AGF Management Limited Reports Third Quarter Financial Results
AGF reports net income of
Earnings per share in the third quarter of 2009, on a fully diluted basis, were
While the global economy continues to face strong challenges, economic indicators suggest a recovery may be starting to take shape. The third quarter showed signs of improvement over the second quarter of 2009 with AGF reporting a 9.6% increase in assets under management (AUM), a 2.4% increase in total revenue, and a 14.5% increase in earnings before interest, taxes, depreciation and amortization (EBITDA). Year-over-year results, however, show that the economy has yet to reach pre-recession levels as evidenced by third quarter numbers that show a 15.8% decline in AUM, a 20.5% decline in revenue and a 31.2% decrease in EBITDA compared with the same period a year earlier.
"There were signs during the third quarter that the global economy is moving toward a recovery. Global markets continued to improve with higher indices contributing to increases in our AUM and profitability compared to the second quarter," said Chairman and CEO Blake C. Goldring. "While encouraged by the steady growth in our AUM over the past quarter, we will continue to strengthen the business through expense discipline, improving our future operating capabilities and servicing our clients."
Added
During this quarter, total consolidated revenue decreased to
Total AUM decreased 15.8% to
Also in the quarter, in keeping with our stated strategy to slow loan growth and suspend new originations of lower margin lending products, our Trust Company Operations loan assets declined 14.1% over
This strategy has helped to deliver an 87.8% increase in Trust EBITDA in the third quarter ended
Caution Regarding Forward-Looking Statements
This Management's Discussion and Analysis (MD&A) includes forward-looking statements about the Company, including its business operations, strategy and expected financial performance and condition. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as 'expects', 'anticipates', 'intends', 'plans', 'believes' or negative versions thereof and similar expressions, or future or conditional verbs such as 'may', 'will', 'should', 'would' and 'could'. In addition, any statement that may be made concerning future financial performance (including revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future action on our part, is also a forward-looking statement. Forward-looking statements are based on certain factors and assumptions, including expected growth, results of operations, business prospects, performance and opportunities. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risks, uncertainties and assumptions about our operations, economic factors and the financial services industry generally. They are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements made by us due to, but not limited to, important factors such as level of assets under our management, volume of sales and redemption of our investment products, performance of our investment funds and of our investment managers and advisors, competitive fee levels for investment management products and administration, and competitive dealer compensation levels, size and default experience on our loan portfolio and cost efficiency in our loan operations, as well as interest and foreign exchange rates, taxation, changes in government regulations, unexpected judicial or regulatory proceedings, and our ability to complete strategic transactions and integrate acquisitions. We caution that the foregoing list is not exhaustive. The reader is cautioned to consider these and other factors carefully and not place undue reliance on forward-looking statements. Other than specifically required by applicable laws, we are under no obligation (and expressly disclaim any such obligation) to update or alter the forward-looking statements, whether as a result of new information, future events or otherwise. For a more complete discussion of the risk factors that may impact actual results, please refer to the 'Managing Risk - Overview' section of this MD&A and to the 'Risk Factors and Risk Management' section of our 2008 annual MD&A.
Dear fellow shareholders
The mutual fund industry showed some positive signs in the third quarter that investors are slowly regaining confidence in the markets. Industry redemptions of money market funds accelerated during the summer months and net sales of long-term funds showed improvement when compared with the first half of the year. Industry mutual fund assets increased amid improving equity markets but still lagged levels from a year ago.
AGF's total assets under management (AUM) grew to
Our Trust Company Operations continued to focus on responsible management of our lending portfolios during the third quarter of 2009. Despite the fact that loan assets declined 14.1% year-over-year at
Consolidated revenue was
For the three months ended
Our focus and commitment continues to be providing excellence in the investment management business. We believe that prudent management of our expenses and balance sheet will allow AGF to weather future challenges and positions us appropriately as an economic recovery begins to take shape. We remain committed to achieving our long-term objectives and delivering superior value to our shareholders, clients and unitholders.
(signed)
Blake C. Goldring, M.S.M., CFA
Chairman and Chief Executive Officer
September 23, 2009
(1) Cash flow from continuing operations, free cash flow and EBITDA are
non-GAAP measures. Please refer to pages 5 and 6 of this report for
definitions of these metrics.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the three and nine months ended August 31, 2009
This Management's Discussion and Analysis (MD&A) presents an analysis of the financial condition of AGF Management Limited and its subsidiaries (AGF) as at
There have been no material changes to the information discussed in the following sections of the 2008 annual MD&A: "Risk Factors and Risk Management", "Controls and Procedures", "Contractual Obligations", "Intercompany and Related Party Transactions" and "Government Regulations". The "Key Performance Indicators and Non-GAAP Measures" section contains a reconciliation of non-GAAP measures to GAAP measures.
Overview
With
For purposes of this discussion, the operations of AGF and our subsidiary companies are referred to as "we", "us", "our" or "the Company". The financial results relating to the operations have been reported in three segments: Investment Management Operations, Trust Company Operations and Other.
The Investment Management Operations segment includes the results of our retail mutual fund, institutional and high-net-worth client businesses. The Trust Company Operations segment includes the results of AGF Trust Company, and the Other segment includes our equity interest in Smith and Williamson Holdings Limited (S&WHL).
Strategy and Quarterly Overview
As stated in our 2008 annual MD&A, our overall business strategy is to foster the development of best-in-class operating segments to provide world-class financial services to investors in
Profitability and operating conditions improved in the third quarter of 2009 compared to the second quarter of this year. However, profitability and operating conditions in the third quarter of 2009 compared to the same quarter in 2008 remained challenging due to lower year over year global stock market indices. During the third quarter of 2009:
- Revenue decreased 20.5% as compared with the same period in 2008,
driven primarily by a 22.4% decline in Investment Management
Operations revenue which was directly related to lower year-over-year
AUM levels.
- Earnings before interest, taxes, depreciation and amortization
(EBITDA) decreased 31.2% during the same period to $56.1 million as
declining revenue outpaced expense savings.
- EBITDA margin declined to 38.2% in the third quarter of 2009 as
compared to 44.1% in the third quarter of 2008 but increased from
34.1% in the second quarter of 2009.
- Net income decreased 44.5% over the same period in 2008 primarily due
to a decline in Investment Management Operations revenue and an
increase in Trust Company Operations provision for loan losses. This
was partly offset by declines in selling, general and administrative
(SG&A) expenses.
- Total AUM declined 15.8% from $48.7 billion at August 31, 2008 to
$41.0 billion as at August 31, 2009. AUM increased by 9.6% from
$37.4 billion at May 31, 2009 due to improving stock markets during
the third quarter of 2009.
- SG&A expenses declined 12.5% in the quarter ended August 31, 2009 as
compared to the corresponding period in 2008 as a result of cost
reduction initiatives across the Company.
- AGF Trust real estate secured loan assets declined 22.6% over the
previous year and investment loans declined 6.8% with total loan
assets declining 14.1% year-over-year. This decline in loan assets is
reflective of our strategy to suspend new originations of lower
margin lending products and slow loan growth in 2009.
- AGF Trust remained profitable in the third quarter of 2009,
representing 27.6% of AGF Management Limited's pre-tax income.
- We delivered value directly to our shareholders through dividend
payments. Dividends paid, including dividends reinvested, on Class A
voting common shares (Class A shares) and Class B non-voting shares
(Class B shares) remained steady at $22.2 million in the third
quarter of 2009 compared to $22.4 million in the same period in 2008.
- Following the end of our third quarter, on September 16, 2009,
Manulife Investments announced that its new GIF Select platform will
include a number of new investment fund options, including a bundle
from AGF. The product, to be called Manulife AGF Bundle, will consist
of three AGF funds - AGF Canada Class, AGF Global Equity Class and
AGF Canadian Bond Fund.
Key Performance Indicators and Non-GAAP Measures
We measure the success of our business strategies using a number of key performance indicators (KPIs), which are outlined below. With the exception of revenue, the following KPIs are not measurements in accordance with Canadian GAAP. They should not be considered as an alternative to net income or any other measure of performance under Canadian GAAP. Segment discussions include a review of KPIs that are relevant to each segment.
(a) Consolidated Operations
Revenue
Revenue is a measurement defined by Canadian GAAP and is recorded net of fee rebates, sales taxes and distribution fees paid to limited partnerships. Revenue is indicative of the potential to deliver cash flow.
We derive our revenue principally from a combination of:
- management and advisory fees based on AUM
- deferred sales charges (DSC) earned from investors when mutual fund
securities sold on a DSC basis are redeemed
- net interest income earned on AGF Trust's loan portfolio
EBITDA
We define EBITDA as earnings before interest, taxes, depreciation and amortization. EBITDA is a standard measure used in the mutual fund industry by management, investors and investment analysts to understand and compare results. We believe this is an important measure because it allows us to assess our investment management businesses without the impact of amortization. EBITDA for the Trust Company Operations segment includes interest expense related to deposits. These deposits fund our investment loan and real estate secured loan programs and are therefore considered an operating cost directly related to generating interest revenue. We include this interest expense in Trust Company Operations EBITDA to provide a meaningful comparison to our other business segments and our competitors.
Please see the "Consolidated Operating Results" section on page 12 of this MD&A for a schedule showing how EBITDA reconciles to our GAAP financial statements.
Cash Flow from Operations
We report cash flow from operations before net changes in non-cash balances related to operations. Cash flow from operations helps to assess the ability of the business to generate cash, which is used to pay dividends, repurchase shares, pay down debt and fund other needs.
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Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ millions) 2009 2008 2009 2008
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Net cash provided by
continuing operating
activities $ 59.8 $ 97.1 $ 117.8 $ 283.0
Less: net changes in
non-cash balances
related to operations 10.8 30.8 (22.6) 62.9
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Cash flow from
continuing operations $ 49.0 $ 66.3 $ 140.4 $ 220.1
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Free Cash Flow from Operations
We define free cash flow as cash flow from operations before net changes in non-cash balances related to operations less selling commissions paid. This is a relevant measure in the investment management business since a substantial amount of cash is spent on upfront commission payments. Free cash flow represents cash available for distribution to our shareholders or for general corporate purposes.
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Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ millions) 2009 2008 2009 2008
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Cash flow from
continuing operations
(defined above) $ 49.0 $ 66.3 $ 140.4 $ 220.1
Less: selling
commissions paid 13.1 17.6 41.0 72.2
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Free cash flow $ 35.9 $ 48.7 $ 99.4 $ 147.9
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EBITDA Margin
EBITDA margin provides useful information to management and investors as an indicator of our overall operating performance. We believe EBITDA margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define EBITDA margin as the ratio of EBITDA to revenue.
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Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ millions) 2009 2008 2009 2008
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EBITDA $ 56.1 $ 81.5 $ 147.9 $ 259.7
Divided by revenue 146.9 184.7 428.4 573.4
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EBITDA margin 38.2% 44.1% 34.5% 45.3%
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Pre-Tax Profit Margin
Pre-tax profit margin provides useful information to management and investors as an indicator of our overall operating performance. We believe pre-tax profit margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define pre-tax profit margin as the ratio of income before taxes to revenue.
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Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ millions) 2009 2008 2009 2008
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Net income $ 22.8 $ 41.1 $ 52.2 $ 147.8
Add: income taxes 7.6 10.0 17.5 17.5
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Income before taxes 30.4 51.1 69.7 165.3
Divided by revenue 146.9 184.7 428.4 573.4
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Pre-tax profit margin 20.7% 27.7% 16.3% 28.8%
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Return on Equity (ROE)
We monitor ROE to assess the profitability of the consolidated Company on an annual basis. We calculate ROE by dividing net income in the quarter annualized by average shareholders' equity.
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For the three months ended August 31, August 31,
($ millions) 2009 2008
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Net income (annualized) $ 91.2 $ 164.4
Divided by average shareholders' equity 1,098.8 1,150.2
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Return on equity 8.3% 14.3%
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Long-term Debt to EBITDA Ratio
Long-term debt to EBITDA ratio provides useful information to management and investors as an indicator of our ability to service our long-term debt. We define long-term debt to EBITDA ratio as long-term debt at the end of the period divided by EBITDA in the quarter annualized.
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For the three months ended August 31, August 31,
($ millions) 2009 2008
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Long-term debt $ 182.6 $ 147.8
EBITDA (annualized) 224.4 326.0
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Long-term debt to EBITDA 81.4% 45.3%
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(b) Investment Management Operations
Assets Under Management (AUM)
The amount of AUM is critical to our business since these assets generate fees from our mutual fund, institutional, strategic accounts and high-net-worth relationships. AUM will fluctuate in value as a result of investment performance, sales and redemptions. Mutual fund AUM determine a significant portion of our expenses because we pay upfront commissions and trailing commissions to financial advisors, as well as investment advisory fees based on the value of AUM.
Investment Performance
Investment performance, which represents market appreciation (depreciation) of fund portfolios and is shown net of management fees received, is a key driver of the level of AUM and is central to the value proposition that we offer advisors and unitholders. Growth in AUM resulting from investment performance increases the wealth of our unitholders, and, in turn, we benefit from higher revenues. Alternatively, poor relative investment performance will reduce our AUM levels and result in lower management fee revenues. Strong relative investment performance may also contribute to gross sales growth or reduced levels of redemptions. Conversely, poor relative investment performance may result in lower gross sales and higher levels of redemptions. Refer to the "Managing Risk" section of this report for further information.
Net Sales
One of the goals of our mutual fund business is to generate positive net sales on an annual basis, which allows for increasing revenues. Gross sales and redemptions as a percentage of AUM are monitored separately and the sum of these two amounts comprises net sales. Net sales, together with investment performance and fund expenses, determine the level of average daily mutual fund AUM. This is the basis on which management fees are charged. The average daily mutual fund AUM is equal to the average daily net asset value of the AGF mutual funds.
We monitor inflows and outflows in our high-net-worth client and institutional businesses separately. We do not compute an average daily AUM figure for them.
EBITDA Margin
EBITDA margin provides useful information to management and investors as an indicator of our operating performance in our Investment Management Operations segment. We believe EBITDA margin is a valuable measure since it assesses the extent we are able to earn profit from each dollar of revenue. We define EBITDA margin as the ratio of EBITDA to revenue.
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Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ millions) 2009 2008 2009 2008
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EBITDA $ 45.8 $ 66.0 $ 122.4 $ 212.3
Divided by revenue 120.4 155.2 343.3 483.3
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EBITDA margin 38.0% 42.5% 35.7% 43.9%
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Pre-Tax Profit Margin
Pre-tax profit margin provides useful information to management and investors as an indicator of our operating performance in our Investment Management Operations segment. We believe pre-tax profit margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define pre-tax profit margin as the ratio of income before taxes and non-segmented items to revenue.
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Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ millions) 2009 2008 2009 2008
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Income before taxes and
non-segmented items $ 22.6 $ 38.8 $ 51.5 $ 127.8
Divided by revenue 120.4 155.2 343.3 483.3
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Pre-tax profit margin 18.8% 25.0% 15.0% 26.4%
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(c) Trust Company Operations
Loan Asset Growth
In the Trust Company Operations segment (AGF Trust), we focus on long-term, profitable growth and credit quality in our investment and real estate secured loans. New originations, net of repayments, drive the outstanding balance of loans on which we charge interest. Loan asset growth increases our revenue and assists with our ability to grow our profits in AGF Trust.
Net Interest Income
Net interest income is a common lending industry performance indicator. We monitor this figure to evaluate the growth of the financial contribution of AGF Trust. The figure is calculated by subtracting interest expense from interest income earned from AGF Trust loan assets.
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Three months ended Nine months ended
August 31, August 31,
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($ millions) 2009 2008 2009 2008
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Interest income $ 52.2 $ 76.3 $ 177.5 $ 229.0
Less: interest expense 29.9 50.8 103.0 155.6
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Net interest income $ 22.3 $ 25.5 $ 74.5 $ 73.4
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Net Interest Margin
Net interest margin is equal to annualized net interest income divided by the average quarterly total loan balance.
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For the three months ended August 31, August 31,
($ millions) 2009 2008
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Annualized net interest income $ 89.2 $ 102.0
Divided by average quarterly total loan balance 3,870.3 4,374.4
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Net interest margin 2.3% 2.3%
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Efficiency Ratio
The efficiency ratio is a financial services industry KPI that measures the efficiency of the organization. We use this ratio to compare expenses and keep them in line from one period to another as the Trust Company grows. The ratio is calculated from AGF Trust results by dividing non-interest expenses by the total of net interest income and non-interest income.
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Three months ended Nine months ended
August 31, August 31,
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($ millions) 2009 2008 2009 2008
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Selling, general and
administrative expenses $ 9.0 $ 10.6 $ 26.0 $ 32.8
Add: amortization expense 0.8 0.9 2.2 1.9
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Non-interest expense $ 9.8 $ 11.5 $ 28.2 $ 34.7
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Other revenue $ 2.5 $ 2.7 $ 6.6 $ 8.6
RSP loan securitization
income (loss), net of
impairment 0.6 0.2 (0.4) 0.3
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Non-interest income $ 3.1 $ 2.9 $ 6.2 $ 8.9
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Net interest income $ 22.3 $ 25.5 $ 74.5 $ 73.4
Add: non-interest income 3.1 2.9 6.2 8.9
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Total of net interest
income and non-interest
income $ 25.4 $ 28.4 $ 80.7 $ 82.3
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Efficiency ratio 38.6% 40.5% 34.9% 42.2%
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EBITDA Margin
EBITDA margin provides useful information to management and investors as an indicator of AGF Trust's operating performance. We believe EBITDA margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define EBITDA margin as the ratio of EBITDA to revenue.
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Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ millions) 2009 2008 2009 2008
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EBITDA $ 9.2 $ 14.4 $ 21.1 $ 39.6
Divided by revenue 25.4 28.4 80.7 82.3
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EBITDA margin 36.2% 50.7% 26.1% 48.1%
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Pre-Tax Profit Margin
Pre-tax profit margin provides useful information to management and investors as an indicator of AGF Trust's operating performance. We believe pre-tax profit margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of net interest income. We define pre-tax profit margin as the ratio of income before taxes and non-segmented items to total revenue.
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Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ millions) 2009 2008 2009 2008
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Income before taxes and
non-segmented items $ 8.4 $ 13.5 $ 18.9 $ 37.7
Divided by revenue 25.4 28.4 80.7 82.3
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Pre-tax profit margin 33.1% 47.5% 23.4% 45.8%
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Assets-to-Capital Multiple
Federally regulated deposit-taking institutions (DTI) are expected to meet an assets-to-capital multiple test. The assets-to-capital multiple is determined by dividing the DTI's total assets by its total regulatory capital, and expresses the extent by which capital is leveraged into the assets of the DTI.
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As at August 31,
($ millions) 2009 2008
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Total assets per OSFI guidelines $ 4,796.4 $ 5,359.7
Divided by adjusted Tier 1 and Tier 2 capital 368.1 355.2
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Assets-to-capital multiple 13.0 15.1
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Loan-to-Value Ratio
Loan-to-value ratio on our conventional mortgage loans is calculated using outstanding balance of conventional mortgage loans divided by the estimated fair value of the real estate serving as collateral for the conventional mortgage loans as at the date the loans were funded.
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As at August 31,
($ millions) 2009 2008
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Conventional mortgage loans(1) $ 605.9 $ 800.4
Divided by fair value of collateral 971.7 1,254.6
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Loan-to-value ratio 62.4% 63.8%
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(1) Includes loan provision and deferred sales commission of
$11.3 million.
Significant Accounting Policies
A summary of AGF's significant accounting policies can be found in Note 1 of our 2008 audited Consolidated Financial Statements.
Significant Accounting Estimates
Goodwill and other intangibles are subject to impairment tests on an annual basis or more frequently if events or changes in circumstances indicate that the assets may be impaired. AGF's ongoing review of the valuation of goodwill and other intangibles resulted in a writedown of
Changes in Significant Accounting Policies
Goodwill, Intangible Assets and Financial Statement Concepts
Effective
Credit Risk and Fair Value
Effective
Future Accounting Changes
Conversion to International Financial Reporting Standards in Fiscal 2012
In
AGF is currently assessing the differences between IFRS and GAAP, as well as the alternatives available upon adoption. The impact these differences may have on the financial results has not yet been determined and will be part of an ongoing process as our assessment continues and the International Accounting Standards Board and the AcSB issue new standards and recommendations.
Managing Risk
AGF is subject to a number of company and non-company specific risk factors that may impact our operating and financial performance. These risks and the management of those risks are detailed in our 2008 annual MD&A in the section entitled "Risk Factors and Risk Management". The Company has not identified any material changes to the risk factors affecting its business or in the management of those risks. Refer to Note 14 of the Consolidated Financial Statements and Notes for risks arising from the use of financial instruments.
Changes in Internal Controls over Financial Reporting
The Chief Executive Officer and the Chief Financial Officer have designed or caused the design of the Internal Controls over Financial Reporting (ICFR) and Disclosure Controls and Procedures. There have been no material weaknesses identified relating to the design of the ICFR. There have been no changes to AGF's internal controls for the quarter ended
Consolidated Operating Results
The table below summarizes our consolidated operating results for the three and nine months ended
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Three months ended Nine months ended
August 31, August 31,
($ millions, ---------------------------------------------------------
except per
share amounts) 2009 2008 % change 2009 2008 % change
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Revenue
Investment
Management
Operations $ 120.4 $ 155.2 (22.4%) $ 343.3 $ 483.3 (29.0%)
Trust Company
Operations 25.4 28.4 (10.6%) 80.7 82.3 (1.9%)
Other 1.1 1.1 (0.0%) 4.4 7.8 (43.6%)
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146.9 184.7 (20.5%) 428.4 573.4 (25.3%)
Expenses
Investment
Management
Operations 74.6 89.2 (16.4%) 220.9 271.0 (18.5%)
Trust Company
Operations 16.2 14.0 15.7% 59.6 42.7 39.6%
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90.8 103.2 (12.0%) 280.5 313.7 (10.6%)
EBITDA(1) 56.1 81.5 (31.2%) 147.9 259.7 (43.0%)
Amortization 23.9 28.1 (14.9%) 73.1 86.4 (15.4%)
Interest
expense 1.6 2.1 (23.8%) 4.7 7.5 (37.3%)
Non-controlling
interest 0.2 0.2 0.0% 0.4 0.5 (20.0%)
Income taxes 7.6 10.0 (24.0%) 17.5 17.5 0.0%
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Net income $ 22.8 $ 41.1 (44.5%) $ 52.2 $ 147.8 (64.7%)
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Earnings
per share -
diluted $ 0.25 $ 0.46 (45.7%) $ 0.58 $ 1.65 (64.8%)
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(1) For the definition of EBITDA, see the "Key Performance Indicators and
Non-GAAP Measures" section. The items required to reconcile EBITDA to
net income, a defined term under Canadian GAAP, are detailed above.
Revenue for the three and nine months ended
Expenses for the three and nine months ended
The impact of revenue declining at a faster rate than expenses served to decrease EBITDA by 31.2% and 43.0% for the three and nine months ended
Amortization expense decreased 14.9% and 15.4% for the three and nine months ended
Interest expense was
For the three and nine months ended
The impact of the above revenue and expense items resulted in net income of
A further discussion follows of the results of each business segment for the three and nine months ended
Business Segment Performance
We report on three business segments: Investment Management Operations, Trust Company Operations and Other. AGF's reportable segments are strategic business units that offer different products and services. The Investment Management Operations segment provides investment management and advisory services. It is responsible for the management and distribution of AGF investment products and services, including retail mutual fund operations, institutional investment management and high-net-worth client investment counselling services. The Trust Company Operations segment offers GICs, real estate secured loans and investment loans. The Other segment includes the results of S&WHL, which is accounted for by the equity method, as well as our interest expense.
Investment Management Operations
Business and Industry Profile
Our Investment Management Operations segment provides products and services across the wealth continuum, including mutual funds, wrap products, institutional investment services and high-net-worth investment management. Our products are delivered through multiple channels, including advisors, financial planners, banks, strategic partnerships, life insurance companies, brokers and consultants.
We compete with numerous domestic and foreign players within the Canadian investment management industry. We believe our status as an independent fund manufacturer without distribution conflict will benefit us and our shareholders as the industry continues to evolve. We also remain focused on building our reputation and presence internationally as an institutional investment management firm and we continue to attract a significant amount of interest in our investment strategies from international investors.
Segment Strategy and Quarterly Overview
We continue to consistently apply our strategy to enhance the client-centric model in our investment management business by maintaining a high level of communication with our clients and strong partnerships with advisors. We remain committed to excellence in investment management, relationship management and product management. We continue to focus on leveraging our investment management competency across all distribution channels. On the retail side, we continue to work aggressively to increase our market share in the investment categories that matter the most to investors. We continue to grow our institutional business by increasing our sales efforts in international markets and expanding our institutional product platform.
Global stock markets continued to strengthen in the third quarter of 2009, leading to a sequential increase in our mutual fund AUM. While industry AUM and sales of mutual funds remained below levels from a year ago, investors appeared to regain some confidence in the markets in the third quarter. Industry redemptions of money market funds accelerated during the summer months and long-term funds posted much improved sales numbers compared with the second quarter.
Assets Under Management
The primary sources of revenue for AGF's Investment Management Operations segment are management and advisory fees. The amount of management and advisory fees depends on the level and composition of AUM. Under the management and investment advisory contracts between AGF and each of the mutual funds, we are entitled to monthly fees. These fees are based on a specified percentage of the average daily net asset value of the respective fund. In addition, we earn fees on our institutional, strategic accounts and high-net-worth client AUM. As a result, the level of AUM has a significant influence on financial results.
The following table illustrates the composition of the changes in total AUM during the three and nine months ended
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Three months ended Nine months ended
August 31, August 31,
($ millions, ---------------------------------------------------------
except per
share amounts) 2009 2008 % change 2009 2008 % change
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Mutual fund
AUM, beginning
of period $ 20,907 $ 28,627 (27.0%) $ 19,761 $ 30,052 (34.2%)
Gross sales of
mutual funds 592 854 (30.7%) 1,930 2,927 (34.1%)
Redemptions of
mutual funds (759) (1,426) (46.8%) (2,436) (3,983) (38.8%)
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Net mutual
fund sales (167) (572) (70.8%) (506) (1,056) (52.1%)
Market
appreciation
(depreciation)
of fund
portfolios 1,402 (1,684) (183.3%) 2,887 (2,625) (210.0%)
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Mutual fund
AUM, end
of period $ 22,142 $ 26,371 (16.0%) $ 22,142 $ 26,371 (16.0%)
Institutional
and strategic
accounts AUM 16,018 18,579 (13.8%) 16,018 18,579 (13.8%)
High-net-worth
AUM 2,874 3,787 (24.1%) 2,874 3,787 (24.1%)
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Total AUM,
end of period $ 41,034 $ 48,737 (15.8%) $ 41,034 $ 48,737 (15.8%)
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Average daily
mutual fund
AUM for the
period $ 21,399 $ 26,725 (19.9%) $ 20,069 $ 27,901 (28.1%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Global market declines and an industry trend of reduced gross sales of long-term funds resulted in a decrease in mutual fund AUM to
Market performance influences the level of AUM. During the three and nine months ended
The impact of the U.S. dollar increase relative to the Canadian dollar on the market value of AGF mutual funds for the three months ended
Financial and Operational Results
The Investment Management Operations segment results for the three and nine months ended
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
---------------------------------------------------------
($ millions) 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Revenue
Management
and advisory
fees $ 114.8 $ 146.8 (21.8%) $ 322.7 $ 457.2 (29.4%)
Deferred
sales charges 4.9 6.4 (23.4%) 16.5 18.6 (11.3%)
Investment
income and
other revenue 0.7 2.0 (65.0%) 4.1 7.5 (45.3%)
-------------------------------------------------------------------------
120.4 155.2 (22.4%) 343.3 483.3 (29.0%)
Expenses
Selling,
general and
administrative 39.5 44.8 (11.8%) 122.7 135.3 (9.3%)
Trailing
commissions 32.8 40.7 (19.4%) 90.3 124.2 (27.3%)
Investment
advisory fees 2.3 3.7 (37.8%) 7.9 11.5 (31.3%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
74.6 89.2 (16.4%) 220.9 271.0 (18.5%)
-------------------------------------------------------------------------
EBITDA(1) 45.8 66.0 (30.6%) 122.4 212.3 (42.3%)
Amortization 23.2 27.2 (14.7%) 70.9 84.5 (16.1%)
-------------------------------------------------------------------------
Income before
taxes and
non-segmented
items $ 22.6 $ 38.8 (41.8%) $ 51.5 $ 127.8 (59.7%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the definition of EBITDA, see the "Key Performance Indicators and
Non-GAAP Measures" section. The items required to reconcile EBITDA to
net income, a defined term under Canadian GAAP, are detailed above.
Revenue
For the three- and nine-month periods ended
Management and Advisory Fees
The 19.9% and 28.1% decline in average daily mutual fund AUM in the three and nine months ended
Deferred Sales Charges (DSC)
We receive DSC upon redemption of securities sold on the contingent DSC or low-load commission basis for which we finance the selling commissions paid to the dealer. The DSC ranges from 3.0% to 5.5%, depending on the commission option, of the original subscription price of the funds purchased if the funds are redeemed within the first two years, and declines to zero after three or seven years. DSC revenue fluctuates based on the level of redemptions, the age of the assets being redeemed and the proportion of redemptions composed of back-end assets. DSC revenues for the three and nine months ended
Expenses
For the three- and nine-month periods ended
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for the three- and nine-month periods ended
-------------------------------------------------------------------------
Three Nine
months months
ended ended
August 31, August 31,
-----------------------
($ millions) 2009 2009
-------------------------------------------------------------------------
Increase (decrease) in fund absorption expenses $ (0.5) $ 1.8
Increase (decrease) in compensation-related
expenses (2.1) (14.5)
Increase (decrease) in other expenses (2.5) (4.0)
Increase (decrease) in severance and
restructuring expenses (0.2) 4.1
-------------------------------------------------------------------------
$ (5.3) $ (12.6)
-------------------------------------------------------------------------
The following explains expense changes in the three- and nine-month
periods ended August 31, 2009 compared with the previous-year period:
- Absorption expense estimates remained relatively flat quarter over
quarter and were up $1.8 million in the nine-month period. Lower
transactional volumes, improved contractual pricing and removal of
the management expense ratio (MER) caps have contributed to our
improving absorption expenses.
- Compensation-related expenses decreased due to staff reductions,
lower estimates for performance-based payouts and stock-based
compensation expense.
- Other expenses decreased $2.5 million and $4.0 million for the three
and nine months ended August 31, 2009 due to continued cost savings
initiatives.
- Severance and restructuring expenses decreased $0.2 million and
increased $4.1 million for the three and nine months ended August 31,
2009. The increase year-to-date is as a result of longer-term cost
savings initiatives.
Trailing Commissions
Trailing commissions paid to investment dealers depend on total AUM, the proportion of mutual fund AUM sold on a front-end versus back-end commission basis and the proportion of equity fund AUM versus fixed-income fund AUM. Annualized trailing commissions as a percentage of average daily mutual fund AUM were 0.61% and 0.60% for the three and nine months ended
Investment Advisory Fees
External investment advisory fees decreased 37.8% and 31.3% for the three- and nine-month periods ended
EBITDA
EBITDA for the Investment Management Operations segment were
Amortization
The largest item in this category is amortization of deferred selling commissions. The category also represents amortization of property, equipment, customer contracts and other intangible assets. We internally finance all selling commissions paid. These selling commissions are capitalized and amortized on a straight-line basis over a period that corresponds with their applicable DSC schedule. Amortization expense related to deferred selling commissions was
During the third quarter of fiscal 2009, we paid
Trust Company Operations
Business and Industry Profile
Through AGF Trust, we offer financial solutions that include GICs, real estate secured loans and investment loans.
AGF Trust investment loans consist of secured investment loans and RSP loans distributed through financial advisors who continue to broaden their suite of products to meet the needs of their clients. AGF Trust has a competitive edge in the advisor channel as we leverage AGF's mutual fund wholesaler relationships. Our mutual fund wholesalers have operated successfully in the advisor channel for many years and our reputation for quality service is widely acknowledged, as demonstrated by our recognition as Advisors' Choice Investment Fund Company of the Year at the 2008 Canadian Investment Awards.
We offer real estate secured loans to Canadians who have sound credit, but whose circumstances may not meet the traditional requirements of Canada's large banks to qualify for their lowest rate real estate secured loan products. Real estate secured loan products are distributed primarily through the mortgage broker channel. Borrowers have chosen to deal with mortgage brokers to take advantage of independent advice and competitive rates. Lenders have provided real estate secured loans in this channel to reduce distribution costs.
Segment Strategy and Highlights
AGF Trust, similar to other financial institutions in
For the three and nine months ended
As at
Financial and Operational Results
The Trust Company Operations segment results for the three and nine months ended
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
---------------------------------------------------------
($ millions) 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Interest income
Loan interest $ 50.2 $ 68.6 (26.8%) $ 165.1 $ 203.8 (19.0%)
Investment
interest 2.0 7.7 (74.0%) 12.4 25.2 (50.8%)
-------------------------------------------------------------------------
52.2 76.3 (31.6%) 177.5 229.0 (22.5%)
Interest expense
Deposit interest 42.2 52.6 (19.8%) 137.1 149.9 (8.5%)
Other interest
expense
(income) (12.3) (1.8) n/m (34.1) 5.7 n/m
-------------------------------------------------------------------------
29.9 50.8 (41.1%) 103.0 155.6 (33.8%)
-------------------------------------------------------------------------
Net interest
income 22.3 25.5 (12.5%) 74.5 73.4 1.5%
Other revenue 2.5 2.7 (7.4%) 6.6 8.6 (23.3%)
RSP loan
securitization
income (loss),
net of impairment 0.6 0.2 n/m (0.4) 0.3 n/m
-------------------------------------------------------------------------
Total revenue 25.4 28.4 (10.6%) 80.7 82.3 (1.9%)
Expenses
Selling,
general and
administrative 9.0 10.6 (15.1%) 26.0 32.8 (20.7%)
Provision for
loan losses 7.2 3.4 111.8% 33.6 9.9 239.4%
-------------------------------------------------------------------------
16.2 14.0 15.7% 59.6 42.7 39.6%
EBITDA(1) 9.2 14.4 (36.1%) 21.1 39.6 (46.7%)
Amortization 0.8 0.9 (11.1%) 2.2 1.9 15.8%
-------------------------------------------------------------------------
Income before
taxes and
non-segmented
items $ 8.4 $ 13.5 (37.8%) $ 18.9 $ 37.7 (49.9%)
-------------------------------------------------------------------------
(1) For the definition of EBITDA, see the "Key Performance Indicators and
Non-GAAP Measures" section. The items required to reconcile EBITDA to
net income, a defined term under Canadian GAAP, are detailed above.
Revenue, Net Interest Income and Net Interest Margin
Net interest income, which is expressed net of interest on deposits and other interest expense, decreased 12.5% in the three months ended
Selling, General and Administrative Expenses
SG&A expenses decreased 15.1% and 20.7% in the three- and nine-month periods ended
Provision for Loan Losses
The total provision for loan losses increased to
Based on our analysis of the RSP portfolio, we had approximately
Loan writeoffs, net of recoveries for the three months ended
EBITDA and EBITDA Margin
A decline in revenue and an increase in the loan loss provision contributed to a decline in EBITDA for the three and nine months ended
Pre-Tax Profit Margin
As a result of the factors outlined above, pre-tax profit margin of 33.1% in the third quarter 2009 declined from 47.5% in the third quarter of 2008.
Operational Performance
The table below highlights our key operational measures for the Trust Company Operations segment for the three and nine months ended
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
---------------------------------------------------------
($ millions) 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Real estate
secured loans(1)
Insured
mortgage
loans $ 533.7 $ 626.2 (14.8%) $ 533.7 $ 626.2 (14.8%)
Conventional
mortgage loans 605.9 800.4 (24.3%) 605.9 800.4 (24.3%)
HELOCs 444.8 620.0 (28.3%) 444.8 620.0 (28.3%)
-------------------------------------------------------------------------
1,584.4 2,046.6 (22.6%) 1,584.4 2,046.6 (22.6%)
Investment
loans(1)
Secured
investment
loans 1,748.1 1,759.0 (0.6%) 1,748.1 1,759.0 (0.6%)
RSP loans 447.2 589.2 (24.1%) 447.2 589.2 (24.1%)
Other loans 6.3 13.0 (51.5%) 6.3 13.0 (51.5%)
-------------------------------------------------------------------------
2,201.6 2,361.2 (6.8%) 2,201.6 2,361.2 (6.8%)
Other assets 1,013.8 959.5 5.7% 1,013.8 959.5 5.7%
-------------------------------------------------------------------------
Total Assets $4,799.8 $5,367.3 (10.6%) $4,799.8 $5,367.3 (10.6%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net interest
income $ 22.3 $ 25.5 (12.5%) $ 74.5 $ 73.4 1.5%
RSP loan
securitization
income (loss),
net of
impairment 0.6 0.2 200.0% (0.4) 0.3 (233.3%)
Other revenue 2.5 2.7 (7.4%) 6.6 8.6 (23.3%)
Non-interest
expenses(2) (9.8) (11.5) (14.8%) (28.2) (34.7) (18.7%)
Provision for
loan losses (7.2) (3.4) 111.8% (33.6) (9.9) 239.4%
-------------------------------------------------------------------------
Income before
taxes and
non-segmented
items $ 8.4 $ 13.5 (37.8%) $ 18.9 $ 37.7 (49.9%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Efficiency
ratio(3) 38.6% 40.5% 34.9% 42.2%
Assets-to-capital
multiple(3) 13.0 15.1 13.0 15.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes loan provision and deferred sales commission.
(2) Includes SG&A and amortization expenses.
(3) For the definition of efficiency ratio and assets-to-capital
multiple, see the "Key Performance Indicators and Non-GAAP Measures"
section.
Loan Asset Growth
Loan originations decreased significantly compared to the third quarter of 2008 as a result of amendments to our lending programs. Real estate secured loan assets decreased by 22.6% year-over-year. Secured investment loans decreased 0.6% to
Efficiency Ratio
The efficiency ratio is defined as non-interest expenses divided by the total of net interest income and non-interest income. It is a key industry performance indicator used to ensure expenses are contained as the Trust business grows. In the third quarter of 2009, the efficiency ratio experienced a favourable change to 38.6% from 40.5% in the same period of 2008. The efficiency ratio for the nine-month period ended
Balance Sheet
Total assets decreased 10.6% to
Loan Portfolio Credit
The credit risk factors considered when assessing the collectability of the various loan portfolios are primarily based on the individuals' ability and willingness to make future loan payments, coupled with the underlying collateral security held for each of the loan categories. The key risk factors considered include:
- Employment rates: higher unemployment rates will likely result in
higher default rates as individuals' ability to pay deteriorates.
- Residential property prices and sales volume: declining
residential property prices and reduced volumes of residential
property sales may result in lower resale prices and longer
disposal times, therefore, increasing losses incurred on the
disposition of the property.
- Equity market performance: declining global equity markets present
increased risk on the secured investment loan portfolio as the
value of the underlying collateral is lower. While the Trust
Company has recourse to the personal assets of clients with
respect to investment loans, the global macro-economic situation
and employment levels may impede the Trust Company's ability to
realize on the full value of the loan.
The general allowance for real estate secured loan losses decreased to
Liquidity and Capital Resources
For the three and nine months ended
During the three- and nine-month period ended
Our free cash flow was used primarily to fund the following:
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Payment of dividends $ 21.6 $ 21.5 $ 64.6 $ 58.5
Acquisitions of
subsidiaries - - 19.9 20.8
Purchase of property,
equipment and other
intangible assets 0.6 2.6 1.6 5.3
Investments(1) (8.8) 2.5 (4.9) 2.7
Bank credit facility
repayment (borrowing) 12.1 24.2 (58.9) 12.1
Investment in Trust
Operations (eliminated
on consolidation) - - - 35.0
-------------------------------------------------------------------------
$ 25.5 $ 50.8 $ 22.3 $ 134.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes $63.8 million and $338.0 million of cash invested by AGF
Trust into investments available for sale during the three and nine
months ended August 31, 2009 (2008 - nil and $140.0 million).
During the three months ended
Consolidated cash and cash equivalents of
During the quarter, our term loan facility was renewed in the form of a three-year prime-rate-based revolving term loan facility to a maximum of
Capital Management Activities
We actively manage our capital to maintain a strong and efficient capital base to maximize risk-adjusted returns to shareholders, invest in future growth opportunities, including acquisitions, and to ensure that the regulatory capital requirements are met for each of our subsidiary companies. AGF's management of its capital and its capital requirements are detailed in the section entitled 'Capital Management Activities' in the Company's Annual MD&A as at
Normal Course Issuer Bid
In
As at
Dividends
For the three months ended
The holders of Class B shares are entitled to receive cash dividends. Dividends are paid in equal amounts per share on all Class B and Class A shares at the time outstanding, without preference or priority of one share over another. No dividends may be declared if there is a default of a condition of our loan facility or where such payment of dividends would create a default.
Our Board of Directors may determine that Class B shareholders shall have the right to elect to receive part or all of such dividend in the form of a stock dividend. They also determine whether a dividend in Class B shares is substantially equal to a cash dividend. This determination is based on the weighted average price at which the Class B shares traded on the
The following table sets forth the dividends paid by AGF on Class B and Class A shares for the period indicated:
-------------------------------------------------------------------------
Years ended
November 30 2009* 2008 2007 2006 2005
-------------------------------------------------------------------------
Per share $ 1.00 $ 0.95 $ 0.78 $ 0.69 $ 0.56
-------------------------------------------------------------------------
Percentage increase 5% 22% 13% 23% 37%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
* The total of dividends paid in January, April and July 2009 and to be
paid in October 2009.
We review our dividend distribution policy on a quarterly basis, taking into account our financial position, profitability, cash flow and other factors considered relevant by our Board of Directors.
Outstanding Share Data
Set out below is our outstanding share data as at
-------------------------------------------------------------------------
As at August 31, 2009 2008
-------------------------------------------------------------------------
Shares
Class A voting common shares 57,600 57,600
Class B non-voting shares 88,947,873 89,442,224
Stock Options
Outstanding options 5,895,249 3,909,948
Exercisable options 2,383,233 1,943,192
-------------------------------------------------------------------------
During the three and nine months ended
Selected Quarterly Information
-------------------------------------------------------------------------
($ millions, except per
share amounts)
For the three-month August 31, May 31, Feb 28, Nov. 30,
period ended 2009 2009 2009 2008
-------------------------------------------------------------------------
Revenue (continuing
operations) $ 146.9 $ 143.5 $ 138.0 $ 152.2
Cash flow
(continuing
operations)(1) 49.0 44.7 46.7 57.4
EBITDA (continuing
operations)(2) 56.1 49.0 42.8 54.0
Pre-tax income
(continuing operations) 30.4 23.0 16.3 (24.1)
Net income 22.8 17.2 12.2 (19.3)
Earnings per share
Basic $ 0.26 $ 0.19 $ 0.14 $ (0.21)
Diluted $ 0.25 $ 0.19 $ 0.14 $ (0.21)
Weighted average
basic shares 88,914,200 88,826,605 88,564,160 89,446,562
Weighted average fully
diluted shares 89,931,517 89,234,015 88,564,160 90,679,048
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ millions, except per
share amounts)
For the three-month Aug. 31, May 31, Feb. 29, Nov. 30,
period ended 2008 2008 2008 2007
-------------------------------------------------------------------------
Revenue (continuing
operations) $ 184.7 $ 194.3 $ 194.3 $ 199.1
Cash flow
(continuing
operations)(1) 66.3 71.5 83.5 95.0
EBITDA (continuing
operations)(2) 81.5 88.6 89.5 87.5
Pre-tax income
(continuing operations) 51.1 57.7 56.5 53.7
Net income 41.1 44.0 62.7 49.4
Earnings per share
Basic $ 0.46 $ 0.49 $ 0.70 $ 0.55
Diluted $ 0.46 $ 0.49 $ 0.70 $ 0.54
Weighted average
basic shares 89,451,578 89,349,275 89,039,394 90,200,924
Weighted average fully
diluted shares 89,870,475 89,785,796 89,807,506 91,566,659
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Cash flow from operations before net change in non-cash balances
related to operations.
(2) For the definition of EBITDA, see the "Key Performance Indicators and
Non-GAAP Measures" section.
Additional Information
Additional information relating to the Company can be found in our Consolidated Financial Statements and accompanying Notes for the three and nine months ended
AGF Management Limited
Consolidated Balance Sheet
-------------------------------------------------------------------------
As at August 31, November 30,
2009 2008
($ thousands) (unaudited) (audited)
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 382,885 $ 584,168
Investments available for sale (note 2(a)) 528,680 188,435
Accounts receivable, prepaid expenses and
other assets 102,429 78,403
Current portion of retained interest from
securitization (note 3) 4,157 5,487
Real estate secured and investment loans
due within one year (note 5) 520,835 606,844
-------------------------------------------------------------------------
1,538,986 1,463,337
Retained interest from securitization
(note 3) 37,486 39,460
Real estate secured and investment loans
(note 5) 3,265,174 3,824,006
Investment in associated company (note 2(b)) 96,129 98,338
Management contracts 504,269 504,269
Customer contracts, net of accumulated
amortization 15,484 18,783
Goodwill 172,985 172,985
Trademarks 1,935 1,935
Deferred selling commissions, net of
accumulated amortization 281,105 304,406
Property, equipment and computer software,
net of accumulated amortization 15,396 19,423
Other assets (note 6) 46,477 87,017
-------------------------------------------------------------------------
Total assets $ 5,975,426 $ 6,533,959
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current Liabilities
Accounts payable and accrued liabilities $ 284,312 $ 306,834
Future income taxes 23,516 26,240
Long-term debt due within one year (note 7) - 21,171
Deposits due within one year (note 5(f)) 2,304,337 2,486,635
-------------------------------------------------------------------------
2,612,165 2,840,880
Deposits (note 5(f)) 1,911,905 2,275,426
Long-term debt (note 7) 182,593 123,740
Future income taxes 157,376 171,293
Other long-term liabilities (note 8) 7,984 14,995
-------------------------------------------------------------------------
Total liabilities 4,872,023 5,426,334
-------------------------------------------------------------------------
Non-controlling interest 396 203
Shareholders' equity
Capital stock (note 9) 436,553 431,897
Contributed surplus 19,612 17,127
Retained earnings 661,790 676,190
Accumulated other comprehensive
income (loss) (14,948) (17,792)
-------------------------------------------------------------------------
Total shareholders' equity 1,103,007 1,107,422
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,975,426 $ 6,533,959
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(The accompanying notes are an integral part of these Consolidated
Financial Statements.)
AGF Management Limited
Consolidated Statement of Income
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
($ thousands) ------------------------------------------------------
(unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue
Management and
advisory fees $ 114,775 $ 146,827 $ 322,670 $ 457,201
Deferred sales
charges 4,872 6,375 16,454 18,597
RSP loan
securitization
income (loss),
net of impairment
(note 3) 544 163 (437) 250
Investment income
and other revenue 4,372 5,737 15,181 23,877
-------------------------------------------------------------------------
124,563 159,102 353,868 499,925
-------------------------------------------------------------------------
AGF Trust
interest income
(note 11) 52,182 76,293 177,501 229,048
AGF Trust interest
expense (note 11) (29,883) (50,729) (103,012) (155,620)
-------------------------------------------------------------------------
Trust Company net
interest income 22,299 25,564 74,489 73,428
-------------------------------------------------------------------------
Total Revenue 146,862 184,666 428,357 573,353
-------------------------------------------------------------------------
Expenses
Selling, general
and administrative 48,391 55,296 148,718 168,069
Trailing commissions 32,819 40,746 90,272 124,191
Investment advisory
fees 2,288 3,719 7,888 11,516
Amortization of
deferred selling
commissions 20,763 23,907 64,128 74,760
Amortization of
customer contracts 1,263 1,856 3,299 5,825
Amortization of
property, equipment
and computer
software 1,896 2,339 5,649 5,832
Interest expense 1,633 2,098 4,764 7,494
Provision for AGF
Trust loan losses
(note 5(e)) 7,243 3,396 33,596 9,857
-------------------------------------------------------------------------
116,296 133,357 358,314 407,544
Income before income
taxes and non-
controlling interest 30,566 51,309 70,043 165,809
Income tax expense
(reduction) (note 12)
Current 14,431 17,813 35,512 42,281
Future (6,789) (7,793) (18,001) (24,763)
-------------------------------------------------------------------------
7,642 10,020 17,511 17,518
-------------------------------------------------------------------------
Non-controlling
interest (note 4) 181 150 381 446
-------------------------------------------------------------------------
Net income for the
period $ 22,743 $ 41,139 $ 52,151 $ 147,845
-------------------------------------------------------------------------
Earnings per share
(note 9(g))
Basic $ 0.26 $ 0.46 $ 0.59 $ 1.66
Diluted $ 0.25 $ 0.46 $ 0.58 $ 1.65
-------------------------------------------------------------------------
(The accompanying notes are an integral part of these Consolidated
Financial Statements.)
AGF Management Limited
Consolidated Statement of Changes in Shareholders' Equity
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
($ thousands) ------------------------------------------------------
(unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Common shares
Balance, beginning
of period $ 434,814 $ 434,621 $ 431,897 $ 421,923
Issued through
dividend
reinvestment plan 578 819 1,959 3,989
Stock options
exercised 1,161 709 1,161 5,121
Issued on
acquisition of
Highstreet
Partners Limited
(note 4) - - 1,536 5,116
-------------------------------------------------------------------------
Balance, end of
period 436,553 436,149 436,553 436,149
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning
of period 18,803 14,962 17,127 14,948
Stock options 809 1,100 2,485 1,114
-------------------------------------------------------------------------
Balance, end of
period 19,612 16,062 19,612 16,062
-------------------------------------------------------------------------
Retained earnings
Balance, beginning
of period 661,267 701,947 676,190 635,369
Net income for
the period 22,743 41,139 52,151 147,845
Dividends on AGF
Class A voting
common shares and
AGF Class B
non-voting shares (22,220) (22,358) (66,551) (62,486)
-------------------------------------------------------------------------
Balance, end of
period 661,790 720,728 661,790 720,728
-------------------------------------------------------------------------
Accumulated other
comprehensive income
(loss)
Balance, beginning
of period (20,300) (10,444) (17,792) (3,238)
Other comprehensive
income (loss) 5,352 (3,264) 2,844 (10,470)
-------------------------------------------------------------------------
Balance, end of
period (14,948) (13,708) (14,948) (13,708)
-------------------------------------------------------------------------
Total shareholders'
equity $ 1,103,007 $ 1,159,231 $ 1,103,007 $ 1,159,231
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(The accompanying notes are an integral part of these Consolidated
Financial Statements.)
AGF Management Limited
Consolidated Statement of Comprehensive Income
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
($ thousands) ------------------------------------------------------
(unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net income $ 22,743 $ 41,139 $ 52,151 $ 147,845
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other comprehensive
income (losses),
net of tax
Foreign currency
translation
adjustments
related to net
investments in
self-sustaining
foreign
operations(1) 792 (1,594) (4,850) (5,570)
-------------------------------------------------------------------------
792 (1,594) (4,850) (5,570)
-------------------------------------------------------------------------
Net unrealized gains
(losses) on
available for
sale securities
Unrealized gains
(losses)(2) 3,765 (2,112) 6,425 (4,276)
Reclassification
of realized loss
(gain) or other
than temporary
impairment to
earnings 737 - 1,087 (77)
-------------------------------------------------------------------------
4,502 (2,112) 7,512 (4,353)
-------------------------------------------------------------------------
Net unrealized gains
(losses) on
cash flow hedges
Unrealized gains
(losses)(3) - 291 - (946)
Reclassification of
realized loss on
cash flow hedges 58 151 182 399
-------------------------------------------------------------------------
58 442 182 (547)
-------------------------------------------------------------------------
Total other
comprehensive
income (loss),
net of tax $ 5,352 $ (3,264) $ 2,844 $ (10,470)
-------------------------------------------------------------------------
Comprehensive
income $ 28,095 $ 37,875 $ 54,995 $ 137,375
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net of income tax expense of $0.2 million and reduction $0.8 million
for the three and nine months ended August 31, 2009. Net of income
tax reduction of $0.2 million and $0.9 million for the three and nine
months ended August 31, 2008.
(2) Net of income tax expense of $1.3 million and $1.9 million for the
three and nine months ended August 31, 2009. Net of income tax
reduction of $0.4 million and $0.9 million for the three and nine
months ended August 31, 2008.
(3) Net of income tax expense of $0.1 million and net of income tax
reduction of $0.5 million for the three and nine months ended August
31, 2008.
(The accompanying notes are an integral part of these Consolidated
Financial Statements.)
AGF Management Limited
Consolidated Statements of Cash Flow
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
($ thousands) ------------------------------------------------------
(unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating Activities
Net income for
the period $ 22,743 $ 41,139 $ 52,151 $ 147,845
Items not
affecting cash
Amortization 23,922 28,102 73,076 86,417
Future income
taxes (6,789) (7,793) (18,001) (24,763)
RSP loan
securitization
income (loss),
net of impairment (544) (163) 437 (250)
Provision for
AGF Trust loan
losses 7,243 3,396 33,596 9,857
Stock-based
compensation 1,248 2,225 4,054 6,684
Equity investment
in S&WHL (1,131) (1,142) (4,390) (7,747)
Dividends from
S&WHL - - 1,031 1,116
Other 2,224 482 (1,595) 930
-------------------------------------------------------------------------
48,916 66,246 140,359 220,089
Net change in
non-cash balances
related to
operations (note 10) 10,847 30,810 (22,570) 62,888
-------------------------------------------------------------------------
Net cash provided
by operating
activities 59,763 97,056 117,789 282,977
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing Activities
Issue of Class B
non-voting shares 1,161 581 1,161 2,483
Dividends paid (21,642) (21,539) (64,592) (58,497)
Increase (decrease)
in bank loan (12,061) (24,209) 58,853 (12,133)
Net increase
(decrease) in AGF
Trust deposits (191,364) 74,945 (525,316) 669,068
-------------------------------------------------------------------------
Net cash provided by
(used in) financing
activities (223,906) 29,778 (529,894) 600,921
Investing Activities
Deferred selling
commissions paid (13,073) (17,574) (40,978) (72,242)
Proceeds from sale
of discontinued
operations - - 702 -
Acquisition of
subsidiaries, net
of cash acquired - - (19,924) (20,784)
Purchase of property,
equipment and
computer software (578) (2,553) (1,622) (5,296)
Purchase of
investments
available
for sale (55,025) (2,543) (333,066) (142,709)
Net decrease
(increase) in AGF
Trust real estate
secured and
investment loans 267,694 (119,058) 605,710 (737,144)
-------------------------------------------------------------------------
Net cash provided by
(used in) investing
activities 199,018 (141,728) 210,822 (978,175)
-------------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalents 34,875 (14,894) (201,283) (94,277)
Balance of cash and
cash equivalents,
beginning
of period 348,010 748,491 584,168 827,874
-------------------------------------------------------------------------
Balance of cash and
cash equivalents,
end of period $ 382,885 $ 733,597 $ 382,885 $ 733,597
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Represented by:
Cash and cash
equivalents $ 28,117 $ 43,821
AGF Trust cash
and cash
equivalents 354,768 689,776
-------------------------------------------------------------------------
$ 382,885 $ 733,597
-------------------------------------------------------------------------
Refer to Note 10 for supplemental cash flow information.
(The accompanying notes are an integral part of these Consolidated
Financial Statements.)
Notes to Consolidated Financial Statements
For the three and nine months ended August 31, 2009 (tabular amounts in
thousands of dollars, except per share amounts) (unaudited)
These unaudited Q3 2009 Consolidated Financial Statements of AGF
Management Limited (AGF or the Company) have been prepared in accordance
with Canadian generally accepted accounting principles (GAAP), using the
same significant accounting policies as AGF's Consolidated Financial
Statements for the year ended November 30, 2008. These financial
statements do not contain all the disclosures required by Canadian GAAP
for annual financial statements and should be read in conjunction with
the Consolidated Financial Statements for the year ended November 30,
2008. Certain comparative amounts in these financial statements have been
reclassified to conform to the current year's presentation.
Note 1: Changes in Accounting Policy
Goodwill, Intangible Assets and Financial Statement Concepts
Effective December 1, 2008, the CICA's new accounting standard "Handbook
Section 3064, Goodwill and Intangible Assets" was adopted. The standard
clarifies that costs can be deferred only when they relate to an item
that meets the definition of an asset, and as a result, start-up costs
must be expensed as incurred. "Section 1000, Financial Statements
Concepts" was also amended to provide consistency with Section 3064.
These standards did not have any impact on the financial position or
earnings of the Company.
Credit Risk and Fair Value
Effective December 1, 2008, EIC-173 "Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities" was adopted. EIC-173 requires
the Company's own credit risk and the credit risk of the counterparty to
be taken into account in determining the fair value of financial assets
and financial liabilities, including derivatives. The new guidance did
not have a material effect on the financial position or earnings of the
Company.
Future Accounting Changes
Conversion to International Financial Reporting Standards in Fiscal 2012
In February 2008, the Canadian Accounting Standards Board (AcSB)
confirmed that all Canadian publicly-accountable enterprises will be
required to adopt International Financial Reporting Standards (IFRS) for
years beginning on or after January 1, 2011. AGF will adopt IFRS for the
year beginning December 1, 2011 and will present the interim and annual
consolidated financial statements including comparative prior year
financial statements in accordance with IFRS.
AGF is currently assessing the differences between IFRS and GAAP, as well
as the alternatives available upon adoption. The impact these differences
may have on the financial results has not yet been determined and will be
an ongoing process as our assessment continues and the International
Accounting Standards Board and the AcSB issue new standards and
recommendations.
Note 2: Investments Available for Sale and Investment in S&WHL
(a) The following table presents a breakdown of available for sale
investments, excluding retained interest from securitization:
-------------------------------------------------------------------------
August 31, November 30,
($ thousands) 2009 2008
-------------------------------------------------------------------------
Trust:
Canadian government debt(1)
Federal $ 10,181 $ 10,233
Provincial 310,580 45,767
Deposits with regulated institutions 85,842 83,498
Other securities 104,252 28,992
-------------------------------------------------------------------------
510,855 168,490
Investment Management:
Canadian government debt
Federal 296 294
AGF mutual funds and other 11,575 15,013
Equity securities 5,954 4,638
-------------------------------------------------------------------------
17,825 19,945
-------------------------------------------------------------------------
$ 528,680 $ 188,435
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes investments issued and/or guaranteed by the Canadian
government
(b) The Company holds a 30.3% investment in S&WHL accounted for using the
equity method. At August 31, 2009, the carrying value was
$96.1 million (November 30, 2008 - $98.3 million). During the three
and nine months ended August 31, 2009, the Company recognized
$1.1 million and $4.4 million (2008 - $1.1 million and $7.7 million)
in revenue from S&WHL. During the first quarter of 2009, the Company
received $1.0 million in dividends (2008 - $1.1 million) from S&WHL.
No dividends were received from S&WHL during the second or third
quarters of 2009 and 2008. A dividend has been declared by S&WHL and
the Company will receive approximately $5.0 million on October 2,
2009.
Note 3: Securitization of AGF Trust Loans
On March 30, 2007, AGF Trust securitized $263.6 million of RSP loans.
Cash flows of $252.9 million were received on the securitization and a
gain of $8.0 million was recorded, net of transaction fees of
$0.1 million. As at August 31, 2009, $120.6 million (November 30, 2008 -
$166.6 million) of securitized loans were outstanding.
When RSP loan receivables are sold in securitization to a securitization
trust under terms that transfer control to third parties, the transaction
is recognized as a sale and the related loan assets are removed from the
Consolidated Balance Sheet. As part of the securitization, certain
financial assets are retained. The retained interests are carried at fair
value and are determined using the present value of future expected cash
flows. A gain or loss on the sale of loan receivables is recognized
immediately in income. The amount of the gain or loss is determined by
estimating the fair value of future expected cash flows using
management's best estimates of key assumptions: excess spread, discount
rate on the interest-only strip, expected credit losses, prepayment rates
and the expected weighted average life of RSP loans that are commensurate
with the risks involved. The current fair value of retained interests is
determined using the present value of future expected cash flows as
discussed above. During the three and nine months ended August 31, 2009,
a $0.3 million and $3.1 million writedown was booked as an other-than-
temporary impairment (2008 - $1.5 million and $3.2 million).
The Company has recorded retained interests of $41.6 million
(November 30, 2008 - $44.9 million) made up of i) the rights to future
excess interest on these RSP loans after investors in the securitization
trust have received the return for which they contracted, valued at
$7.6 million (November 30, 2008 - $12.4 million), ii) cash collateral of
$12.7 million (November 30, 2008 - $12.0 million) and iii) over-
collateralization of $21.3 million (November 30, 2008 - $20.5 million).
As at August 31, 2009, the impaired loans included in the securitized
balances were equal to $0.2 million (November 30, 2008 - $0.2 million),
and during the three and nine months ended August 31, 2009, $0.6 million
and $2.0 million of securitized RSP loans were written off (2008 -
$0.6 million and $2.2 million).
The Company's claim on the retained interests is subordinate to
investors' interests. Recourse available to investors and the
securitization trust are limited to the retained interests. For the three
months ended August 31, 2009, cash flows of $1.5 million (2008 -
$1.9 million) related to the interest-only strip were received on the
securitized loans. For the nine months ended August 31, 2009, cash flows
of $4.4 million (2008 - $6.1 million) related to the interest-only strip
were received on the securitized loans. The total other income recognized
from securitization, net of securitization writedown, during the three
months ended August 31, 2009, was $0.6 million (2008 - $0.2 million
loss). The total other loss recognized from securitization, including
securitization writedown, during the nine months ended August 31, 2009,
was $0.4 million (2008 - $0.3 million income).
The significant assumptions used to value the retained interests were as
follows:
Excess spread 4.7% - 4.8%
Discount rate on interest-only strip 7.5%
Expected credit losses 1.7% - 2.0%
Prepayment rate 16.3% - 18.3%
Expected weighted average life of RSP loans 1.8 - 1.9 years
AGF Trust retained servicing responsibilities for the securitized loans.
A servicing liability of $0.7 million was recorded as at August 31, 2009
(November 30, 2008 - $1.1 million). This amount represents the estimated
future cost of servicing the securitized loans. The amount amortized
related to the servicing liability during the three and nine months ended
August 31, 2009 was $0.1 million (2008 - $0.2 million) and $0.4 million
(2008 - $0.6 million).
The following table presents key economic assumptions and the sensitivity
of the current fair value of retained interests to two adverse changes in
each key assumption as at August 31, 2009. Since the sensitivity is
hypothetical, it should be used with caution. The effect of changes in
the fair value of retained interests was calculated using a discounted
cash flow analysis.
-------------------------------------------------------------------------
Impact on fair value of
($ thousands) retained interests
-------------------------------------------------------------------------
Discount rate
+10% $ (53)
+20% (104)
Prepayment rate
+10% $ (83)
+20% (172)
Expected credit losses
+10% $ (379)
+20% (758)
Excess spread
-10% $ (768)
-20% (1,533)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 4: Acquisition of Highstreet Partners Limited
On December 1, 2006, AGF acquired 79.9% of Highstreet Partners Limited
(Highstreet). The purchase consideration was payable in a combination of
cash and the issue of Class B non-voting shares (Class B shares). On
March 2, 2009, a final payment of $21.5 million was paid, consisting of
$20.0 million in cash and the issuance of 188,444 Class B shares valued
at $1.5 million. The total consideration paid, including acquisition
costs and imputed interest, was $65.4 million in cash and the issuance of
629,443 Class B shares valued at $12.3 million. In addition, a contingent
consideration will be paid in 2010 if certain financial profitability
targets are achieved by Highstreet. At this time, the amount of the
contingent consideration is not determinable.
Note 5: AGF Trust
AGF Trust's principal business activities are originating real estate
secured loans and investment loans and deposit taking. Details relating
to these activities are as follows:
-------------------------------------------------------------------------
Term to contractual repricing
-------------------------------------------------------
Variable 1 year or 1 to 5 August November
($ thousands) rate less years 31, 2009 30, 2008
-------------------------------------------------------------------------
Mortgage loans $ 1,182 $ 461,167 $ 687,826 $1,150,175 $1,394,499
Home equity lines
of credit (HELOC) 442,092 - - 442,092 651,893
-------------------------------------------------------------------------
Total real estate
secured loans 443,274 461,167 687,826 1,592,267 2,046,392
Investment loans 2,225,445 3,222 3,115 2,231,782 2,411,968
-------------------------------------------------------
Total loans 2,668,719 464,389 690,941 3,824,049 4,458,360
---------------------------------
Less: allowance
for loan losses (44,171) (37,130)
Add: net deferred
sales commissions
and commitment fees 6,131 9,620
----------------------
3,786,009 4,430,850
Less: current portion (520,835) (606,844)
----------------------
$3,265,174 $3,824,006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Real Estate Secured and Investment Loans
The table represents the period of contractual repricing of interest
rates on outstanding amounts. Principal repayments due on real estate
and investment loans due within one year as at August 31, 2009 were
$520.8 million (November 30, 2008 - $606.8 million).
As at August 31, 2009, AGF Trust's mortgage portfolio comprises a
combination of fixed rate and variable rate residential mortgages
with a weighted average term to repricing of 1.8 years (November 30,
2008 - 2.0 years) and a weighted average yield of 6.8% (November 30,
2008 - 7.1%). Insured mortgage loans, excluding loan loss allowance,
deferred commissions and pending representment, were $533.0 million
as at August 31, 2009 (November 30, 2008 - $616.6 million). HELOCs,
which totalled $442.1 million as at August 31, 2009, had an average
interest rate of 4.2% (November 30, 2008 - 4.5%). Investment loans,
excluding RSP loans, totalled $1.8 billion as at August 31, 2009, and
had an average interest rate (based on the prime interest rate) of
4.0% (November 30, 2008 - 5.5%). The average interest rate on all
investment loans as at August 31, 2009, was 4.3% (November 30, 2008 -
5.8%). Mortgage and HELOC loans are secured primarily by residential
real estate. Secured investment loans of $1.8 billion (November 30,
2008 - $1.8 million) are secured primarily by the investment made
using the initial loan proceeds. The market value of this investment
loan collateral is approximately $1.4 billion (November 30, 2008 -
$1.2 billion).
(b) Loans by Province and by Type
The following tables are a breakdown of the total value and total
number of loans by province and by type:
-------------------------------------------------------------------------
As at Conven-
August tional Secured
31, Insured Mort- Invest- HELOC
2009 ($ Mortgage gage ment RSP Receiv- Finance
millions) Loans Loans Loans Loans ables Loans Total
-------------------------------------------------------------------------
British
Columbia $ 10.3 $ 38.2 $ 331.7 $ 44.3 $ 47.8 $ 0.3 $ 472.6
Alberta 61.5 164.0 211.4 47.3 315.1 1.6 800.9
Ontario 324.6 267.6 854.0 159.1 34.4 1.0 1,640.7
Quebec 136.6 147.4 128.9 176.3 0.2 1.6 591.0
Other - - 232.6 39.8 44.6 1.8 318.8
-------------------------------------------------------------------------
Total
value of
loans $ 533.0 $ 617.2 $1,758.6 $ 466.8 $ 442.1 $ 6.3 $3,824.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Conven-
tional Secured
As at Insured Mort- Invest- HELOC
August Mortgage gage ment RSP Receiv- Finance
31, 2009 Loans Loans Loans Loans ables Loans Total
-------------------------------------------------------------------------
British
Columbia 60 159 4,869 5,000 209 163 10,460
Alberta 787 1,008 3,659 4,140 1,365 679 11,638
Ontario 2,136 1,620 13,676 18,284 198 368 36,282
Quebec 284 786 2,372 16,888 4 601 20,935
Other - - 3,375 3,596 300 882 8,153
-------------------------------------------------------------------------
Total
number
of loans 3,267 3,573 27,951 47,908 2,076 2,693 87,468
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at Conven-
November tional Secured
30, Insured Mort- Invest- HELOC
2008 ($ Mortgage gage ment RSP Receiv- Finance
millions) Loans Loans Loans Loans ables Loans Total
-------------------------------------------------------------------------
British
Columbia $ 12.8 $ 48.2 $ 340.2 $ 57.8 $ 84.7 $ 0.6 $ 544.3
Alberta 68.1 214.6 217.9 59.8 446.0 3.0 1,009.4
Ontario 388.3 335.9 879.9 216.1 60.9 2.0 1,883.1
Quebec 147.4 179.2 132.5 208.1 0.3 2.6 670.1
Other - - 240.1 48.5 60.0 2.9 351.5
-------------------------------------------------------------------------
Total
value of
loans $ 616.6 $ 777.9 $1,810.6 $ 590.3 $ 651.9 $11.1 $4,458.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Conven-
As at tional Secured
Novem- Insured Mort- Invest- HELOC
ber 30, Mortgage gage ment RSP Receiv- Finance
2008 Loans Loans Loans Loans ables Loans Total
-------------------------------------------------------------------------
British
Columbia 66 201 4,944 6,985 354 244 12,794
Alberta 327 997 3,735 5,551 1,990 1,020 13,620
Ontario 2,518 2,000 13,930 25,198 327 543 44,516
Quebec 834 1,221 2,411 19,939 5 857 25,267
Other - - 3,452 4,488 407 1,193 9,540
-------------------------------------------------------------------------
Total
number
of loans 3,745 4,419 28,472 62,161 3,083 3,857 105,737
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Impaired Loans
Loans are considered to be past due where repayment of principal or
interest is contractually in arrears. Loans are classified as
impaired when, in the opinion of management, there is reasonable
doubt as to the collectability, either in whole or in part, of
principal or interest, or when principal or interest is 90 days past
due, except where the loan is both well-secured and in the process of
collection. As at August 31, 2009, impaired loans were $55.6 million
(November 30, 2008 - $45.4 million) and $34.8 million (November 30,
2008 - $31.3 million) net of the specific allowance for loan losses.
-------------------------------------------------------------------------
August 31, November 30,
($ thousands) 2009 2008
-------------------------------------------------------------------------
Impaired Loans:
Insured mortgage loans $ 6,806 $ 5,483
Conventional mortgage loans 39,163 33,628
Secured investment loans 2,406 988
RSP loans 5,368 4,846
HELOC receivables 1,827 478
-------------------------------------------------------------------------
$ 55,570 $ 45,423
-------------------------------------------------------------------------
The following table provides an aging of loans:
-------------------------------------------------------------------------
As at August 31, 2009 1 to 29 30 to 60
($ thousands) Current days days
-------------------------------------------------------------------------
Insured mortgage loans $ 450,293 $ 36,919 $ 12,316
Conventional mortgage loans 514,939 36,743 21,288
Secured investment loans 1,736,847 13,874 3,861
RSP loans 451,822 6,264 3,737
HELOC receivables 432,414 6,096 1,680
Finance loans 6,336 - -
-------------------------------------------------------------------------
$3,592,651 $ 99,896 $ 42,882
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at August 31, 2009 61 to 90 Over 90
($ thousands) days days Total
-------------------------------------------------------------------------
Insured mortgage loans $ 5,489 $ 28,006 $ 533,023
Conventional mortgage loans 4,999 39,183 617,152
Secured investment loans 1,633 2,406 1,758,621
RSP loans 2,010 2,992 466,825
HELOC receivables - 1,902 442,092
Finance loans - - 6,336
-------------------------------------------------------------------------
$ 14,131 $ 74,489 $3,824,049
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at November 30, 2008 1 to 29 30 to 60
($ thousands) Current days days
-------------------------------------------------------------------------
Insured mortgage loans $ 551,772 $ 29,567 $ 6,085
Conventional mortgage loans 670,763 53,741 12,176
Secured investment loans 1,790,788 15,284 2,220
RSP loans 574,049 9,958 4,435
HELOC receivables 646,891 3,847 658
Finance loans 11,061 - -
-------------------------------------------------------------------------
$4,245,324 $ 112,397 $ 25,574
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at November 30, 2008 61 to 90 Over 90
($ thousands) days days Total
-------------------------------------------------------------------------
Insured mortgage loans $ 3,313 $ 25,878 $ 616,615
Conventional mortgage loans 7,537 33,668 777,885
Secured investment loans 1,510 790 1,810,592
RSP loans 1,120 752 590,314
HELOC receivables - 497 651,893
Finance loans - - 11,061
-------------------------------------------------------------------------
$ 13,480 $ 61,585 $4,458,360
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(d) Mortgages in Legal Action
The following table provides a summary of conventional mortgages in
legal action which includes demand for payment, power of sale and
foreclosures. The table details opening mortgages in legal action for
the period and related changes to the pool, being additions,
discharged mortgages other than sold, proceeds on foreclosed
mortgages discharged and related losses, to arrive at the ending
balance of mortgages in legal action.
-------------------------------------------------------------------------
Nine months ended August 31, 2009 2008
($ thousands)
-------------------------------------------------------------------------
Balance outstanding, beginning of the period $ 44,987 $ 35,070
Additions 40,833 28,073
Discharged mortgages other than sold (16,401) (23,563)
Proceeds on foreclosed mortgages discharged (17,001) (5,585)
Loss on foreclosed mortgages discharged (2,729) (1,310)
-------------------------------------------------------------------------
$ 49,689 $ 32,685
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(e) Allowance for Credit Losses
During 2008, as a result of economic and market indicators, the
Company refined its provision for specific allowances to include
loans in arrears of one to 90 days in addition to impaired loans. The
change in the allowance for loan losses is as follows:
-------------------------------------------------------------------------
Nine months ended
August 31, 2009 Specific General Total
($ thousands) allowances allowances allowances
-------------------------------------------------------------------------
Balance, beginning of the period $ 14,163 $ 22,967 $ 37,130
Amounts written off (27,766) - (27,766)
Recoveries 1,211 - 1,211
Provision for loan losses 33,232 364 33,596
-------------------------------------------------------------------------
$ 20,840 $ 23,331 $ 44,171
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Breakdown by category as at
August 31, 2009:
Conventional mortgage loans $ 6,286 $ 5,788 $ 12,074
Secured investment loans 4,943 6,274 11,217
RSP loans 9,401 10,216 19,617
HELOCs receivables 210 1,053 1,263
-------------------------------------------------------------------------
$ 20,840 $ 23,331 $ 44,171
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended
August 31, 2008 Specific General Total
($ thousands) allowances allowances allowances
-------------------------------------------------------------------------
Balance, beginning of the period $ 1,860 $ 15,277 $ 17,137
Amounts written off (7,327) - (7,327)
Recoveries 652 - 652
Provision for loan losses 6,777 3,080 9,857
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 1,962 $ 18,357 $ 20,319
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Breakdown by category as at
August 31, 2008:
Conventional mortgage loans $ 1,556 $ 7,640 $ 9,196
Secured investment loans 33 4,407 4,440
RSP loans 373 4,772 5,145
HELOC receivables - 1,538 1,538
-------------------------------------------------------------------------
$ 1,962 $ 18,357 $ 20,319
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(f) AGF Trust Deposits
-------------------------------------------------------------------------
Term to maturity
-----------------------------------
1 year or 1 to 5 August November
($ thousands) Demand less years 31, 2009 30, 2008
-------------------------------------------------------------------------
Deposits $ 3,335 $2,301,002 $1,922,690 $4,227,027 $4,776,511
Less: deferred
selling
commissions (10,785) (14,450)
Less: current
portion (2,304,337) (2,486,635)
-------------------------------------------------------------------------
Long-term deposits $1,911,905 $2,275,426
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at August 31, 2009, deposits were substantially comprised of GICs
with a weighted average term to maturity of 1.3 years (November 30,
2008 - 1.4 years) and a weighted average interest rate of 3.83%
(November 30, 2008 - 4.22%). Approximately 17.3% of deposits mature
within 90 days (November 30, 2008 - 11.7%).
(g) Interest Rate Swaps
To hedge its exposure to fluctuating interest rates, AGF Trust has
entered into interest rate swap transactions with four Canadian
chartered banks, as noted below. The swap transactions expire between
September 2009 and October 2012. They involve the exchange of either
the one-month bankers' acceptance (BA) rate or the three-month BA
rate to receive fixed interest rates. The swap contracts designated
as fair value hedging instruments for deposits are used by AGF Trust
for balance sheet matching purposes and to mitigate net interest
revenue volatility. As at August 31, 2009, the aggregate notional
amount of the swap transactions was $2.5 billion (November 30, 2008 -
$3.2 billion). The aggregate fair value of the swap transactions,
which represents the amount that would be received by AGF Trust if
the transactions were terminated at August 31, 2009, was
$60.3 million (November 30, 2008 - $85.0 million).
-------------------------------------------------------------------------
Fixed interest
Notional amount of swap Fair value Maturity date rate received
-------------------------------------------------------------------------
($ thousands) ($ thousands)
780,000 $ 2,786 2009 0.70% - 4.70%
945,000 23,958 2010 0.84% - 5.05%
525,000 24,271 2011 0.85% - 5.08%
220,000 9,302 2012 1.60% - 5.01%
-------------------------------------------------------------------------
Note 6: Other Assets
-------------------------------------------------------------------------
August 31, November 30,
($ thousands) 2009 2008
-------------------------------------------------------------------------
Long-term portion of derivatives used to
manage interest rate exposure $ 43,122 $ 85,097
Other 3,355 1,920
-------------------------------------------------------------------------
$ 46,477 $ 87,017
-------------------------------------------------------------------------
The current portion of derivatives used to manage interest rate exposure
is included under accounts receivable, prepaid expenses and other assets.
As at August 31, 2009, the current portion was $17.2 million
(November 30, 2008 - nil). Refer to Note 5(g) for details on the
derivatives used to manage interest rate exposure. Refer to Note 14 for
further details of the Company's derivative instruments.
Note 7: Long-Term Debt
-------------------------------------------------------------------------
August 31, November 30,
($ thousands) 2009 2008
-------------------------------------------------------------------------
Revolving term loan $ 182,593 $ 123,740
Payment related to acquisition of Highstreet
Partners Limited (note 4) - 21,171
-------------------------------------------------------------------------
182,593 144,911
Less: amount included in current liabilities - 21,171
-------------------------------------------------------------------------
$ 182,593 $ 123,740
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Revolving Term Loan
The Company has arranged a three-year prime-rate-based revolving term
loan to a maximum of $300.0 million (November 30, 2008 -
$300.0 million) with a Canadian chartered bank. Under the loan
agreement, AGF is permitted to draw down the revolving term loan by
direct advances and/or bankers' acceptances (BAs). The revolving term
loan is available at any time for a period of 364 days from
commencement of the loan (the commitment period). The expiration of
the current commitment period is July 31, 2010. However, AGF may
request within 75 to 90 days prior to the end of the commitment
period a recommencement of the three-year term at the expiry of the
then-current commitment period. Without recommencement, the loan
shall be automatically converted to a term loan facility having a
term of two years. The loan balance shall be repaid over a period of
two years in minimum quarterly instalments of one-twelfth of the
amount of principal outstanding with the balance payable at the end
of the term. As at August 31, 2009, AGF has drawn $182.6 million
(November 30, 2008 - $123.7 million) against the facility in the form
of eight to 30 day BAs at an effective average interest rate of 2.9%
(November 30, 2008 - 2.9%) per annum.
Security for the bank loans include a specific claim over the
management fees owing from the mutual funds (subject to the existing
claims of related limited partnerships) for which AGF acts as manager
and a pledge of assets by AGF Management Limited and certain
subsidiaries, including AGF Funds Inc. and 20/20 Financial
Corporation.
(b) Payments Due Related to Acquisition of Highstreet Partners Limited
On December 1, 2006, AGF acquired 79.9% of Highstreet (refer to
Note 4). On March 2, 2009, a payment of $21.5 million was paid. The
payment consisted of $20.0 million in cash and the issuance of
188,444 Class B shares valued at $1.5 million. In addition, a further
contingent payment is due as described in Note 4.
Note 8: Other Long-term Liabilities
-------------------------------------------------------------------------
August 31, November 30,
($ thousands) 2009 2008
-------------------------------------------------------------------------
Long-term portion of derivative used to
manage changes in share-based compensation $ 1,751 $ 7,755
Long-term compensation-related liabilities 2,842 3,310
Long-term portion of Elements Advantage 3,329 3,808
Other 62 122
-------------------------------------------------------------------------
$ 7,984 $ 14,995
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The current portion of the derivative used to manage changes in share-
based compensation is included under accounts payable and accrued
liabilities. As at August 31, 2009, the current portion was $2.8 million
(November 30, 2008 - nil). The notional amount of the derivative used to
manage share-based compensation is $8.9 million or 295,609 share units
and matures in 2010. Refer to Note 14 for further details on the
Company's derivative instruments.
The current portion of the Elements Advantage liability is included under
accounts payable and accrued liabilities. As at August 31, 2009, the
current portion was $5.1 million (November 30, 2008 - $4.0 million).
Note 9: Capital Stock
(a) Authorized Capital
The authorized capital of AGF consists of an unlimited number of AGF
Class B non-voting common shares (Class B shares) and an unlimited
number of AGF Class A voting common shares (Class A shares). The
Class B shares are listed for trading on the Toronto Stock Exchange.
(b) Change During the Period
The change in capital stock is summarized as follows:
-------------------------------------------------------------------------
Nine months ended
August 31, 2009 2008
-----------------------------------------------
($ thousands, except Stated Stated
share amounts) Shares value Shares value
-------------------------------------------------------------------------
Class A shares 57,600 $ - 57,600 $ -
-------------------------------------------------------------------------
Class B shares
Balance, beginning
of period 88,480,104 $ 431,897 88,922,157 $ 421,923
Issued through dividend
reinvestment plan 199,325 1,959 174,034 3,989
Stock options exercised 80,000 1,161 130,150 5,121
Issued on acquisition
of Highstreet Partners
Limited (note 4) 188,444 1,536 215,883 5,116
-------------------------------------------------------------------------
Balance, end of period 88,947,873 $ 436,553 89,442,224 $ 436,149
-------------------------------------------------------------------------
(c) Class B Shares Purchased for Cancellation
AGF has obtained applicable regulatory approval to purchase for
cancellation, from time to time, certain of its Class B shares
through the facilities of the Toronto Stock Exchange (or as otherwise
permitted by the Toronto Stock Exchange). Under its normal course
issuer bid, AGF may purchase up to 10% of the public float
outstanding on the date of the receipt of regulatory approval or up
to 7,108,630 shares through to February 25, 2010. No Class B shares
were purchased during the three and nine months ended August 31, 2009
(2008 - nil).
(d) Stock Option Plans
AGF has established stock option plans for senior employees under
which stock options to purchase an aggregate maximum of 4,695,701
Class B shares could have been granted as at August 31, 2009 (2008 -
6,647,252). The stock options are issued at a price not less than the
market price of the Class B shares immediately prior to the grant
date. Stock options are vested to the extent of 25% to 33% of the
individual's entitlement per annum, or in some instances, vest at the
end of the term of the option.
The change in stock options during 2009 and 2008 is summarized as
follows:
-------------------------------------------------------------------------
Nine months ended
August 31, 2009 2008
----------------------------------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
-------------------------------------------------------------------------
Class B share options
Balance, beginning
of period 6,576,948 $ 16.59 4,268,765 $ 22.50
Options granted - - 40,000 22.36
Options forefeited/
expired (601,699) 20.43 (268,667) 26.54
Options exercised (80,000) 14.52 (130,150) 19.08
-------------------------------------------------------------------------
Balance, end of period 5,895,249 $ 16.23 3,909,948 $ 22.33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months ended August 31, 2009, no stock options were
granted (2008 - 40,000) and compensation expense and contributed
surplus of $0.8 million (2008 - $1.3 million) were recorded.
During the nine months ended August 31, 2009, no stock options were
granted (2008 - 40,000) and compensation expense and contributed
surplus of $2.5 million (2008 - $3.8 million) were recorded.
(e) Restricted Share Unit (RSU) and Performance Share Unit (PSU) Plans
The changes in share units during the nine months ended August 31,
2009 and August 31, 2008, are as follows:
-------------------------------------------------------------------------
Nine months ended
August 31, 2009 2008
-----------------------------------------------
Number of share units Number of share units
-------------------------------------------------------------------------
Outstanding, beginning
of period
Non-vested 680,889 345,257
Issued
Initial allocation - -
In lieu of dividends 46,707 10,180
Settled in cash (47,750) (340)
Forfeited and cancelled (72,666) (19,650)
-------------------------------------------------------------------------
Outstanding, end of period 607,180 335,447
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Compensation expense for the three months ended August 31, 2009
related to these share units was $0.7 million (2008 - $0.9 million),
and for the nine months ended August 31, 2009, was $2.2 million (2008
- $1.4 million). During the year ended November 30, 2008, it was
determined that the achievement of certain performance criteria
necessary for the PSUs to be paid was unlikely. As a result, the
Company no longer records a liability for PSUs. AGF has entered into
a swap agreement to fix the cost of compensation related to certain
RSUs and PSUs. As at August 31, 2009, AGF has economically hedged
210,061 share units at a fixed cost of $30.17. Refer to Note 14 for
further details on the Company's derivative instruments.
(f) Deferred Share Unit (DSU) Plan
There is no unrecognized compensation expense related to directors'
DSUs since these awards vest immediately upon grant. As at August 31,
2009, 38,641 (2008 - 14,411) DSUs were outstanding. Compensation
expense related to these DSUs for three months ended August 31, 2009
was $0.1 million (2008 - $0.1 million), and for the nine months
ending August 31, 2009, was $0.4 million (2008 - $0.3 million).
(g) Earnings per Share
The following table sets forth the calculation of both basic and
diluted earnings per share and earnings per share and diluted
earnings per share from continuing operations.
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
($ thousands, except -----------------------------------------------
per share amounts) 2009 2008 2009 2008
-------------------------------------------------------------------------
Numerator
Net income for the
period $ 22,743 $ 41,139 $ 52,151 $ 147,845
Denominator
Weighted average
number of shares
- basic 88,914,200 89,451,578 88,769,812 89,280,734
Dilutive effect of
employee stock
options 1,017,317 418,897 547,118 518,892
-------------------------------------------------------------------------
Weighted average
number of shares
- diluted 89,931,517 89,870,475 89,316,930 89,799,626
Earnings per share
Basic $ 0.26 $ 0.46 $ 0.59 $ 1.66
Diluted $ 0.25 $ 0.46 $ 0.58 $ 1.65
-------------------------------------------------------------------------
Note 10: Supplemental Disclosure of Cash Flow Information
(a) Changes in Non-Cash Operating Working Capital Items
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
(Increase) decrease in
accounts receivable $ (8,700) $ (10,060) $ (24,070) $ 14,941
Decrease in other assets 3,199 1,006 24,923 3,793
Increase (decrease) in
accounts payable and
accrued liabilities 15,461 38,658 (24,866) 41,766
Increase in deposits
and other liabilities 887 1,206 1,443 2,388
-------------------------------------------------------------------------
$ 10,847 $ 30,810 $ (22,570) $ 62,888
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Income Taxes and Interest Paid
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
Income taxes paid $ 11,709 $ 7,930 $ 49,508 $ 29,030
Interest paid 25,552 46,381 88,998 144,266
-------------------------------------------------------------------------
$ 37,261 $ 54,311 $ 138,506 $ 173,296
-------------------------------------------------------------------------
Note 11: AGF Trust Net Interest Income
The breakdown of net interest income is as follows:
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
AGF Trust interest income
Loan interest $ 50,185 $ 68,576 $ 165,056 $ 203,784
Investment interest 1,997 7,717 12,445 25,264
-------------------------------------------------------------------------
52,182 76,293 177,501 229,048
AGF Trust interest expense
Deposit interest 42,276 52,557 137,140 149,926
Hedging interest income (18,138) (7,838) (52,199) (12,028)
Other interest expense 5,745 6,010 18,071 17,722
-------------------------------------------------------------------------
29,883 50,729 103,012 155,620
-------------------------------------------------------------------------
AGF Trust net interest
income $ 22,299 $ 25,564 $ 74,489 $ 73,428
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 12: Income Tax
In December 2007, a reduction of the federal corporate income tax rate
from 18.5% to 15.0% by January 1, 2012 was substantively enacted.
Accordingly, during the nine months ended August 31, 2008, the Company
recognized a $19.5 million reduction in future income tax liabilities.
Note 13: Capital Management
Detailed disclosure of the Company's capital, including management
objectives and policies and regulatory capital requirements, are included
in Note 23 to the 2008 Audited Consolidated Financial Statements. The
cumulative amount of minimum regulatory capital in the Investment
Management business remains unchanged from November 30, 2008 at
approximately $6.0 million.
Capital measures at AGF Trust are detailed as follows:
-------------------------------------------------------------------------
Basel II
As at -------------------------
($ thousands, except for risk- August 31, November 30,
weighted assets in $ millions) 2009 2008
-------------------------------------------------------------------------
Risk-weighted assets(1)
Credit risk $ 1,859.1 $ 2,244.3
Operational risk 208.6 172.6
-------------------------------------------------------------------------
Total risk-weighted assets 2,067.7 2,416.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Tier 1 capital
Common shares $ 82,768 $ 82,768
Contributed surplus 1,565 1,338
Retained earnings 113,669 101,432
Non-cumulative preferred shares 64,000 64,000
Less: securitization and other (12,466) (15,567)
-------------------------------------------------------------------------
249,536 233,971
Tier 2 capital
Subordinated debentures 109,500 109,500
General allowances 16,267 19,638
Less: securitization and other (7,228) (8,295)
-------------------------------------------------------------------------
118,539 120,843
-------------------------------------------------------------------------
Total capital $ 368,075 $ 354,814
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For operational risk, AGF Trust uses the Basic Indicator Approach -
calculated as 15% of the previous three-year average of net interest
income and other income, excluding gain or loss on investments. The
risk-weighted equivalent is determined by multiplying the capital
requirement for operational risk by 12.5.
Note 14: Financial Instruments
The carrying amounts for the Company's financial instruments classified
based on categories according to CICA Handbook "Section 3855 Financial
Instruments - Recognition and Measurement" are as follows:
-------------------------------------------------------------------------
As at August 31, 2009 Loans and
Receivables
or Other
Available Held for Financial
($ thousands) for Sale Trading Liabilities
-------------------------------------------------------------------------
Cash and cash equivalents $ - $ 382,885 $ -
Investments 528,680 - -
Retained interest from
securitization 41,643 - -
Accounts receivable - - 81,892
Real estate secured and
investment loans - - 3,786,009
Derivatives - 60,317 -
Other assets - - 3,355
-------------------------------------------------------------------------
Total financial assets $ 570,323 $ 443,202 $ 3,871,256
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable and accrued
liabilities $ - $ - $ 281,505
Long-term debt - - 182,593
Deposits - - 4,216,242
Derivatives - 4,558 -
Other long-term liabilities - - 6,233
-------------------------------------------------------------------------
Total financial liabilities $ - $ 4,558 $ 4,686,573
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at November 30, 2008 Loans and
Receivables
or Other
Available Held for Financial
($ thousands) for Sale Trading Liabilities
-------------------------------------------------------------------------
Cash and cash equivalents $ - $ 584,168 $ -
Investments 188,435 - -
Retained interest from
securitization 44,947 - -
Accounts receivable - - 76,316
Real estate secured and
investment loans - - 4,430,850
Derivatives - 85,097 -
Other assets - - 1,920
-------------------------------------------------------------------------
Total financial assets $ 233,382 $ 669,265 $ 4,509,086
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable and accrued
liabilities $ - $ - $ 306,834
Long-term debt - - 144,911
Deposits - - 4,762,061
Derivatives - 7,755 -
Other long-term liabilities - - 7,240
-------------------------------------------------------------------------
Total financial liabilities $ - $ 7,755 $ 5,221,046
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Risk Management
In the normal course of business, the Company manages risks that arise as
a result of its use of financial instruments. These risks include market,
liquidity and credit risk.
Market Risk
Market risk is the risk that the fair value of financial instruments will
fluctuate due to changes in market factors. Market risk includes fair
value risk, interest rate risk and foreign currency risk. The Company is
exposed to these risks directly through its financial instruments.
Fair Value Risk
Fair value risk is the risk of loss due to adverse changes in equity
prices. The Company is exposed to fair value risk on its investments
available for sale related to mutual funds and equity securities,
retained interest from securitization and derivative positions used to
manage changes in share-based compensation. Any unrealized gains or
losses arising from changes in the fair value of the financial
instruments available for sale are recorded in other comprehensive
income. Based on the carrying value of the investments referred to above
at August 31, 2009, the effect of a 10% decline or increase in the value
of investments would result in a $1.8 million annualized unrealized gain
or loss to other comprehensive income (2008 - $2.4 million). Refer to
Note 3 for the effect of changes to key assumptions on the fair value of
retained interests.
Interest Rate Risk
Interest rate risk, inclusive of credit spread risk, is the risk of loss
due to the following: changes in the level, slope and curvature of the
yield curve; the volatility of interest rates; mortgage prepayment rates;
changes in the market price of credit and the creditworthiness of a
particular client.
The Company, through AGF Trust, is exposed to interest rate risk through
its real estate secured and investment loans receivable, managed and
supervised by AGF Trust's Asset and Liability Committee. AGF Trust
employs a number of techniques to manage this risk, including the
matching of asset and liability terms. AGF Trust also uses interest rate
swaps to manage any residual mismatches. In addition, AGF Trust has
assessed the interest rate risk for investment loans, RSP loans and HELOC
receivables, to be low due to the variable rate nature of these products.
AGF Trust is also exposed to interest rate risk through its investments
available for sale. As at August 31, 2009, a 1% increase in interest
rates would result in an increase in annual net interest income of
approximately $4.6 million (2008 - $3.8 million), while a 1% decrease in
interest rates will result in an increase in net interest income of
approximately $0.6 million (2008 - $3.8 million).
The Company is also exposed to interest rate risk through its floating-
rate debt and cash balances. As at August 31, 2009, the effect of a 1%
change in the variable interest rates on the average loan balance
outstanding for the nine months would have resulted in an annualized
change in interest expense of approximately $1.5 million (2008 -
$1.5 million).
Foreign Currency Risk
Foreign currency risk is the risk of loss due to changes in spot and
forward rates and the volatility of currency exchange rates. The Company
is subject to foreign exchange risk on its integrated foreign
subsidiaries in Ireland and Singapore, which provide investment advisory
services. These subsidiaries retain minimal monetary exposure to the
local currency, as the majority of revenues are earned in Canadian
dollars and salaries and wages are primarily paid on a monthly basis and
represent the majority of the local currency expenses. As such, these
foreign subsidiaries have limited use of financial instruments
denominated in local currencies, thus resulting in minimal foreign
exchange risk.
Derivative Instruments
Details of the Company's derivative instruments are as follows:
-------------------------------------------------------------------------
As at August 31, 2009 Hedging item
maximum
maturity Notional Fair
($ thousands) Interest Rate date amount Value
-------------------------------------------------------------------------
Derivatives used to
manage interest rate
exposure 0.70% - 5.08% 2012 2,470,000 60,317
Derivatives used to
manage changes in
share-based
compensation - 2010 8,919 (4,558)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at November 30, 2008 Hedging item
maximum
maturity Notional Fair
($ thousands) Interest Rate date amount Value
-------------------------------------------------------------------------
Derivatives used to
manage interest rate
exposure 1.31% - 5.08% 2012 3,167,000 85,097
Derivatives used to
manage changes in
share-based
compensation - 2010 10,275 (7,755)
-------------------------------------------------------------------------
Liquidity Risk
Liquidity risk arises from the possibility that the Company cannot meet a
demand for cash resources when required or meet its financial
obligations.
The Company manages its liquidity risk through the management of its
capital structure and financial leverage as outlined in Notes 9 and 13.
In its Investment Management and Other segment, the Company manages its
liquidity by monitoring actual and projected cash flows to ensure that it
has sufficient liquidity through cash received from operations, as well
as borrowings under its credit facility. The key liquidity requirements
within this segment are the funding of commissions paid on mutual funds
and dividends paid to shareholders. The Company is subject to certain
financial loan covenants under its credit facility and has met all of
these conditions.
AGF Trust manages liquidity risk through deposit-taking activities and
through the securitization of loans. The key liquidity requirements
within this segment are the funding of mortgages and loans and the
ability to pay out maturing GICs. AGF Trust's overall liquidity risk is
managed by its treasury department and is supervised by AGF Trust's Asset
and Liability Committee in accordance with the policies for management of
assets and liabilities, liquidity and loan financing activities. These
policies aim to ensure that AGF Trust has sufficient cash resources to
meet its current and future financial obligations in the regular course
of business and under a variety of conditions.
Management monitors cash resources daily to ensure that AGF Trust's
liquidity measurements are within the limits established by policies. In
addition, management meets regularly to assess the timing of cash inflows
and outflows related to loan and deposit maturities, and to review
various possible stress scenarios. AGF Trust aims to maintain a prudent
reserve of unencumbered liquid assets that are readily available if
required. It strives to maintain a stable volume of base deposits that
originate from its deposit brokerage clientele.
The Government of Canada introduced a guarantee program on debt issuances
of deposit-taking institutions. Under that program, AGF Trust can issue
up to $952.9 million of debt with a government backstop and a term of up
to three years.
The Company's internal audit department reviews the compliance of AGF
Trust's liquidity policies. Internal audit reports are presented to the
Audit Committee of the Trust Board for review.
Credit Risk
Credit risk is the potential of financial loss arising from the failure
of a borrower or counterparty to honour its financial or contractual
obligations to the Company. The Company's overall credit risk strategy
and credit risk policy are developed by its Executive Committee and
further refined at the business unit level, through the use of policies,
processes and internal controls. They are designed to promote business
activities while ensuring these activities are within the standards of
risk tolerance levels. As at August 31, 2009, financial assets of
$4.9 billion (November 30, 2008 - $5.4 billion), consisting of cash and
cash equivalents, investments, retained interests from securitization,
real estate secured loans and investment loans, accounts receivable and
other assets, were exposed to credit risk up to the maximum of their
respective carrying value.
Cash and cash equivalents consist primarily of highly liquid temporary
deposits with Canadian and Irish banks, as well as commercial paper,
bank-sponsored ABCP, bank deposit notes, reverse re-purchase agreements,
BAs and floating-rate notes.
Investments subject to credit risk consist primarily of floating-rate
notes, senior debt instruments, investments in mutual funds of AGF and
other securities. For investing activities done through AGF Trust,
policies have been established that identify the types and rating of debt
investments in which AGF Trust can invest. These policies also restrict
AGF Trust's transactions primarily to major chartered banks and
recognized investment dealers who are members of the Investment Industry
Regulatory Organization of Canada (IIROC). AGF Trust Executive Committee
(EXCO) maintains a list of the approved securities dealers and
counterparties, which are reviewed at least annually by the Trust Board.
AGF Trust uses external credit rating agencies in assessing the credit
quality of certain investments in financial assets. The credit rating
agencies used include DBRS, S&P and Moody's. As at August 31, 2009, AGF
Trust held investments with long term ratings from DBRS of A (high) to
AAA (or the equivalent from other credit rating agencies). AGF Trust held
investments with short term ratings from DBRS of R-1 (high) (or the
equivalent from other credit rating agencies).
The Company's most significant credit risk is through AGF Trust's real
estate secured loans and investment loans. AGF Trust mitigates this risk
through stringent credit policies and lending practices. These policies
aim to ensure that the authority to approve credit applications is
appropriately delegated by senior management or the Investment Committee
of AGF Trust, depending on the risk and the amount of the credit
application. The credit policies also provide guidelines for pricing
based on risk, for reviewing any collateral pledged for a credit
application, monitoring of impaired loans and for establishing and
reviewing loan loss provisions to ensure they are adequate. The policies
establish risk limits for credit concentration by counterparty,
geographic location and other risk factors that would impact AGF Trust's
credit risk profile. AGF Trust has adjusted its policies and criteria
related to its loan provisions and lending practices to reflect the
higher probability of default that occurs during a weaker economy.
At August 31, 2009, AGF Trust's loan assets totalled $3.8 billion
(November 30, 2008 - $4.5 billion) and were comprised of mortgage loans,
investment loans, RSP loans, finance loans and HELOC receivables. Of this
amount, $1.1 billion (November 30, 2008 - $1.4 billion) was represented
by mortgage loans and $0.4 billion (November 30, 2008 - $0.7 billion) was
represented by HELOC receivables, both of which are secured by
residential real estate. At August 31, 2009, 46.3% (November 30, 2008 -
44.2%) of mortgage loans were insured by Canada Mortgage and Housing
Corporation (CMHC) or another insurer. Conventional uninsured mortgages
have loan-to-value ratios of less than 80% of the appraised value of the
property at the time the mortgage loan was granted. The average loan-to-
value ratio of uninsured mortgage loans was 62.4% as at August 31, 2009
(2008 - 63.8%).
Residential mortgages represent the largest component of the total
mortgage portfolio, comprising 97.2% as at August 31, 2009 (November 30,
2008 - 97.5%). AGF Trust's credit risk on these loans is also mitigated
through the use of collateral, primarily in the form of residential real
estate. Under AGF Trust's lending criteria, management reviews all
mortgage loans on a regular basis to determine the appropriate allowance
for loss required by AGF Trust. Risk is also mitigated through
residential mortgage insurance through CMHC or another insurer. As at
August 31, 2009, $533.0 million of AGF Trust's residential mortgage
portfolio was insured (November 30, 2008 - $616.6 million).
Credit risk for HELOCs and investment loans is mitigated by collateral in
the form of residential mortgages and investment funds, respectively.
Investment loans, excluding RSP loans, of $1.78 billion (November 30,
2008 - $1.8 billion), are secured primarily by the investment made using
the initial loan proceeds. The market value of this investment loan
collateral is approximately $1.4 billion (November 30, 2008 -
$1.2 billion).
RSP loans are used by borrowers to purchase assets in a retirement
savings plan. The creditworthiness of each borrower is assessed prior to
approval of the loan. Predictive scorecards are used to determine the
probability of default and bankruptcy of the borrowers. On a regular
basis, AGF Trust reviews the credit quality in the portfolio. Loans in
arrears are also reviewed regularly to determine the appropriate loan
loss reserves.
Derivative financial instruments expose AGF Trust to credit risk to the
extent that if a counterparty default occurs, market conditions are such
that AGF Trust would incur a loss in replacing the defaulted transaction.
AGF Trust negotiates derivative master netting agreements with
counterparties with which it contracts. These agreements reduce credit
risk exposure. AGF Trust assesses the creditworthiness of the
counterparties to minimize the risk of counterparty default under the
agreements. AGF Trust only uses major Chartered banks as counterparties
with a minimum credit rating of AA.
Note 15: Segment Information
AGF has three reportable segments: Investment Management Operations,
Trust Company Operations and Other. The Investment Management Operations
segment provides investment management and advisory services and is
responsible for the management and distribution of AGF investment
products. AGF Trust offers a range of trust services including GICs, term
deposits, real estate secured loans and investment loans. The results of
Smith & Williamson Holdings Limited have been included in Other.
The results of the reportable segments are based on the internal
financial reporting systems of AGF. The accounting policies used in these
segments are generally consistent with those described in the "Summary of
Significant Accounting Policies" detailed in AGF's 2008 Annual Report.
-------------------------------------------------------------------------
Three months ended Investment Trust
August 31, 2009 Management Company
($ thousands) Operations Operations Other(1) Total
-------------------------------------------------------------------------
Revenue $ 120,381 $ 25,350 $ 1,131 $ 146,862
Operating expenses 74,567 16,174 - 90,741
Amortization and other
expenses 23,203 719 1,633 25,555
-------------------------------------------------------------------------
Segment income before
taxes $ 22,611 $ 8,457 $ (502) $ 30,566
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Investment Trust
August 31, 2008 Management Company
($ thousands) Operations Operations Other(1) Total
-------------------------------------------------------------------------
Revenue $ 155,168 $ 28,356 $ 1,142 $ 184,666
Operating expenses 89,190 13,967 - 103,157
Amortization and other
expenses 27,182 920 2,098 30,200
-------------------------------------------------------------------------
Segment income before
taxes $ 38,796 $ 13,469 $ (956) $ 51,309
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended Investment Trust
August 31, 2009 Management Company
($ thousands) Operations Operations Other(1) Total
-------------------------------------------------------------------------
Revenue $ 343,280 $ 80,687 $ 4,390 $ 428,357
Operating expenses 220,877 59,597 - 280,474
Amortization and other
expenses 70,930 2,146 4,764 77,840
-------------------------------------------------------------------------
Segment income before
taxes $ 51,473 $ 18,944 $ (374) $ 70,043
Total Assets $1,175,584 $4,799,842 $ - $5,975,426
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended Investment Trust
August 31, 2008 Management Company
($ thousands) Operations Operations Other(1) Total
-------------------------------------------------------------------------
Revenue $ 483,274 $ 82,332 $ 7,747 $ 573,353
Operating expenses 270,963 42,670 - 313,633
Amortization and other
expenses 84,474 1,943 7,494 93,911
-------------------------------------------------------------------------
Segment income before
taxes $ 127,837 $ 37,719 $ 253 $ 165,809
Total Assets $1,289,849 $5,367,345 $ - $6,657,194
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Other revenue relates to S&WHL.
This report contains forward-looking statements with respect to AGF,
including its business operations and strategy, as well as financial
performance and condition. Although Management believes that the
expectations reflected in such forward-looking statements are reasonable,
such statements involve risks and uncertainties. Actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause results to differ materially
include, among other things, general economic and market factors,
including interest rates, business competition, changes in government
regulations or in tax laws, and other factors discussed in materials
filed with applicable securities regulatory authorities from time to
time.
About AGF Management Limited
AGF Management Limited is one of Canada's premier investment management companies with offices across
For further information: AGF Management Limited shareholders and analysts, please contact: Greg Henderson, CA, Senior Vice-President and Chief Financial Officer, (416) 865-4156, [email protected]; Deirdre Neary, Director, Investor Relations, (416) 815-6268, [email protected]; Media, please contact: Lucy Becker, Vice-President, Corporate Communications, (416) 865-4284, [email protected]
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