Second Quarter Results
For the quarter ended September 30, 2007
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Message
to Stakeholders
ATB Announces excellent operating results offset by
$79.6-million provision for third party asset-backed commercial paper
Edmonton - November 23, 2007
ATB Financial reported second quarter earnings of $8.5 million for the period ending September 30, 2007, net of provisions totalling $79.6 million for potential losses and restructuring costs on third party asset-backed commercial paper (ABCP). This provision reduced operating revenue to $137.6 million, down $48.2 million or 25.95 per cent over the second quarter of the prior year. Non-interest expenses also increased by $18.5 million or 16.49 per cent. ATB’s equity now stands at $1.7 billion, up 11.63 per cent compared to September 30, 2006.
"ATB Financial has year-to-date earnings of $73.0 million despite absorbing a $79.6 million ABCP provision. ATB Financial continues to have an excellent year and from an operating perspective had one of our strongest second quarters on record," said Dave Mowat, President and CEO, ATB Financial. “Although we remain optimistic that a restructuring of these investments will be successful, we cannot be completely certain of the final outcome. The first of these trusts to be restructured (Skeena – which represents $91.0 million of our holdings) has been done at par. However, there is still uncertainty on the process for the remaining trusts. We will be working diligently toward a successful restructuring, however, appropriate provisions are being taken at this time to reflect the situation’s uncertainty. The full extent of the ABCP restructuring should be known by year-end. While this is a serious financial event for ATB our core operations continue to perform well. Investor Services attained $4.0 billion in assets under administration and management during the quarter, Personal and Business Financial Services experienced strong loan growth of $516.6 million, and Corporate Financial Services attained favorable deposit growth of $72.5 million. It is a testament to the work of ATB associates that we can absorb a $79.6 million provision and still record positive earnings.”
Financial
Highlights
Current results compared to the second quarter of fiscal year 2006-2007:
- Net income of $8.5 million, down 90.90 per cent, due to $79.6 million ABCP provision.
- Total assets of $22.5 billion, up 16.21 per cent.
- Net loans of $18.2 billion, up 13.51 per cent.
- Total deposits of $20.2 billion, up 16.25 per cent.
- Investor Services assets under administration and management of $4.04 billion, up 35.69 per cent.
- Operating revenue of $137.6 million, down 25.95 per cent.
- Efficiency ratio (non-interest expenses as a percentage of operating revenues) decreased to 59.71 from to 60.28 per cent, excluding all ABCP-related provisions.
Personal
& Business Financial Services
This line of business saw loan growth in the second quarter of $516.6 million (or 3.63 per cent), which compares favorably to growth of $360.9 million (or 2.82 per cent) in the second quarter last year. However, deposit growth of $47.9 million (or 0.33 per cent) was down significantly from growth in the second quarter of the prior year of $278.0 million (or 2.05 per cent). This trend is expected to continue and is generally consistent with industry experience.
Operating revenue increased from the second quarter last year by $13.1 million or 9.44 per cent.
Branch Network
During the second quarter, ATB Financial opened two new branches, one in each of Edmonton and Calgary. Edmonton – The Meadows, our 156th branch was opened in July 2007 and Calgary – Westwinds, our 157th branch was opened in September 2007.
ATB Investor Services
ATBIS achieved a significant milestone this quarter with asset growth of $96.2 million bringing the total assets under administration and management to over $4.0 billion.
Corporate Financial Services (CFS)
CFS comprises of three sub-lines of business – Energy, Commercial, and Food & Forestry. The second quarter saw deposit growth of $72.5 million, a 3.88 per cent growth from the prior quarter’s ending balance. This compares favorably to the small decrease in deposits in the second quarter of the prior year.
Loan balances remained relatively flat in the second quarter compared to growth of $341.5 million (or 12.99%) in the second quarter last year. This is due to the managed pay-down of certain loans and the reduced activity in the land development, home- builder, and energy servicing sectors.
Operating revenue of $24.9 million in the second quarter compares favorably to operating revenue of $18.5 million generated in the second quarter of the prior year.
Asset Backed Commercial Paper
As announced on August 24, 2007, ATB held $1.2 billion of third-party or non-bank asset backed commercial paper (“ABCP”) in our corporate investment portfolio. Our second quarter results include provisions for losses and restructuring costs amounting to $79.6 million in respect of our ABCP holdings.
The Canadian market for third party sponsored ABCP suffered a liquidity disruption in mid-August 2007 following which a group of financial institutions and other parties agreed, pursuant to the Montreal Accord (the “Accord”), to a standstill period in respect of ABCP sold by twenty-three conduit issuers. Participants to the Accord also agreed in principle to the conversion of the ABCP investments into longer-term financial instruments with maturities corresponding to the underlying assets. A Pan-Canadian Investors Committee was subsequently established to oversee the orderly restructuring of these instruments during this standstill period. The signatories to the Montreal Accord have recently agreed to extend the standstill period to December 14, 2007. ATB is a signatory to the Accord, a member of the Investors Committee, and is actively involved in the restructuring process.
As of September 30, 2007, ATB held a variety of investments in ABCP totaling $1.2 billion. Of these holdings, investments in twelve conduits amounting to $1.1 billion are subject to the Montreal Accord.
In the absence of an active market for third party ABCP during the standstill period, ATB has estimated the fair value of these assets using a valuation model. The valuation incorporates management’s best estimates of credit risk attributable to underlying assets, the relevant market interest rate, and assumptions regarding the likelihood that the restructuring process will proceed as outlined by the Investors Committee. ATB has recorded a $77.6 million provision for losses reflecting our estimated reduction in the fair value of these investments as at September 30, 2007. Further, ATB has accrued a $2.0 million provision for its estimated share of restructuring costs associated with the Montreal Accord. These amounts are included in our operating results for the second quarter under the headings Other Income and Non-Interest Expenses, respectively.
ATB’s estimate of the fair value of the third party sponsored ABCP investments as at September 30, 2007 is subject to significant uncertainty. The resolution of these uncertainties could be such that the ultimate fair value of these investments may vary significantly from management’s current best estimate and the magnitude of any such difference could be material to our financial results.
To ensure ATB maintained its strong liquidity position following the ABCP market disruption, additional investments were made in other liquid assets funded through the issuance of short-and mid-term notes. The liquidity disruption in the Canadian market for third party sponsored ABCP has had no other significant impact on ATB’s operations or financial position.
ATB in the
Community
ATB Financial has a 69-year tradition of investing in communities across Alberta. Our competitive advantage is our people. ATB associates are actively involved in the communities where they live, work, and raise their families. During the quarter, ATB sponsored a number of events including:
- Chuck wagon driver Chad Harden at the Calgary Stampede;
- The Edmonton Grand Prix, including the ATB Financial Go-Kart Track; and
- The Lethbridge Air Show.
Each and every quarter, throughout the province, ATB’s presence in the community is magnified by the compassion and generosity of our associates as demonstrated by their involvement in their local communities. We have a special program, Community Stars, which recognizes ATB associates who volunteer for a number of not-for-profit organizations across the province. ATB also makes a financial contribution on their behalf to salute their involvement.
ATB's seventh annual STARS air ambulance campaign concluded in September. Eighteen central Alberta and Calgary branches raised $60,280 during the three-week campaign, bringing the total donated to STARS through corporate donations and fundraising to over $610,000.
Economic Review and Outlook
Alberta’s economy remains a growth leader in Canada. Nonetheless, expansion has slowed noticeably since the summer. Several factors have contributed to this slowdown.
Soft gas prices—combined with high drilling costs—have been largely responsible for the slowdown in Alberta’s energy sector this year (with drilling activity down by about twenty-five per cent). It is unlikely gas prices will rise significantly as forecasts for this winter are for above normal temperatures and inventories are currently high.
The rise of the Canadian dollar to well above par against the US dollar has weighed heavily on Alberta’s exporters. The value of sales of gas, beef, forest products, and crude oil is being severely constrained by the soaring loonie, and tourism operators are also negatively affected.
ATB Financial's Business Sentiments IndexTM for the fourth calendar quarter of 2007 was 150.0, down slightly from the 152.5 level in the third quarter, but still up solidly from the 140.3 in the second quarter. Business sentiment and hiring intentions are especially buoyant in northeastern Alberta. However, it is unclear whether this overall sentiment will remain as robust going into the first Business Sentiments Index™ survey in 2008.
Despite some setbacks, Alberta’s economy is still in extremely good shape. Housing price increases are moderating to healthier levels, and inflation appears to be easing to under five per cent. It is expected that Alberta’s real GDP will again lead the country in 2007 and 2008, with growth in the range of three to four per cent.
Bob Splane
Chairman of the Board |
Dave Mowat
President & CEO |
November 2007
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Management's Discussion and Analysis (unaudited)
Net Income
ATB Financial reported net income of $8.5 million for its second quarter ended September 30, 2007 compared to $64.5 million for the previous quarter and $93.9 million for the second quarter last year. This represents a $55.9 million or 86.75 per cent decrease from the previous quarter's net income and a decrease of $85.4 million or 90.90 per cent from last year’s second quarter net income.
The decrease in net income over the previous quarter reflects a $79.6 million provision for losses and restructuring costs relating to ATB’s investments in certain third party asset-backed commercial paper (“ABCP”). ATB has provided for a decline in the estimated fair value of these investments as well as related restructuring costs we expect to incur relating to these investments. (Further details are provided under the heading “Asset Backed Commercial Paper” later in this discussion). This decrease also reflects a reduction in the provision for credit losses of $8.0 million together with a reduction in non-interest expenses of $5.6 million.
The decrease in net income compared to the same quarter last year is also driven by the $79.6 million provision for losses in fair value and restructuring costs related to the ABCP investments together with a decrease of $18.7 million in the recovery of credit losses combined with a $18.5 million increase in non-interest expense. Last year’s credit loss recovery was largely due to a refinement in the methodology of establishing the general loan loss allowance, that resulted in a one-time recovery of $24.3 million. Non-interest expenses also increased by $18.5 million from the same quarter a year ago.
Net Interest Income
ATB's net interest income has increased significantly year-over-year, largely driven by an increase in average interest-earning assets of $2.9 billion. A significant portion of the increase, over $8.7 million, can be attributed to the impact of the new accounting standards for Financial Instruments implemented in the first quarter (refer to Note 2).
Other Income
Other income, net of the provision for losses on ABCP, was a negative figure for the second quarter ended September 30, 2007 as ATB incurred a net loss of $31.2 million, a decrease of $79.5 million compared to last quarter. Virtually all of this decrease is explained by the $77.6 million provision for decreases in the estimated fair value of certain ABCP investments. Decreases in sundry other income (down $4.4 million) and credit fees (down $2.3 million) were partially offset by increases in gains on derivative financial instruments, insurance, card fees, and investor services. Last quarter saw a number of non-recurring gains, which were included in sundry other income.
Other income decreased by $74.0 million compared to the second quarter last year, again reflecting the ABCP provision. The reduction in credit fees– down by $5.9 million – is due to the $6.7 million second quarter impact of the new accounting standard for Financial Instruments implemented in the first quarter this year (refer to Note 2). All other major reporting categories increased from the second quarter in the prior year. Revenues from the Investor Services portfolio grew by $3.4 million or 50.85 per cent, reflecting strong year-over-year growth in this line of business. Card fees increased by $2.4 million, derivative income by $1.3 million, insurance by $1.2 million, and foreign exchange by $1.1 million.
Provision
for Credit Losses
Results for the quarter ended September 30, 2007 include a $1.4 million net recovery of credit losses, compared to a $6.6 million net provision last quarter and a $20.1 million net recovery in the second quarter last year.
The general loan loss recovery for the quarter was a $1.4 million recovery compared to an expense of $6.4 million last quarter and a $19.7 million recovery for the same quarter last year. Last year’s general loan loss recovery included a one-time recovery of $24.3 million that resulted from the implementation of a refined loan loss methodology.
This quarter, ATB had a specific recovery of less than $0.1 million compared to an expense of $0.2 million last quarter and a recovery of $0.4 million in the same quarter last year.
Total specific and general allowances for credit losses exceeded gross impaired loans by $97.8 million at September 30, 2007, compared to $116.4 million last quarter and $86.0 million a year ago. Loan quality remains 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 $130.5 million for the second quarter ended September 30, 2007, a decrease of $5.6 million or 4.10 per cent compared to the prior quarter, and an increase of $18.5 million or 16.49 per cent compared to the second quarter last year.
The decrease from the previous quarter was primarily due to a significant decrease in other non-interest expenses and associate compensation costs. The reduction in other non-interest expenses was due to a one time reversal of a prior period accounting estimate. The reduction in associate costs is primarily a timing issue relative to use of vacation during the summer period and the maxing out of annual CPP and EI contributions during the quarter. The current quarter also includes an accrual of $2.0 million for ATB’s anticipated share of the professional fees and other costs to be incurred for restructuring its third party ABCP holdings subject to the Montreal Accord.
Compared to the second quarter last year, non-interest expenses increased across almost all lines, with the majority ($12.5 million) relating to associate compensation. This reflects both an increase in the number of associates as well as rising salary costs over the prior year. It also reflects the $3.3 million impact of the new Financial Instruments accounting standard (refer to Note 2) and the $2.0 million provision for ABCP restructuring costs.
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 59.71 per cent this quarter, excluding the impact of the ABCP provisions. This represents an improvement from 65.68 per cent for the prior quarter and from 60.28 per cent for the second quarter last year.
Balance Sheet and Changes in Equity
ATB’s total assets were $22.5 billion at September 30, 2007, an increase of 4.72 per cent from $21.4 billion at June 30, 2007 and 16.21 per cent from $19.3 billion at September 30, 2006. Total loans, net of allowance for loan losses, increased by $489.8 million or 2.77 per cent compared to the previous quarter and by $2.16 billion or 13.51 per cent compared to the second quarter last year. Total deposits increased by $919.4 million or 4.76 per cent compared to the prior quarter and by $2.83 billion or 16.25 per cent compared to the end of the second quarter last year.
Loans, deposits, other assets, and other liabilities were all impacted by adjustments required by the new Financial Instruments standards implemented in the first quarter (refer to Note 2), however the amounts are not considered significant in the context of the balance sheet as a whole. Accumulated other comprehensive income, a new line of equity that resulted from the implementation of the Financial Instruments standards in the first quarter (refer to Note 2) decreased from a negative $12.2 million to a negative $6.3 million reflecting the net change in fair value adjustments required by the new Financial Instruments standards that were not charged to income in the second quarter.
ATB’s total equity as at September 30, 2007 is $1.68 billion, up $14.4 million from the end of the prior quarter and up $175.1 million from a year ago.
Asset Backed Commercial Paper
Overview
As announced on August 24, 2007, ATB held third party or non-bank asset backed commercial paper (“ABCP”) with a total par value of $1.2 billion in our corporate investment portfolio. $255.0 million of these investments were acquired at par as of that date through an exchange of ATB Money Market investments held through our Investor Services subsidiaries. This action was taken to protect ATB’s clients from undue hardship resulting from the uncertainty surrounding the liquidity disruption that affected the Canadian market for such ABCP in mid-August. The balance of these investments had been previously acquired by ATB prior to the disruption for short-term liquidity management purposes as then investment grade instruments rated “R-1 (High)” by the DBRS Limited rating agency (“DBRS”).
The Canadian market for third party sponsored ABCP suffered a liquidity disruption in mid-August 2007 following which a group of financial institutions and other parties agreed, pursuant to the Montreal Accord (the “Accord”), to a standstill period in respect of ABCP sold by twenty-three conduits or issuers. During this period, investors would not demand repayment of their ABCP investments as they matured and the commercial paper issuers would not make liquidity calls to their liquidity providers who, in turn, would not demand additional collateral from the issuers. Participants to the Accord also agreed in principle to the conversion of the ABCP investments into longer-term financial instruments with maturities corresponding to the underlying assets. A Pan-Canadian Investors Committee was subsequently established to oversee the orderly restructuring of these instruments during this standstill period. This Investors Committee, headed by Mr. Purdy Crawford, has engaged Ernst & Young and JP Morgan to assist in the restructuring process. The signatories to the Montreal Accord have recently agreed to extend the standstill period to December 14, 2007. ATB is a signatory to the Accord, a member of the Investors Committee and is actively supporting the restructuring process.
Holdings and Valuation
As of September 30, 2007, ATB held a variety of ABCP investments totaling $1.2 billion (or $1.1 billion, net of the $77.6 million provision in respect of losses from decreases in estimated fair value of third party ABCP). ATB has no further exposure to third party sponsored ABCP beyond these direct holdings of which investments in twelve conduits amounting to $1.1 billion (or $1.0 billion, net of the $77.6 million provision) are subject to the Montreal Accord. Restructuring plans have been announced for one of ATB’s holdings to date – Skeena Trust – where’s ATB’s $91.7 million investment in this conduit will be repaid through a combination of cash and long-term floating rate notes to be issued by a successor Trust. All of the investments ATB holds continue to be rated “R-1 (High) – Under Review with Developing Implications” by DBRS.
In the absence of an active market for third party ABCP during the standstill period, ATB has estimated the fair value of these assets using a probability weighted discounted cash flow valuation model. The valuation incorporates management’s best estimates of credit risk attributable to underlying assets, especially to U.S sub-prime mortgages where we believe our exposure is negligible. The valuation also incorporates management’s best estimates of the relevant market interest rate (to assess the time value of the investments tied up during the standstill period) and the risk that the restructuring process will not proceed as outlined by the Investors Committee. In particular, the valuation includes a probability-weighted analysis of the risk that not all of the restructured, longer-term assets will be rated as having AAA credit quality (or equivalent) and will pay interest at an appropriate market rate for such investments.
ATB has recorded a $77.6 million provision to reflect the reduction in the estimated fair value of the third party sponsored ABCP as at September 30, 2007. Given the expected timing of the restructuring process and ongoing events in the credit markets, this reduction in estimated fair value is considered to represent an “other than temporary” impairment in value and has been reflected in our Interim Consolidated Statement of Income as a separate charge against other income. Further, ATB has accrued $2.0 million for its estimated share of restructuring costs associated with the Montreal Accord and these amounts are also reflected in our in our Interim Consolidated Statement of Income as professional and consulting costs.
Uncertainty
ATB’s estimate of the fair value of the third party sponsored ABCP investments as at September 30, 2007 is subject to significant uncertainty. Considering the restructuring process is still ongoing and will be until at least mid-December, its eventual outcome is inherently uncertain. The eventual terms of the restructured investments and their underlying assets, and therefore the amount and timing of the cash flows ATB will ultimately receive following the restructuring process are also uncertain. The resolution of these uncertainties could be such that some or all of $77.6 million provision for losses could be crystallized during the restructuring process, or that even further losses could be incurred. There is the potential that the ultimate fair value of these investments may vary significantly from management’s current best estimate. The magnitude of any such difference could be material to our financial results.
Impact on ATB Operations
With the disruption of the active market for the third party sponsored ABCP pursuant to the Montreal Accord, ATB considers these investments to be illiquid in the short-term. 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 to not be constrained by this unplanned issuance. The liquidity disruption in the Canadian market for third party sponsored ABCP has had no other significant impact on ATB’s operations or financial position.
Segmented
Information
On a segmented basis, total assets for Personal and Business Financial Services increased by $737.7 million or 5.22 per cent during the second quarter and by $1.84 billion or 14.09 per cent from a year ago. Total assets for Corporate Financial Services increased in the quarter by $49.0 million or 1.38 per cent and by $665.0 million or 22.67 per cent from a year ago. Investor Services’ assets under management and administration grew to $4.04 billion at September 30, 2007, an increase of $96.2 million or 2.44 per cent from June 30, 2007 and a $1.06 billion or 35.69 per cent increase from September 30, 2006.
Operating revenues increased across all lines of business this quarter compared to last quarter. This, combined with a reduction in the credit loss provision, resulted in improvements to net income across all the lines of business from the previous quarter. Operating revenues increased across all lines compared to the same quarter last year, resulting in increased net income in Corporate Financial Services and Investor Services. Personal and Business Financial Services actually saw a reduction in net income compared to the same quarter last year due to the impact of the refinement of the general loan loss allowance model in last year’s net income (refer to Note 4).
The impact of the implementation of the new Financial Instruments standards is included within Other Business Units.
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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Highlights