Third Quarter Results
For the quarter ended December 31, 2006
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Message
to Stakeholders
ATB Financial Investor Services Tops $3 Billion
Edmonton - February 16, 2007 -
ATB Financial reported third quarter earnings of $69.2 million for the period ending December 31, 2006. Increased net interest income of $148.6 million, as well as relatively low loan loss provisions, positively contributed to this quarter’s results. ATB’s equity now stands at $1.6 billion, up $277.1 million compared to December 31, 2005.
“ATB Investor Services continues to produce consistent and strong results surpassing another milestone with $3.4 billion in assets under management and administration,” said Bob Normand, President and CEO, ATB Financial. “Our customers have responded very favourably to our Investor Services offer. We are confident that this line of business will continue to perform strongly in the marketplace, especially since we only introduced this line of business four years ago.”
Financial
Highlights
Current results compared to the third quarter of fiscal year 2005-2006:
- Net income of $69.2 million, up 67.09 per cent.
- Total assets of $19.8 billion, up 13.80 per cent.
- Net loans of $16.5 billion, up 13.75 per cent.
- Total deposits of $17.8 billion, up 13.38 per cent.
- Net interest income of $148.6 million, up 24.25 per cent.
- Non-interest expenses of $121.7 million, up 16.06 per cent.
- Efficiency ratio (non-interest expenses as a percentage of operating revenues) improved to 63.00 per cent from 68.38 per cent.
Personal
& Business Financial Services
This line of business saw loan growth in the third quarter decrease to $345.3 million from $360.9 million in the second quarter this year. Deposits decreased by $56.0 million, which is a normal occurrence for the third quarter.
ATB MasterCard launched its first co-branded card with Calgary Coop and their 400,000 members. We are expecting this to be a very successful venture.
Branch Network - In the third quarter, we opened the new Calgary West Springs branch, our 153rd branch in the network. Calgary Beacon Hill branch opened January 22, 2007, our 154th branch. We have three branch re-locations at various stages of completion for the fourth quarter: Strathmore, Killam, and Stettler.
ATB Investor Services
ATBIS achieved another milestone this quarter with asset growth of $424.4 million and now has $3.4 billion in assets under administration and management.
Corporate Financial Services
Within the CFS line of business, all three sub-lines of business – Energy, Commercial, and Food and Forestry – grew their loan balance during the third quarter. To date, the CFS loan book has grown at an annualized rate of over 40 per cent. Deposits also grew during the quarter and have recorded an annualized growth rate of about 28 per cent. The credit quality of the loan portfolio has remained stable for the past three quarters as determined by an internal weighted average risk rating.
CFS celebrated the commencement of their client derivative business during the third quarter.
ATB in the
Community
During the third quarter, ATB associates and our customers generously supported our array of community programs. The ATB United Way campaign is our most successful annual fundraising campaign. Combined with ATB’s 50 per cent corporate matching contribution, ATB associates raised a record $538,525 for United Way agencies across the province.
Edmonton and area branches organized fundraising activities for the Christmas Bureau in December. The Christmas Bureau is one of Edmonton’s longest-serving non-profit organizations whose mission is to provide festive meals to those less fortunate. Our 2006 campaign raised $43,283 for this worthwhile organization. To date, ATB has donated more than $200,000 to the Christmas Bureau.
ATB’s sixth annual STARS fundraising campaign raised $73,228. ATB has now donated more than $500,000 to STARS Air Ambulance. To celebrate this significant milestone, STARS has added the ATB logo to the tailfins of their fleet of helicopters.
Third Quarter - Economic Review and Outlook
The Alberta economy continues to grow rapidly as businesses in the province cope with labour shortages. High levels of in-migration present challenges to governments at all levels. While oil prices have moderated recently, political instability in many of the largest oil exporting countries suggest a collapse of prices is unlikely. A lower Canadian dollar will cushion the effect of lower energy prices somewhat.
The substantial oil sands and upgrader investment projects continue to proceed with proponents looking at innovative ways of managing costs in an over-heated economy. An element of uncertainty is the growing public concern about climate change and how federal policies may impact both oil sands projects and upgrading facilities.
ATB Financial’s Business Sentiments Index™ for the first quarter of 2007 shows that Alberta businesses expect a slight moderation of activity this quarter.
Housing prices in Alberta have seen a phenomenal increase in value, with price pressures shifting north into the Edmonton region. These pressures may be discouraging inter-provincial migration, thereby putting a damper on price increases. Nevertheless, housing starts in 2007 should remain elevated and ATB’s mortgage book is expected to expand at double-digit rates.
Alberta’s labour market leads the nation with the highest participation and employment rates and the lowest unemployment rate. Shortages of labour have been driving up wages and salaries and these pressures are expected to persist.
Robert Splane Bob Normand
Chairman of the Board President & CEO
February 2007
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Management's Discussion and Analysis (unaudited)
Net Income
ATB Financial reported net income for its third quarter ended December 31, 2006, of $69.2 million compared to $93.9 million for the previous quarter and $41.4 million for the third quarter last year. This represents a $24.7 million or 26.3 per cent decrease from the previous quarter's net income and an increase from last year’s third quarter net income of $27.8 million or 67.1 per cent.
The decrease in net income over the previous quarter is due almost entirely to a refinement of the methodology for establishing the level of ATB’s general loan loss allowance during the second quarter, which resulted in a one-time increase to net income of approximately $24.3 million. If not for the impact of this change, net income for the third quarter would have been approximately the same as the second quarter.
The increase in net income compared to the same quarter last year is due to an increase of $39.8 million in operating revenues, and a reduction of $4.8 million in the provision for credit losses, offset by an increase of only $16.8 million in non-interest expenses.
Net Interest Income
ATB’s net interest income was $148.6 million for the third quarter ended December 31, 2006, an increase of $5.5 million or 3.9 per cent compared to the previous quarter, and $29.0 million or 24.3 per cent compared to the third quarter of last fiscal year.
The increase in net interest income over last quarter was the result of a significant growth in average interest-earning assets of $780.1 million, partially offset by a decrease of just over one basis point in the net interest spread earned on those assets. Average net interest spread earned on ATB’s total assets declined slightly over the quarter from 3.11, to 3.10 per cent.
ATB’s net interest income has increased significantly year over year, with average interest-earning assets increasing by $2.5 million and the spread earned on those assets increasing by 23 basis points. The increase in spread reflects our rising interest rate environment. Prime rates have increased by 1 per cent over the intervening year. Our spread is also relatively high as a result of our success in growing relatively low-cost retail deposits.
Other
Income
Other income totalled $44.6 million for the third quarter ended December 31, 2006, an increase of $1.8 million compared to last quarter. All major components of other income increased this quarter, with the exception of service charges and credit fees, which decreased by $1.6 million in total. This is due to a decline in loan growth compared to last quarter combined with the seasonality of personal service charges and commissions, which are traditionally higher in the summer. Sundry other income increased by $1.6 million, mainly due to positive “mark-to-market” adjustments relating to the portion of ATB’s corporate derivative portfolio that did not meet the criteria for hedge accounting.
Other income increased by $10.8 million or 32.1 per cent compared to the third quarter last year. Revenues from the Investor Services portfolio grew by $2.6 million or 54.4 per cent, reflecting strong year-over-year growth in this line of business. Sundry other income also increased significantly year over year. This was largely due to “mark-to-market” adjustments on ATB’s corporate derivative portfolio, offset by a relative decrease in income recognized in respect of ATB’s creditor insurance program.
Provision
for Credit Losses
Results for the quarter ended December 31, 2006, include a $2.3 million net provision for credit losses, compared to a $20.1 million net recovery last quarter and a $7.1 million net provision in the third quarter last year. The general loan loss expense for the quarter was $3.9 million compared to a recovery of $19.7 million last quarter and an $8.1 million expense for the same quarter last year. The recovery last quarter reflects the refinement in the methodology used to determine the level of the general loan loss allowance, such that there was a one-time reduction to the provision of $24.3 million. Except for this, the preceding quarter would have seen a charge of $4.6 million.Net specific loan loss recovery was $1.6 million this quarter, compared to a recovery of $0.4 million in the second quarter and a recovery of $1.0 million in the third quarter last year.
Total specific and general allowances for credit losses exceeded gross impaired loans by $96.6 million at December 31, 2006, compared to $86.0 million last quarter and $90.8 million a year ago. Loan quality remains extremely strong, with less than one per cent of our total gross loan portfolio classified as impaired at the end of the current quarter.
Non-Interest
Expenses
Non-interest expenses were $121.7 million for the third quarter ended December 31, 2006, an increase of $9.7 million or 8.6 per cent compared to the prior quarter, and an increase of $16.8 million or 16.1 per cent compared to the third quarter last year.
The increase from the previous quarter was primarily due to increased expenditure on associate compensation, combined with increases in data-processing and communications costs, and other sundry expenses. The majority of the increase in non-interest expenses compared to the third quarter last year relates to associate compensation, reflecting continued growth in all of ATB’s lines of business and the competitive marketplace.
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 63.00 per cent this quarter. This represents a deterioration from 60.28 per cent for the prior quarter and an improvement from 68.38 per cent for the third quarter last year.
Balance
Sheet
ATB’s total assets were $19.8 billion at December 31, 2006, an increase of 2.7 per cent from $19.3 billion at September 30, 2006, and 13.8 per cent from $17.4 billion at December 31, 2005. Total loans, net of allowance for loan losses, increased by $470.3 million or 2.9 per cent compared to the previous quarter and by $2.0 billion or 13.8 per cent compared to the third quarter last year. Total deposits increased by $0.4 billion or 2.4 per cent compared to the prior quarter and by $2.1 billion or 13.4 per cent compared to the end of quarter three last year. By comparison, during the third quarter of last year, total assets increased by 5.1 per cent, total loans increased by 3.8 per cent, and total deposits increased by 5.1 per cent compared to the prior quarter.
ATB’s total equity as at December 31, 2006, is $1.6 billion, up by $69.2 million from the end of the prior quarter and up $277.1 million from a year ago.
Segmented
Information
On a segmented basis, total assets for Personal and Business Financial Services increased by $171.6 million or 1.3 per cent during the third quarter and by $1.0 billion or 8.5 per cent from a year ago. Total assets for Corporate Financial Services increased in the quarter by $309.4 million or 10.6 per cent and by $985.9 million or 43.7 per cent from a year ago. Investor Services’ assets under management and administration grew to $3.4 billion at December 31, 2006, an increase of $424.4 million or 14.3 per cent from September 30, 2006, and a $1.3 billion or 65.0 per cent increase from December 31, 2005.
Operating revenues increased across all lines of business this quarter with the exception of Personal and Business Financial Services, which reported a decrease of $1.1 million caused by a reduction in other income. This reduction was as a result of seasonal factors, as well as decreased loan growth during the third quarter. Growth in net interest income was strong across all the lines. Net income decreased for both the Personal and Business Financial Services and the Corporate Financial Services lines of business this quarter, largely due to the impact last quarter of the remodelling of the general loan loss allowance, which resulted in a one-time increase to consolidated net income of $24.3 million.
Investor Services' net income continued to grow this quarter, increasing by $0.6 million over last quarter and by $2.0 million compared to the same quarter last 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.
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Highlights