year 2000 readiness of all applications under its control during the third quarter. Year 2000 certification of
all third party software used by ATB is expected to be completed by the end of January 1999. Management of external risk continues
as ATB works with service providers, suppliers and trading partners to ensure operations will not be disrupted. Contingency plans
are also being addressed.
ATB's Future
As a provincial Crown corporation, ATB's mandate and operating authority is solely a decision of the Government of Alberta.
On July 16, 1998, the Provincial Treasurer engaged CIBC Wood Gundy to review the changes in the financial services marketplace
and the impact of those changes on the government's relationship with ATB. ATB holds itself accountable to standards of publicly
traded companies so that it will be prepared for any change in direction the government may want to make.
Regardless of ATB's future, the 100% guarantee on all deposits and related interest continues to apply to all deposits, including
GICs, RIFs, RSPs, etc.
Outlook
We anticipate improved performance in the independent business and agri-industry portfolios as a result of the newly implemented changes
to our sales organization. Alberta Treasury Branches is here today to serve Albertans. And, we'll be here tomorrow with new ideas, new products
and a determined commitment to be the first choice of Albertans.
Marshall M. Williams
Chairman of the Board |
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Paul G. Haggis
President & Chief Executive Officer |
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Note to the Consolidated Financial Statements
(Unaudited)
September 30, 1998
These financial statements have been prepared in accordance with generally accepted accounting principles on a basis consistent with
those used in the preparation of the annual financial statements.
West Edmonton Mall Loan Guarantee
Under the terms of a guarantee agreement dated October 31, 1994, relating to the refinancing of West Edmonton Mall (WEM), ATB guaranteed
to the Toronto Dominion Bank (TD Bank) repayment
of a $353.3 million credit facility in accordance with the terms of the agreement, and in any event by October 31, 2004.
In the event that ATB is required to honour its guarantee, the net cost
to ATB would be the difference between the amount then owed to the
TD Bank and the proceeds from a realization or refinancing of WEM. During the current period ATB obtained an appraisal that values WEM
at $300.0 million. As a result of this appraisal ATB has provided for a loan guarantee loss of $45.0 million having regard to the
difference between the appraised value and the amount owed to the TD Bank.
On August 25, 1998, ATB filed a Statement of Claim against the owners of WEM and others. ATB seeks to have the refinancing agreements set aside. ATB claims in the alternative that the owners of WEM have defaulted on their obligation to maintain the facility to the standard required under the loan agreements. ATB is applying to have the Court appoint an interim Receiver and Manager. It is management's opinion that if the failure to properly maintain the facility continues, the value
of WEM could decline below the current $300.0 million thereby potentially increasing ATB's liability under its guarantee to the TD Bank. Any increase in ATB's liability under the guarantee would be charged against earnings in the year it is identified. However, management believes it has taken the necessary steps to minimize ATB's exposure under the guarantee to a point where a material addition to the existing provision
is unlikely.
In April and June 1998, WEM provided ATB with copies of purported agreements dated November 15, 1994, February 23, 1996 and March 24, 1996, that purport to amend the WEM refinancing agreements dated October 31, 1994. The agreements purport to extend the term of the guarantee to 2014 and to amend the terms of repayment and other provisions of the refinancing agreements. Management believes that
it will be successful in its legal action to set aside these purported amending agreements and as a result no liability relating to them has
been established.
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Management's Discussion
In the first quarter ATB reported a provision had been established at
June 30, 1998 to reflect a potential loss associated with the West Edmonton Mall (WEM) loan guarantee. A note to the consolidated financial statements for the six months ended September 30, 1998, provides the basis for the provision. The guarantee for the WEM financing is not,
and never has been typical of the normal business activities of ATB.
Net Interest Income
ATB is reporting net interest income of $141.1 million for the six months ended September 30, 1998, as compared to $121.3 million for the same period last year. Net interest spread, calculated as net interest income as a percentage of average earning assets, has increased to 3.2%, from 2.9% a year earlier.
Loan Quality
At September 30, 1998, the allowance for credit losses (including
specific and general loan loss provisions) exceed the gross amount
of impaired loans by $24.7 million. As a percentage of total loans this represents a negative 0.33%, as compared to 2.23% at March 31, 1998. This is attributable to both the continued reduction in gross impaired loans from $414.3 million at March 31, 1998 to $187.0 million
at September 30, 1998, as well as a continued emphasis on ensuring
a prudent general provision.
The provision for credit losses charged to the Statement of Income for the six month period is $8.7 million or 0.23% of average total loans compared to the charge for the previous quarter of 0.10%. The increase was largely attributable to an increase in the general provision and resulted from a continued refinement of our loans systems to identify credit risks, and in particular credit risk related to the year 2000 computer problems as it may relate to some customer operations.
Non-Interest Expenses
For the six month period ended September 30, 1998 it cost ATB
68.75 cents to earn each dollar of revenue compared to 73.80 cents for the same period last year. Total non-interest expenses of $122.6 million represents an increase of $9.2 million from last year, largely a result
of a $4.0 million charge recognizing a cost for the deposit guarantee fee which came into effect April 1, 1998 and increases in staff compensation to industry levels. The productivity ratio is expected to increase marginally in the remaining six months of this fiscal year as a result
of implementing new customer service initiatives.
Balance Sheet
During the last six months, residential mortgage loans increased by $206.3 million and, commercial and independent business loans increased
by $76.7 million. Due to the cyclical nature of the agriculture industry, agri-business loans were down $15.3 million in the period. The net
increase in loans, however, was $56.5 million as a result of the continuing reductions in impaired loans.
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