Management's Discussion and Analysis (unaudited)
Net Income
ATB Financial reported net income for its second quarter ended
September 30, 2006 of $93.9 million compared to $62.1 million for the previous
quarter and $54.4 million for the second quarter last year. This represents a
$31.9 million or 51.34 per cent increase from the previous quarter's net income
and an increase from last year's second quarter net income of $39.5 million or
72.72 per cent.
During the quarter, ATB refined its methodology for establishing
the level of its general loan loss allowance and this resulted in a one-time
reduction in the loan loss provision (with a corresponding increase to net
income) of approximately $24.3 million, which is included in the loan loss
recovery for the quarter. This was partially offset by growth in loan balances
contributing a $4.6 million increase in the general allowance. Net interest
income increased by $8.9 million while other income and non-interest expenses
remained relatively flat compared to last quarter. Compared to the same quarter
last year, total operating revenues increased by $36.1 million (which was
largely due to increases in net interest income) while non-interest expenses
increased by only $16.3 million.
If not for the impact of the change in general loan loss allowance
methodology, net income would have been $69.6 million, up 12.14 per cent on the
prior quarter and 27.97 per cent on the same quarter one year ago.
Net Interest Income
ATB's net interest income was $143.0 million for the
second quarter ended September 30, 2006, an increase of $8.9 million or 6.64 per
cent compared to the previous quarter and $31.3 million or 28.00 per cent
compared to the second quarter of last fiscal year.
The increase in net interest income over last quarter was mainly the result
of growth in average interest-earning assets of $462.1 million combined with an
increase of approximately eight and one-half basis points in the net interest
spread earned on those assets. Average net interest margin earned on ATB's total
assets grew over the quarter to 3.04 per cent, also an increase of eight basis
points. These increases are primarily due to the lagging effect of increases in
the Bank of Canada prime rate ("prime") in the last quarter, combined
with a reduction this quarter in the average volume of wholesale deposits, which
are a relatively more expensive source of funding.
The increase in net interest income over the same period last year reflects
the combination of growth in average interest-earning assets of $2.3 billion
together with an increase in the average net interest spread earned on those
assets of 33 basis points. The prime interest rate has increased by 150 basis
points since the end of the second quarter last year and, because interest
income is more sensitive to rate changes than is interest expense, an increase
in net interest income has resulted.
Other
Income
Other income totaled $42.8 million for the second quarter ended
September 30, 2006, an increase of $0.4 million over last quarter. All lines
within Other Income increased this quarter, with the exception of foreign
exchange and "sundry" other income, which decreased by $1.4 million,
primarily due to a one-time gain on a share redemption during quarter one.
Other income increased by $4.8 million or 12.53 per cent compared to the
second quarter last year. Revenues from the Investor Services portfolio grew by
$2.4 million or 54.75 per cent, reflecting continued growth in this line of
business year over year. Service charge and card fee revenues also increased
significantly year over year.
Provision
for Credit Losses
Results for the quarter ended September 30, 2006
include a $20.1 million net recovery for credit losses, as compared to a $1.4
million expense last quarter and a $0.3 million recovery in the second quarter
last year. The general loan loss expense attributable to the quarter would have
been $4.6 million (resulting in a closing position of $152.5 million) except
that, effective September 30, 2006, ATB refined its methodology to determine the
level of the general loan loss provision. The one-time impact of this change was
to reduce the closing position to $128.2 million, creating a non-recurring gain
of $24.3 million. In the preceding first quarter, the impact of portfolio growth
on the general loan loss allowance was only partially offset by improved loss
forecasts, resulting in a general loan loss expense of $2.9 million. The quarter
two experience a year ago included a net recovery of $0.2 million against the
general allowance, as growth due to increased loan balances was more than offset
by a $6.0 million recovery against the special allowance for BSE.
Net specific loan loss recovery was $0.4 million for the quarter, compared to
a recovery of $1.5 million in the first quarter and a recovery of $0.1 million
in the second quarter last year.
Total specific and general allowances for credit losses exceeded gross
impaired loans by $86.0 million at September 30, 2006 compared to $105.0 million
last quarter and $75.6 million a year ago. ATB's loan portfolio remains very
strong as the Alberta economy continues to thrive.
Non-Interest
Expenses
Non-interest expenses were $112.0 million for the
second quarter ended September 30, 2006, a decrease of $1.1 million or 0.98 per
cent compared to the prior quarter, and an increase of $16.3 million or 17.04
per cent compared to the second quarter last year.
The decrease from the
previous quarter was primarily due to decreased expenditure on associate
compensation, which was partially offset by increases in communications and
electronic processing costs. The majority of the increase in non-interest
expenses compared to the second quarter last year relates to associate
compensation due to staffing increases of approximately 9 per cent. This growth
in associate compensation expenses is likely to continue as all our lines of
business continue to experience growth in funds managed.
ATB's efficiency ratio,
expressed as the ratio of non-interest expenses to operating revenue (net
interest income before loss provisions plus other income), was 60.28 per cent
this quarter. This represents an improvement from 64.08 per cent for the prior
quarter and from 63.90 per cent for the second quarter last year, and is driven
by a proportionally greater increase in operating revenues than in non-interest
expenses.
Balance
Sheet
ATB's total assets were $19.3 billion at September 30, 2006, an
increase of 2.80 per cent from $18.8 billion at June 30, 2006 and 16.46 per cent
from $16.6 billion at September 30, 2005. Total loans, net of allowance for loan
losses, increased by $719.1 million or 4.70 per cent compared to the previous
quarter and by $2.0 billion or 14.66 per cent compared to the second quarter
last year. Total deposits increased by $0.4 billion or 2.50 per cent compared to
the prior quarter and by $2.5 billion or 16.42 per cent compared to the end of
quarter two last year. By comparison, during the second quarter of last year,
total assets increased by 3.10 per cent, total loans increased by 2.47 per cent,
and total deposits increased by 3.07 per cent compared to the prior quarter.
ATB's total equity as at September 30, 2006 is $1.5 billion, up by $93.9
million from the end of the prior quarter and up $249.3 million from a year ago.
Segmented
Information
On a segmented basis, total assets for Personal and
Business Financial Services increased by $381.7 million or 3.02 per cent during
the second quarter and by $1.2 billion or 10.42 per cent from a year ago. Total
assets for Corporate Financial Services increased in the quarter by $341.1
million or 13.16 per cent and by $850.8 million or 40.85 per cent from a year
ago. Investor Services' assets under management and administration grew to just
under $3.0 billion at September 30, 2006, an increase of $359.2 million or 13.72
per cent from June 30, 2006 and a $1.1 billion or 60.03 per cent increase from
September 30, 2005.
Operating revenues increased across all three retail lines of business this
quarter as both net interest income and other income increased. Net income was
also up across all the lines, the most significant increase being in Personal
and Business Financial Services, which saw the majority of the impact of the
remodelling of the general loan loss allowance. Excluding the impact of this,
net income for the line grew by $5.9 million or 16.27 per cent.
Net income for Corporate Financial Services increased by $2.3 million or
20.61 per cent over the prior quarter and by $6.1 million or 79.92 per cent over
the same quarter last year. Investor Services' net loss remained flat at $0.6
million for the quarter but improved by $2.7 million over the same quarter last
year. This line of business is expected to turn a profit by the end of this
fiscal year.
Caution Regarding Forward Looking Statements
This report includes forward-looking statements. ATB Financial
from time to time may make forward-looking statements in other written
or verbal communications. These statements include objectives for the
short and medium term and strategies to achieve those objectives.
By their very nature, forward-looking statements require us to
make assumptions, are subject to inherent risks and uncertainties, and
can change due to a variety of reasons including legislative or
regulatory changes, competition, technological changes, and changes in
interest rates and general economic conditions. The foregoing list is
not exhaustive and when relying on forward-looking statements these
factors as well as other factors should be considered.
ATB cautions readers 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.
Highlights