AGF reports 4.3% increase in net income driven by lower interest,
amortization and tax expenseTORONTO, Sept. 24 /CNW/ - AGF Management Limited (AGF) today announced
financial results for the third quarter ended August 31, 2008 with net income
from continuing operations up 4.3% over the previous year, driven by
reductions in interest, amortization and taxes. This resulted in a 7.0%
increase in earnings per share on a fully diluted basis over the third quarter
of last year. Global stock market volatility prevailed in the third quarter,
resulting in a 7.3% decline in revenue and a 10.7% decrease in earnings before
interest, taxes, depreciation and amortization (EBITDA) compared with the
third quarter of 2007.
"As our industry faces turbulence in the financial markets, we are
sticking with a long-term view and remain committed to our long-term business
strategy. Our business fundamentals are solid and we will continue to employ a
client-centric focus to realize our key growth initiatives," said Chairman and
CEO Blake C. Goldring. "Our best strategy, especially during periods of
volatility, is to closely monitor expenses and be prudent with capital by
paying down debt and strengthening our balance sheet. In the third quarter, we
continued to achieve success in controlling expenses in our investment
management operations, paid down debt and realized significant year-over-year
growth in our Trust Company loan assets and profitability."
In the third quarter of fiscal 2008, total consolidated revenue from
continuing operations decreased to $184.7 million compared with $199.2 million
in the third quarter of the prior year. EBITDA from continuing operations
totalled $81.5 million for the three months ended August 31, 2008, compared
with $91.3 million for the three months ended August 31, 2007. For the third
quarter of 2008, EBITDA margins declined slightly to 44.1% from 45.8% in the
same period a year earlier. In addition, the company paid down $24.2 million
of long-term debt.
Total assets under management (AUM) decreased 9.4% to $48.7 billion at
August 31, 2008 from $53.8 billion as at August 31, 2007. Over the same
period, mutual fund assets declined by 12.2% as a result of market
depreciation and lower levels of gross sales. Average mutual fund assets for
the quarter decreased 11.9% over the third quarter of 2007 and 5.4%
year-over-year. Institutional and high-net-worth client assets declined 5.8%
year-over-year primarily as a result of client rebalancing and redemptions.
Our Trust Company operations, however, continued to grow with loans assets
increasing substantially by 31.0% over August 31, 2007 to $4.4 billion as at
August 31, 2008.
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
law, 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 Management'
section of our 2007 annual MD&A.
Dear fellow shareholders
Our industry continued to be challenged during the third quarter of 2008
with significant swings in global stock markets. This volatility has caused
investors to be cautious, as evidenced by the continued substantial flows into
money market funds throughout the industry. Yet, AGF remained focused on
executing its long-term strategic plan for future growth, continuing to
enhance client relationships and recognizing that market volatility is part of
our industry and a short-term obstacle.
Consistent with the overall industry, gross sales of mutual funds were
down in the third quarter of 2008 compared to 2007. While redemptions of
long-term funds were higher year-over-year due in part to a client
rebalancing, we were encouraged that they were at their lowest level in over a
year in August 2008. This indicates that our clients are committed to keeping
funds invested in the market. We continue to work in close partnership with
advisors to help them guide their clients through this market downturn by
providing strong investment expertise that focuses on long-term financial
success.
Mutual fund assets under management (AUM) were $26.4 billion,
institutional and strategic accounts AUM were $18.6 billion and high-net-worth
AUM were $3.8 billion at the end of the third quarter of 2008. While AUM were
lower than expected, we successfully reduced expenses in our Investment
Management operations and continued to enhance our product offering with the
introduction of innovative client solutions. With the new Harmony
Non-traditional Pool launched at the end of August, we became one of the first
fund companies in Canada to give investors access to global non-traditional
investments such as infrastructure, water, agriculture, oil sands, mining and
real estate in a managed assets program.
Our Trust Company continued to experience substantial growth with loan
assets increasing 31.0% year-over-year by the end of the third quarter of 2008
and revenue up 17.4% over the third quarter of 2007. The Trust Company's
funding sources remain stable since our loans are primarily funded by selling
Guaranteed Investment Certificates (GICs) with Canada Deposit Insurance
Corporation (CDIC) insurance and we continue to closely monitor the collateral
values on our secured loans given the current market conditions.(1)
Consolidated revenue was $184.7 million, compared with $199.2 million in
the third quarter of the prior year. Earnings before interest, taxes,
depreciation and amortization(2) (EBITDA) from continuing operations were
$81.5 million, compared with $91.3 million for the three months ended
August 31, 2007. EBITDA margins(2) for the three months ended August 31, 2008,
were 44.1% compared with 45.8% in the three-month period ended August 31,
2007.
For the three months ended August 31, 2008, AGF reported cash flow from
continuing operations(2) (before net change in non-cash balances related to
operations) of $66.2 million, compared with $69.7 million one year ago. Free
cash flow(2) (cash flow from continuing operations less selling commissions
paid) for the same period was $48.6 million, compared with $38.1 million
one year ago as a result of a decrease in deferred selling commissions paid.
With over 50 years in business, we have lived through many bull and bear
markets. Our long-term success is based on prudent management that will allow
our organization to weather the storm.
We remain committed to achieving our long-term objectives and are
well-positioned to participate strongly when markets stabilize and deliver
superior value to our shareholders, advisors and unitholders.(signed)
Blake C. Goldring, CFA, M.S.M.
Chairman and Chief Executive Officer
August 31, 2008
(1) Refer to page 16 of this report for further information on our
conventional mortgage loan-to-value ratio, and our unsecured exposure
on our investment loan portfolio.
(2) Cash flow from continuing operations, free cash flow, EBITDA and
EBITDA margins 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, 2008This Management's Discussion and Analysis (MD&A) presents an analysis of
the financial condition of AGF Management Limited and its subsidiaries (AGF)
as at August 31, 2008, compared with November 30, 2007. The MD&A also includes
the results of operations for the three and nine months ended August 31, 2008,
compared with the corresponding period of 2007. This discussion should be read
in conjunction with our 2007 annual MD&A and 2007 annual audited Consolidated
Financial Statements and Notes. Certain comparative amounts in these financial
statements have been reclassified to conform with the current year's
presentation. The financial information presented herein has been prepared on
the basis of Canadian Generally Accepted Accounting Principles (GAAP).
Percentage changes are calculated using numbers, rounded to the decimals that
appear in this MD&A. All dollar amounts are in Canadian dollars unless
otherwise indicated.
There have been no material changes to the information discussed in the
following sections of the 2007 annual MD&A: "Risk Factors and Management",
"Controls and Procedures", "Contractual Obligations", "Intercompany and
Related Party Transactions" and "Government Regulations". There has been
additional disclosure regarding the adoption of new accounting policies, which
are discussed in the "Significant Accounting Policies" section of this MD&A.
The "Key Performance Indicators and Non-GAAP Measures" section contains a
reconciliation of non-GAAP measures to GAAP measures.
Overview
With approximately $49 billion in assets under management (AUM), AGF is
one of Canada's largest independent investment management companies, with
operations and investments in Canada, the United Kingdom, Ireland and Asia. We
commenced operations in 1957 by introducing the first mutual fund available to
Canadians seeking to invest in the United States. As of August 31, 2008, we
offered more than 50 domestic and international mutual funds, as well as
managed-asset programs, sold under our Elements and Harmony brands. We also
have a substantial institutional investment management business,
high-net-worth business and a growing trust company.
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).
Investmaster Holdings Limited (Investmaster) was divested on April 30,
2007, and, as such, Investmaster's results have been reported as discontinued
operations for the periods disclosed prior to the sale.
Strategy and Quarterly Overview
As stated in our 2007 annual MD&A, our overall business strategy is to
foster the development of best-in-class operating segments to provide premier
financial services and to maximize shareholder value over the long term.
During the third quarter of 2008:- Revenue decreased 7.3% in the quarter as compared with the same
period in 2007. Year-over-year declines in the Investment Management
segment were partly offset by revenue growth in the Trust Company
segment. Earnings before interest, taxes, depreciation and
amortization (EBITDA) decreased 10.7% during the same period.
- Net income from continuing operations in the third quarter of 2008
increased 4.3% over the same period of 2007, primarily due to the
effective tax rate declining to 22.3% from 25.0% in 2007, as well as
lower interest and amortization expenses.
- Market volatility continued, resulting in total AUM declining 9.4%
from $53.8 billion at August 31, 2007 to $48.7 billion as at
August 31, 2008.
- AGF Trust real estate secured loan assets grew 25.9% over the
previous year and investment loans grew 35.7% with total loan assets
rising 31.0% year-over-year.
- Credit profiles of the AGF Trust borrowers remain consistent, with
impaired loans expressed as a percentage of total loans outstanding
representing 0.5% and 0.7% at August 31, 2008 and November 30, 2007.
- 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) increased 23.8% to $22.4 million in the third
quarter of 2008. This is compared with $18.1 million in the same
period in 2007.
- During the quarter, we continued to pay down long-term debt repaying
$24.2 million and reducing our long-term debt to EBITDA ratio to
45.3%, which is amongst the lowest compared to our publicly-traded
peers.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 portfolioEBITDA
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 11 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.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
----------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net cash provided by
continuing operating
activities $ 97.0 $ 130.0 $ 283.0 $ 288.5
Less: net changes in
non-cash balances
related to operations 30.8 60.3 62.9 65.7
-------------------------------------------------------------------------
Cash flow from
continuing operations $ 66.2 $ 69.7 $ 220.1 $ 222.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------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.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
----------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flow from
continuing operations
(defined above) $ 66.2 $ 69.7 $ 220.1 $ 222.8
Less: selling
commissions paid 17.6 31.6 72.2 124.9
-------------------------------------------------------------------------
Free cash flow $ 48.6 $ 38.1 $ 147.9 $ 97.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
----------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
EBITDA $ 81.5 $ 91.3 $ 259.7 $ 269.7
Divided by revenue 184.7 199.2 573.4 581.2
-------------------------------------------------------------------------
EBITDA margin 44.1% 45.8% 45.3% 46.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------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, non-controlling interest and
non-segmented items to revenue.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
----------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Income before taxes
and non-segmented
items $ 51.3 $ 57.3 $ 165.8 $ 169.6
Divided by revenue 184.7 199.2 573.4 581.2
-------------------------------------------------------------------------
Pre-tax profit margin 27.8% 28.8% 28.9% 29.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------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 by average
shareholders' equity.
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.-------------------------------------------------------------------------
Three months ended
August 31,
--------------------
($ millions) 2008 2007
-------------------------------------------------------------------------
Long-term debt $ 147.8 $ 169.2
EBITDA (annualized) 326.0 365.2
-------------------------------------------------------------------------
Long-term debt to EBITDA 45.3% 46.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------(b) Investment Management Operations
Assets Under Management (AUM)
The amount of AUM is critical to our business since it is from these
assets that we 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 (Market Appreciation (Depreciation) of Investment
Portfolios)Investment performance, which 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. Due to the reporting systems used in
these businesses, 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.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
----------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
EBITDA $ 66.0 $ 76.6 $ 212.3 $ 224.3
Divided by revenue 155.2 173.4 483.3 501.7
-------------------------------------------------------------------------
EBITDA margin 42.5% 44.2% 43.9% 44.7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------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.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
----------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Income before taxes and
non-segmented items $ 38.8 $ 45.7 $ 127.8 $ 132.2
Divided by revenue 155.2 173.4 483.3 501.7
-------------------------------------------------------------------------
Pre-tax profit margin 25.0% 26.4% 26.4% 26.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------(c) Trust Company Operations
Loan Asset Growth
In the Trust Company Operations segment (AGF Trust), we focus on the
growth 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.
Net Interest Margin
Net interest margin is equal to annualized net interest income divided by
the average quarterly total loan balance.
Efficiency Ratio
The efficiency ratio is a lending industry KPI that measures the
efficiency of the organization. We use this ratio to ensure that expenses are
contained as AGF Trust 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.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
----------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Selling, general and
administrative
expenses $ 10.6 $ 8.7 $ 32.8 $ 26.5
Add: amortization
expense 0.9 0.4 1.9 1.0
-------------------------------------------------------------------------
Non-interest expense $ 11.5 $ 9.1 $ 34.7 $ 27.5
-------------------------------------------------------------------------
Other revenue $ 2.6 $ 2.4 $ 8.6 $ 5.0
Gain on RSP loan
securitization and
related income (loss),
net of impairment 0.2 1.4 0.3 11.4
-------------------------------------------------------------------------
Non-interest income $ 2.8 $ 3.8 $ 8.9 $ 16.4
-------------------------------------------------------------------------
Net interest income $ 25.6 $ 20.4 $ 73.4 $ 57.0
Add: non-interest
income 2.8 3.8 8.9 16.4
-------------------------------------------------------------------------
Total of net interest
income and non-
interest income $ 28.4 $ 24.2 $ 82.3 $ 73.4
-------------------------------------------------------------------------
Efficiency ratio 40.5% 37.6% 42.2% 37.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA Margin
EBITDA margin provides useful information to management and investors as
an indicator of our operating performance in AGF Trust. 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.
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
----------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
EBITDA $ 14.4 $ 13.1 $ 39.6 $ 39.3
Divided by revenue 28.4 24.2 82.3 73.4
-------------------------------------------------------------------------
EBITDA margin 50.7% 54.1% 48.1% 53.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Pre-Tax Profit Margin
Pre-tax profit margin provides useful information to management and
investors as an indicator of the operating performance in AGF Trust. 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.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
----------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Income before taxes and
non-segmented items $ 13.4 $ 12.7 $ 37.7 $ 38.2
Divided by revenue 28.4 24.2 82.3 73.4
-------------------------------------------------------------------------
Pre-tax profit margin 47.2% 52.5% 45.8% 52.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------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.
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.
Significant Accounting Policies
A summary of AGF's significant accounting policies can be found in Note 1
of our 2007 audited Consolidated Financial Statements.
Changes in Significant Accounting Policies
Capital Disclosures
Effective December 1, 2007, AGF adopted the CICA's new accounting
standard "Handbook Section 1535, Capital Disclosures". This standard requires
the disclosure of both qualitative and quantitative information to enable
users of financial statements to evaluate the entity's objectives, policies
and processes for managing capital. The new standard did not have any impact
on the financial position or earnings of the Company. Refer to Note 13 of our
Q3 2008 Consolidated Financial Statements.
Financial Instruments Disclosures and Presentation
Effective December 1, 2007, AGF adopted the accounting and disclosure
requirements of the CICA's two new accounting standards: "Handbook Section
3862, Financial Instruments - Disclosures" and "Handbook Section 3863,
Financial Instruments - Presentation". The new standards did not have any
impact on the financial position or earnings of the Company. Refer to Note 14
of our Q3 2008 Consolidated Financial Statements.
Future Accounting Changes
The Canadian Accounting Standards Board (AcSB) confirmed a plan to adopt
the International Financial Reporting Standards (IFRS) in 2011, for interim
and annual financial statements relating to fiscal years beginning on or after
January 1, 2011. The Company will adopt IFRS. The impact of the adoption of
IFRS is not known at this time.
On December 1, 2008, the Company will adopt "CICA 3064, Goodwill and
Intangible Assets". This standard contains revised rules on the recognition,
measurement, presentation and disclosure of goodwill and intangible assets.
The adoption of this standard is not expected to have a significant impact on
the Company's financial position or results of operation.
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 2007 annual MD&A in the
section entitled 'Risk Factors and Management'. Refer to Note 14 of the
Consolidated Financial Statements and Notes for risks arising from the use of
financial instruments.
Market Risk in Assets under Management (AUM)
AUM are exposed to various market risks, including changes in equity
prices, interest rates and foreign exchange rates. These risks transfer to the
Company as our management fee revenue is calculated as a percentage of the
average net asset value of each mutual fund or portfolio managed. The Company
does not quantify these risks in isolation, however, in general, for every
$1 billion reduction of AUM, management fee revenues would decline by
approximately $20 million. The Company monitors these risks as they may impact
earnings, however, it is at the discretion of the fund manager to decide on
the appropriate risk-mitigating strategies for each fund.
To provide additional details on the Company's exposure to these market
risks, the following provides further information on our AUM by asset type and
base currency:-------------------------------------------------------------------------
As at August 31, 2008
-------------------------------------------------------------------------
AUM by Asset Type
Equity 77.7%
Balanced 12.0%
Fixed Income 8.7%
AUM by Base Currency
Canadian dollar 65.2%
Other 34.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Foreign Exchange Risk
The Company is exposed to foreign exchange risks through its 30.4% equity
interest in Smith and Williamson Holdings Limited (S&WHL), which is
denominated in U.K. pounds. The investment is translated into Canadian dollars
at the rate of exchange in effect at the balance sheet date. Unrealized
translation gains and losses are reported in other comprehensive income. Based
on the carrying value at August 31, 2008, a 5% change in the value of the
Canadian dollar would result in a change in other comprehensive income of
$5.1 million.
Changes in Internal Controls over Financial Reporting
Pursuant to Multilateral Instrument 52-109, the Chief Executive Officer
and Chief Financial Officer must certify that they are responsible for the
design of internal controls over financial reporting (or caused them to be
designed under their supervision). Internal controls over financial reporting
are designed to provide reasonable assurance about the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with Canadian GAAP. During the nine-month period ended
August 31, 2008, there was no significant change to the systems of internal
controls within AGF.
Consolidated Operating Results
The table below summarizes our consolidated operating results for the
three and nine months ended August 31, 2008, and August 31, 2007.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
($ millions, except -----------------------------------------------------
per share amounts) 2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Revenue
Investment
Management
Operations $ 155.2 $ 173.4 (10.5%) $ 483.3 $ 501.7 (3.7%)
Trust Company
Operations(1) 28.4 24.2 17.4% 82.3 73.4 12.1%
Other 1.1 1.6 (31.3%) 7.8 6.1 27.9%
-------------------------------------------------------------------------
184.7 199.2 (7.3%) 573.4 581.2 (1.3%)
Expenses
Investment
Management
Operations 89.2 96.8 (7.9%) 271.0 277.4 (2.3%)
Trust Company
Operations 14.0 11.1 26.1% 42.7 34.1 25.2%
-------------------------------------------------------------------------
103.2 107.9 (4.4%) 313.7 311.5 0.7%
EBITDA(2) (continuing
operations) 81.5 91.3 (10.7%) 259.7 269.7 (3.7%)
Amortization 28.1 31.2 (9.9%) 86.4 93.1 (7.2%)
Interest expense 2.1 2.8 (25.0%) 7.5 7.0 7.1%
Non-controlling
interest 0.2 0.2 0.0% 0.5 0.7 (28.6%)
Income taxes 10.0 17.7 (43.5%) 17.5 42.4 (58.7%)
-------------------------------------------------------------------------
Net income from
continuing
operations $ 41.1 $ 39.4 4.3% $ 147.8 $ 126.5 16.8%
Loss on dissolution
of limited
partnerships, net
of tax - - - (2.1)
Gain on sale of
discontinued
operations, net
of tax - - - 4.7
Net earnings (loss)
from discontinued
operations, net
of tax(3) - - - 0.2
-------------------------------------------------------------------------
Net income $ 41.1 $ 39.4 4.3% $ 147.8 $ 129.3 14.3%
-------------------------------------------------------------------------
Earnings per share
from continuing
operations -
diluted $ 0.46 $ 0.43 7.0% $ 1.65 $ 1.39 18.7%
-------------------------------------------------------------------------
(1) The nine months ended August 31, 2007 include an $8.0 million
securitization gain.
(2) 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.
(3) On April 30, 2007, AGF sold 100% of Investmaster. Accordingly,
Investmaster's results have been reported as discontinued operations.Revenue for the three and nine months ended August 31, 2008, declined by
7.3% and 1.3%, respectively, from the corresponding periods in 2007. Revenue
in the Investment Management Operations segment declined 10.5% and 3.7% for
the three and nine months ended August 31, 2008. This corresponds to lower
average levels of AUM offset by higher DSC revenue. The Trust Company
Operations segment, excluding an $8.0 million securitization gain in the nine
months ended August 31, 2007, reported increases in revenue of 17.4% and 25.8%
for the three and nine months ended August 31, 2008, resulting from loan
assets being up 31.0% year-over-year. Revenue from Other, which represents the
results of our 30.4% equity interest in S&WHL, were lower for the three months
ended August 31, 2008 and increased for the nine months ended August 31, 2008.
Traditionally, S&WHL experiences seasonality in earnings related to the
billing of work in progress for its tax, audit and business sources
operations.
Expenses for the three and nine months ended August 31, 2008, decreased
by 4.4% and increased 0.7% compared with the same periods in 2007. The
Investment Management operations' decline in expenses was consistent with the
decline in AUM and reduced SG&A expenses, while Trust operations experienced
higher overall expenses related to volumes and a move to new office premises.
For further details refer to the segment discussions.
The combination of declining revenue and expenses served to decrease
EBITDA by 10.7% and 3.7% for the three and nine months ended August 31, 2008,
from the corresponding periods of 2007. Excluding the $8.0 million
securitization gain in the nine months ended August 31, 2007, EBITDA has
remained relatively stable, declining only 1.0% for the nine months ended
August 31, 2008.
Amortization expense decreased 9.9% and 7.2% for the three and nine
months ended August 31, 2008, compared to the same periods in 2007. The
decline was due to lower amortization of deferred selling commissions in the
Investment Management Operations segment. Amortization of deferred selling
commissions for the three and nine months ended August 31, 2008 accounted for
$23.9 million and $74.8 million (2007 - $27.5 million and $81.2 million) of
the total amortization expense.
Interest expense was $2.1 million and $7.5 million for the three and nine
months ended August 31, 2008, as compared with $2.8 million and $7.0 million
in the same periods of 2007. Lower interest expense in the quarter is
reflective of declining average debt levels and interest rates.
For the three and nine months ended August 31, 2008, income tax expense
was $10.0 million and $17.5 million as compared with $17.7 million and
$42.4 million in the same periods in 2007. Results from the nine months ended
August 31, 2008 include an income reduction of $19.5 million related to the
reduction in the federal income tax rate to 15% from 18.5% by January 1, 2012.
Excluding the impact of this tax reduction, the effective tax rate for the
first nine months of 2008 was 22.3% compared with 25.0% in the same period in
2007.
The impact of the above revenue and expense items resulted in net income
from continuing operations of $41.1 million and $147.8 million for the three
and nine months ended August 31, 2008. This compares with $39.4 million and
$126.5 million in the same periods of 2007. Basic earnings per share from
continuing operations were $0.46 and $1.66 for the three and nine months
ending August 31, 2008, compared with $0.44 and $1.41 per share in the same
periods of 2007. For the nine months ending August 31, 2008, excluding the
impact of the tax reduction of $19.5 million, income from continuing
operations was $128.3 million or $1.43 per share diluted. This compares to
$1.39 for the nine months ended August 31, 2007.
Net income was $41.1 million and $147.8 million for the three and
nine-month period ended August 31, 2008. This compares with $39.4 million and
$129.3 million in the same periods of 2007. Excluding the impact of income tax
as previously discussed, net income for the nine-month period ended August 31,
2008 was $128.3 million. The nine-month period ended August 31, 2007 included
a gain of $4.7 million net of tax related to the gain on sale of discontinued
operations, and a loss of $2.1 million net of tax related to the dissolution
of limited partnerships.
A further discussion follows of the results of each business segment for
the three and nine months ended August 31, 2008, compared with August 31,
2007.
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 funds, institutional
investment management and high-net-worth client investment counselling
services. The Trust Company Operations segment offers a wide range of trust
services and products, including 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, including mutual funds, managed-asset programs and private
investment management. Our products are delivered through multiple channels,
including advisors, financial planners, banks, life insurance companies,
brokers and consultants.
Investment management remains a highly-competitive business, with
numerous domestic and foreign players serving the market. Although the mutual
fund business is reaching the early stages of maturity, we believe there are
opportunities for growth.
Segment Strategy and Quarterly Overview
The strategic priorities for our Investment Management Operations,
detailed in the 2007 annual MD&A, are to continue to build predictable
excellence in three core areas: investment management, relationship management
and product management.
Despite the volatile markets in 2008, we continue to focus on our
strategy to better serve our clients. During the quarter:- We launched an innovative managed assets solution called the Harmony
Non-traditional Pool which gives investors access to global non-
traditional investments such as infrastructure, water, agriculture,
oil sands, mining and real estate. The new pool will also be offered
along with three other Harmony pools and four Harmony portfolios,
within the new Harmony Tax Advantage Group Limited, a new mutual fund
corporation that houses a range of corporate class offerings allowing
investors to switch between them without generating immediate tax
consequences on the switch.
- We introduced new series options on two Harmony portfolios (both in
the trust and corporate class structures) that provide monthly income
and tax efficiencies.
Assets Under ManagementThe 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 August 31, 2008, and August 31,
2007.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------------
($ millions) 2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Mutual fund AUM,
beginning of
period $28,627 $30,606 (6.5%) $30,052 $26,857 11.9%
Gross sales of
mutual funds 854 1,345 (36.5%) 2,927 5,529 (47.1%)
Redemptions of
mutual funds (1,426) (1,003) 42.2% (3,983) (3,242) 22.9%
-------------------------------------------------------------------------
Net mutual fund
sales (572) 342 (267.2%) (1,056) 2,287 (146.2%)
Market appreciation
(depreciation) of
fund portfolios (1,684) (924) 82.3% (2,625) 880 (398.3%)
-------------------------------------------------------------------------
Mutual fund AUM,
end of period $26,371 $30,024 (12.2%) $26,371 $30,024 (12.2%)
Institutional and
strategic accounts
AUM 18,579 19,773 (6.0%) 18,579 19,773 (6.0%)
High-net-worth AUM 3,787 3,973 (4.7%) 3,787 3,973 (4.7%)
-------------------------------------------------------------------------
Total AUM, end of
period $48,737 $53,770 (9.4%) $48,737 $53,770 (9.4%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average daily mutual
fund AUM for the
period $26,725 $30,333 (11.9%) $27,901 $29,477 (5.4%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------Global market declines and an industry trend of reduced gross sales of
long-term funds resulted in a decrease in mutual fund AUM to $26.4 billion at
August 31, 2008, from $30.0 billion as at August 31, 2007. The average daily
mutual fund AUM for the three months ended August 31, 2008, decreased 11.9% to
$26.7 billion, compared with the same period in 2007. The average daily mutual
fund AUM for the nine months ended August 31, 2008, decreased 5.4% to
$27.9 billion, compared with the same period in 2007. During the past 12
months, institutional and strategic accounts AUM decreased by $1.2 billion to
$18.6 billion. This was as a result of market volatility and client
rebalancing as well as redemptions. High-net-worth AUM decreased by
$0.2 billion to $3.8 billion due to market volatility. These decreases
resulted in total AUM decreasing by 9.4% to $48.7 billion.
Market performance influences the level of AUM. During the three and nine
months ended August 31, 2008, the Canadian-dollar-adjusted S&P 500 Index
decreased 1.5% and 6.5%, the Canadian-dollar-adjusted NASDAQ Index increased
0.3% and decreased 5.5%, and the S&P/TSX Composite Index decreased 5.8% and
increased 2.7%. The aggregate market depreciation of our mutual fund
portfolios for the three months ended August 31, 2008, divided by the average
daily mutual fund AUM for the period was 6.3%, after management fees and
expenses paid by the funds. For the nine months ended August 31, 2008, this
represented a market depreciation of 9.4%.
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 August 31,
2008, has been an increase in AUM of $0.3 billion. For the nine months ended
August 31, 2008, the impact of the U.S. dollar has been an increase in AUM of
$0.3 billion.
Financial and Operational Results
The Investment Management Operations segment results for the three and
nine months ended August 31, 2008, and August 31, 2007, are as follows:-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------------
($ millions) 2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Revenue
Management and
advisory fees $ 146.8 $ 166.6 (11.9%) $ 457.2 $ 482.9 (5.3%)
Deferred sales
charges 6.4 4.9 30.6% 18.6 15.0 24.0%
Investment income
and other
revenue 2.0 1.9 5.3% 7.5 3.8 97.4%
-------------------------------------------------------------------------
155.2 173.4 (10.5%) 483.3 501.7 (3.7%)
Expenses
Selling, general
and
administrative 44.8 49.5 (9.5%) 135.3 142.1 (4.8%)
Trailing
commissions 40.7 43.7 (6.9%) 124.2 124.5 (0.2%)
Investment advisory
fees 3.7 3.6 2.8% 11.5 10.8 6.5%
-------------------------------------------------------------------------
89.2 96.8 (7.9%) 271.0 277.4 (2.3%)
-------------------------------------------------------------------------
EBITDA(*) 66.0 76.6 (13.8%) 212.3 224.3 (5.4%)
Amortization 27.2 30.9 (12.0%) 84.5 92.1 (8.3%)
-------------------------------------------------------------------------
Income before taxes
and non-segmented
items $ 38.8 $ 45.7 (15.1%) $ 127.8 $ 132.2 (3.3%)
-------------------------------------------------------------------------
(*) For the definition of EBITDA, see the "Key Performance Indicators and
Non-GAAP Measures" section.
RevenueFor the three and nine-month periods ended August 31, 2008, revenue for
the Investment Management Operations segment decreased by 10.5% and 3.7%
compared with the previous-year periods, with changes in the following
categories:
Management and Advisory Fees
The 11.9% and 5.4% decline in average daily mutual fund AUM in the three
and nine months ended August 31, 2008, contributed to a 11.9% and 5.3%
decrease in management and advisory fee revenue from the same periods in 2007.
Management and advisory fee revenue is reported net of distribution fees paid
to limited partnerships and other third-party financing entities. These
distribution fees totalled $1.5 million (2007 - $2.1 million) for the three
months ended August 31, 2008 and $4.9 million (2007 - $6.9 million) for the
nine months ended August 31, 2008.
Deferred Sales Charges (DSC)
We receive DSC upon redemption of securities sold on the contingent DSC
or back-end commission basis for which we finance the selling commissions paid
to the dealer. The DSC is generally 5.5% of the original subscription price of
the funds purchased if the funds are redeemed within the first two years, and
declines to zero after 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 August 31, 2008, increased by 30.6% and 24.0% from the same
periods in 2007, reflecting higher retail mutual fund redemptions of DSC AUM
that are subject to a charge.
Expenses
For the three and nine-month periods ended August 31, 2008, expenses
decreased by 7.9% and 2.3% from the previous-year period. Changes in specific
categories are described in the discussion that follows.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) for the three and
nine-month periods ended August 31, 2008, were $44.8 million and
$135.3 million. This represents a 9.5% and 4.8% decrease over the same periods
in 2007. The decrease is made up of the following amounts:-------------------------------------------------------------------------
Three months Nine months
ended ended
August 31, August 31,
-----------------------------------
($ millions) 2008 2008
-------------------------------------------------------------------------
Increase in fund absorption expenses $ 1.7 $ 2.2
Decrease in compensation-related expenses (5.6) (5.5)
Decrease in other expenses (0.8) (3.5)
-------------------------------------------------------------------------
$ (4.7) $ (6.8)
-------------------------------------------------------------------------
The following explains expense changes in the three and nine-month periods
ended August 31, 2008, compared with the previous-year periods:
- Our current estimate for 2008 absorption expense increased during the
quarter as a result of lower average levels of AUM as compared to
2007.
- Compensation-related expenses decreased due to lower estimates for
performance based payouts and lower severance payments.
- Other expenses decreased primarily as a result of reduced spending
across a number of expense categories as we continue to focus on
controlling expenses.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 increased to 0.61% and 0.59% for the three and nine months ended August
31, 2008, from 0.58% and 0.56% in the same 2007 periods. The trend in
increasing trailers expressed as a percentage of AUM is attributable to an
increased proportion of mutual fund AUM sold on a front-end basis. It is also
attributable to a change in the mix of assets toward managed products, such as
Harmony and Elements, which generally have higher trailer commissions.
Investment Advisory Fees
External investment advisory fees increased 2.8% and 6.5% for the three
and nine-month periods ended August 31, 2008, compared with the previous-year
period. The year-over-year increase relates primarily to the AGF Dividend
Income Fund, which was managed internally for a portion of 2007.
EBITDA
EBITDA for the Investment Management Operations segment were
$66.0 million and $212.3 million for the three and nine months ended August
31, 2008. This represents a decrease of 13.8% and 5.4% from $76.6 million and
$224.3 million for the same periods of fiscal 2007. The decrease is directly
attributable to lower revenue levels resulting from lower average AUM.
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 $23.9 million and $74.8 million in the three and nine months
ended August 31, 2008, compared with $27.5 million and $81.2 million in the
same periods in 2007.
During the third quarter of fiscal 2008, we paid $17.6 million in selling
commissions, compared with $31.6 million in 2007. The decline is due to lower
sales in 2008. As at August 31, 2008, the unamortized balance of deferred
selling commissions stood at $313.1 million. This is a decrease of
$6.0 million from the balance of $319.1 million as at May 31, 2008. The
contingent DSC that would be received if all of the DSC securities were
redeemed at August 31, 2008, were estimated to be approximately $414.7 million
(August 31, 2007 - $405.2 million).
Trust Company Operations
Business and Industry Profile
Through AGF Trust, we offer financial solutions, including GICs, real
estate secured and investment loans, and Home Equity Lines of Credit (HELOC).
AGF Trust investment loans consist of secured investment loans and RSP
loans distributed through financial advisors. The market for these products
derives from the efforts of 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 over 50 years.
We offer real estate secured loans to Canadians who have sound credit,
but whose circumstances may not meet the 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, which has experienced strong growth. 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. HELOC loans are distributed through
financial advisors to clients who generally have superior credit profiles.
Segment Strategy and Highlights
We strive to earn a high financial return and maximize synergies with the
Investment Management Operations segment.
Specific strategies include:- continuing to focus on organic growth in our real estate secured and
investment loan portfolios
- introducing new products that directly serve the needs of advisors'
clients
- developing effective sales strategies and targeted marketing
- using disciplined loan-underwriting standards and enterprise risk-
management measuresFor the three and nine months ended August 31, 2008, loan originations
were $362.0 million and $1.3 billion. The majority of the funding for lending
and investment activity comes from the ability to attract funds through the
sale of GICs and the sale of loans through securitization. With the current
global market volatility and the Asset-Backed Commercial Paper (ABCP)
situation, AGF Trust continues to adapt to changing business conditions and
increased funding costs across the industry. As previously reported, AGF Trust
holds only bank-sponsored ABCP investments, and in the current and prior
fiscal years, has used only a small portion of its funding in ABCP
investments.
Net loan write-offs were $3.2 million and $6.7 million for the three and
nine months ended August 31, 2008, compared to $0.9 million and $2.9 million
in the same periods in the previous year. The increase in write-offs was due
primarily to a 45% increase in the average balances, aging of the portfolio
and equity market declines (which decrease the value of collateral on the
investment loan portfolio). As at August 31, 2008, collateral value declines
have resulted in approximately $174.0 million of unsecured exposures in our
secured investment loan portfolio. Our weighted average loan-to-value ratio on
our conventional mortgage loan portfolio as at August 31, 2008 was 68.0%.
Total impaired loans expressed as a percentage of total loans outstanding
were 0.5% as at August 31, 2008 and 0.7% as at November 30, 2007.
Securitization Transaction
In the second quarter of 2007, AGF Trust securitized $263.6 million of
RSP loans, recognizing a gain of $8.0 million. There have been no
securitization transactions in 2008.
Financial and Operational Results
The Trust Company Operations segment results for the three and nine
months ended August 31, 2008 and August 31, 2007, are as follows:-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------------
($ millions) 2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Interest income
Loan interest $ 68.6 $ 56.5 21.4% $ 203.8 $ 150.6 35.3%
Investment interest 7.7 6.1 26.2% 25.2 14.2 77.5%
-------------------------------------------------------------------------
76.3 62.6 21.9% 229.0 164.8 39.0%
Interest expense
Deposit interest 52.6 36.2 45.3% 149.9 93.5 60.3%
Other interest
expense (1.8) 6.0 (130.0%) 5.7 14.3 (60.1%)
-------------------------------------------------------------------------
50.7 42.2 20.1% 155.6 107.8 44.3%
-------------------------------------------------------------------------
Net interest income 25.6 20.4 25.5% 73.4 57.0 28.8%
Other revenue 2.6 2.4 8.3% 8.6 5.0 72.0%
Gain on RSP loan
securitization and
related income
(loss), net of
impairment(1) 0.2 1.4 (85.7%) 0.3 11.4 (97.4%)
-------------------------------------------------------------------------
Total revenue 28.4 24.2 17.4% 82.3 73.4 12.1%
Expenses
Selling, general
and
administrative 10.6 8.7 21.8% 32.8 26.5 23.8%
Provision for loan
losses 3.4 2.4 41.7% 9.9 7.6 30.3%
-------------------------------------------------------------------------
14.0 11.1 26.1% 42.7 34.1 25.2%
EBITDA(2) 14.4 13.1 9.9% 39.6 39.3 0.8%
Amortization 0.9 0.4 125.0% 1.9 1.1 72.7%
-------------------------------------------------------------------------
Income before taxes
and non-segmented
items $ 13.5 $ 12.7 6.3% $ 37.7 $ 38.2 (1.3%)
-------------------------------------------------------------------------
(1) The nine months ended August 31, 2007 includes an $8.0 million
securitization gain.
(2) 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, increased 25.5% and 28.8% in the three and nine months
ended August 31, 2008, over the same periods in 2007. Loan balances were
approximately 31.0% higher as at August 31, 2008, compared to 2007. Other
revenue increased by $0.2 million and $3.6 million in the three and nine-month
periods ended August 31, 2008, over the same periods in the previous year. The
increase in the nine-month period is due to higher loan balances and a gain
from hedge ineffectiveness. Securitization gains and related items decreased
$1.2 million in the third quarter of 2008 versus the same quarter last year.
The decrease is primarily due to a write down of retained interests, as a
result of higher than anticipated prepayment rates on securitized loans in
2008. Total revenue increased by 17.4% and 12.1% for the three and nine months
ended August 31, 2008.
The average net interest margin on lending products in the third quarter
of 2008 was 2.33% (Q3 2007 - 2.55%). This spread decrease resulted from
compression in the Prime-Canadian Dollar Offered Rate (CDOR) spread, an
increase in the cost of GIC funding over the past nine months, a slight
decrease in spreads on the investment loan portfolio and a change in the
business mix to include a greater proportion of high credit-quality HELOCs.
Since HELOCs are risk-priced, they earn lower spreads than the Trust Company's
other lending products.
Selling, General and Administrative Expenses
The increases in SG&A expenses of 21.8% and 23.8% in the three and
nine-month periods ended August 31, 2008, over the same periods in 2007,
result from increased staffing levels to support the significant loan growth
during the past 12 months and costs related to a move to new office premises.
Provision for Loan Losses
The total provision for loan losses increased 41.7% in the third quarter
of 2008, compared with the previous-year period. This increase is attributable
to the growth in the loan portfolio, the mix of loan types and an increase in
loan write-offs primarily related to RSP loans. In addition, we have seen an
increase in our loans past due but not impaired balances as at August 31,
2008, compared to November 30, 2007, as detailed in Note 7 of our Q3 2008
Consolidated Financial Statements. The majority of this increase is in the
mortgage loans category and is reflective of seasonality issues surrounding
collections of accounts.
EBITDA
EBITDA of $14.4 million and $39.6 million in the three and nine-month
periods ended August 31, 2008 increased 9.9% and 0.8% compared with the same
periods ended August 31, 2007. Excluding the securitization gain of
$8.0 million in the nine months ended August 31, 2007, EBITDA increased 26.5%
in the nine-month period ended August 31, 2008, compared to the same period in
2007, which is consistent with the growth in loan assets.
Operational Performance
The table below highlights our key operational measures for the Trust
Company Operations segment for the three and nine months ended August 31, 2008
and August 31, 2007.-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
-----------------------------------------------------
($ millions) 2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Real estate secured
loans(1)
Insured mortgage
loans $ 626.2 $ 532.0 17.7% $ 626.2 $ 532.0 17.7%
Conventional
mortgage loans 800.4 701.5 14.1% 800.4 701.5 14.1%
HELOCs 620.0 391.6 58.3% 620.0 391.6 58.3%
-------------------------------------------------------------------------
2,046.6 1,625.1 25.9% 2,046.6 1,625.1 25.9%
Investment loans(1)
Secured investment
loans 1,759.0 1,368.2 28.6% 1,759.0 1,368.2 28.6%
RSP loans 589.2 356.9 65.1% 589.2 356.9 65.1%
Other loans 13.0 15.5 (16.1%) 13.0 15.5 (16.1%)
-------------------------------------------------------------------------
2,361.2 1,740.6 35.7% 2,361.2 1,740.6 35.7%
Other assets 959.5 635.0 51.1% 959.5 635.0 51.1%
-------------------------------------------------------------------------
Total Assets $5,367.3 $4,000.7 34.2% $5,367.3 $4,000.7 34.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net interest
income $ 25.6 $ 20.4 25.5% $ 73.4 $ 57.0 28.8%
Gain on RSP loan
securitization and
related income
(loss), net of
impairment(2) 0.2 1.4 (85.7%) 0.3 11.4 (97.4%)
Other revenue 2.6 2.4 8.3% 8.6 5.0 72.0%
Non-interest
expenses(3) (11.5) (9.1) 26.4% (34.7) (27.6) 25.7%
Provision for loan
losses (3.4) (2.4) 41.7% (9.9) (7.6) 30.3%
-------------------------------------------------------------------------
Income before taxes
and non-segmented
items $ 13.5 $ 12.7 6.3% $ 37.7 $ 38.2 (1.3%)
-------------------------------------------------------------------------
Efficiency ratio(4) 40.5% 37.6% 42.2% 37.5%
Assets-to-capital
multiple(4) 15.1 15.4 15.1 15.4
-------------------------------------------------------------------------
(1) Includes loan provision and deferred sales commission.
(2) The nine months ended August 31, 2007 includes an $8.0 million
securitization gain.
(3) Includes SG&A and amortization expenses.
(4) For the definition of efficiency ratio and assets-to-capital
multiple, see the "Key Performance Indicators and Non-GAAP Measures"
section.Loan Asset Growth
Our continued sales efforts directed at the mortgage broker and advisor
channels resulted in significant loan assets growth year-over-year. Real
estate secured loan assets grew 25.9% year-over-year and benefited from a
steady originations of HELOCs.
Secured investment loans increased 28.6% to $1.8 billion as at August 31,
2008, over the same period in 2007. RSP loan balances increased by
$233.0 million as at August 31, 2008. This is a result of a strong RSP season
despite volatile equity markets.
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 2008, the efficiency ratio experienced
an unfavourable change to 40.5% from 37.6% in the same period of 2007. The
efficiency ratio for the nine-month period ended August 31, 2008, also
experienced an unfavourable change to 42.2% from 37.5% in the same period in
2007.
Balance Sheet
Our balance sheet has grown significantly during the past year, with our
financial position remaining solid. Total assets increased 34.2% to
$5.4 billion as at August 31, 2008, compared with the previous year. As at
August 31, 2008, our asset-to-capital multiple stood at 15.1 times, compared
with 15.4 times at the same time last year. Our risk-based capital ratio was
15.6% as at August 31, 2008. AGF Trust received $35.0 million in debt and
equity capital from AGF Management Limited during the nine-month period ended
August 31, 2008, to support increased asset levels. Liquid assets were high
with $689.8 million in cash and cash equivalents as at August 31, 2008
(November 30, 2007 - $791.3 million), excluding cash currently pledged to
counterparties.
Loan Portfolio Credit
The general allowance for real estate secured loan losses was increased
during the year to $9.2 million from $7.4 million a year ago. The general
allowance for investment loan losses increased to $9.2 million from
$6.7 million a year ago. Approximately 43.9% of real estate secured loan
assets, excluding HELOCs, are insured. We have security for non-RSP investment
loans, consisting of mutual funds and other investments. The value of this
collateral fluctuates with the changes in the underlying investments. The
expense for impaired RSP loans, which consists of the increase in specific
allowances, plus write-offs net of recoveries (excluding securitized RSP
loans) was $3.9 million for the nine months ended August 31, 2008 (2007 -
$2.1 million). For the balance of our loan products, the expense for impaired
loans was $2.8 million (2007 - $0.8 million).
Liquidity and Capital Resources
Consolidated cash flow generated from continuing operating activities,
before net change in non-cash balances related to operations, was
$66.2 million and $220.1 million for the three and nine months ended August
31, 2008. This compares with $69.7 million and $222.8 million in the same
periods of 2007.
Consolidated free cash flow is defined as cash flow from operations less
selling commissions paid. It was $48.6 million and $147.9 million for the
three and nine months ended August 31, 2008, compared with $38.1 million and
$97.9 million in the same period of 2007. We paid $17.6 million and
$72.2 million in selling commissions during the three and nine months ended
August 31, 2008, which were deferred for accounting purposes. This compares
with $31.6 million and $124.9 million paid and deferred in the same periods in
2007.
Our free cash flow was used primarily to fund the following:-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
--------------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Payment of dividends $ 21.5 $ 17.5 $ 58.5 $ 49.0
Acquisitions of
subsidiaries 0.0 7.8 20.8 27.7
Purchase of property,
equipment and other
intangible assets 2.6 3.5 5.3 6.1
Bank credit facility
repayment (borrowing) 24.2 (5.0) 12.1 (89.0)
Investment in Trust
Operations (eliminated
on consolidation) 0.0 17.0 35.0 65.5
-------------------------------------------------------------------------
$ 48.3 $ 40.8 $ 131.7 $ 59.3
-------------------------------------------------------------------------During the three months ended August 31, 2008, our revolving term loan
balance decreased $24.2 million to $147.8 million. Consolidated cash and cash
equivalents of $733.6 million decreased by $94.3 million from November 30,
2007 levels of $827.9 million (2007 - increased by $200.1 million). This was
primarily due to Trust investing $140.0 million of cash into investments
available for sale.
On May 26, 2008, the Company, under its current loan agreement, arranged
an additional three-year prime-rate based reducing term loan to a maximum of
$60.0 million (Facility 2). Facility 2 will be used to finance share
repurchases, permitting AGF to draw down the reducing term loan by direct
advances or bankers' acceptances (BAs). No share repurchases were made in the
third quarter and the availability of Facility 2 has been extended to the
earlier of December 31, 2008 (from September 30, 2008), or the date the
facility is fully drawn. Following this date, Facility 2 is payable in equal
quarterly instalments over twelve quarters. Any undrawn portion of Facility 2
at the end of the availability date will be permanently cancelled.
We also have a six-year prime rate-based revolving term loan facility to
a maximum of $300.0 million, of which $146.9 million was available to be drawn
as at August 31, 2008. Aside from cash held in the Trust Company Operations
segment, which is held to fund loans to clients and GIC maturities, AGF had
$43.8 million of cash as at August 31, 2008. Some of this cash will be used to
repay bank debt in the remainder of 2008. The loan facility will be available
to meet future operational and investment needs. We anticipate that cash flow
from operations, together with the available loan facility, will be sufficient
in the foreseeable future to implement our business plan, finance selling
commissions, satisfy regulatory requirements, service debt repayment
obligations, meet capital spending needs and pay quarterly dividends.
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 capital consists of shareholders' equity. On an annual basis, AGF
prepares a five-year plan detailing projected operating budgets and capital
requirements. Each of AGF's operating segments are required to prepare and
submit a five-year operating plan and budget to AGF's Capital Committee for
approval prior to seeking Board approval. AGF's Capital Committee consists of
the Chairman and CEO, the Vice-Chairman, Senior Vice-President and CFO, and
the Senior Vice-President and General Counsel. Once approved by the Capital
Committee, the five-year plans are reviewed and approved by AGF's Board of
Directors. These plans become the basis for the payment of dividends to
shareholders, the repurchase of Class B shares and, combined with the
reasonable use of leverage, the source of funds for acquisitions.
Investment Management Operations - Regulatory Capital
A significant objective of the Capital Management program is to ensure
regulatory requirements are met regarding regulatory capital requirements. Our
Investment Management businesses, in general, are not subject to significant
regulatory capital requirements in each of the jurisdictions in which they are
registered and operate. The cumulative amount of minimum regulatory capital
across all of our investment management operations is approximately
$6.0 million.
AGF Trust - Regulatory Capital
AGF Trust's regulatory capital consists primarily of common shareholders'
equity, preferred shares and subordinated debentures. Regulatory capital is a
factor that allows the AGF Trust Board of Directors (Trust Board) to assess
the stability and security in relation to the overall risks inherent in AGF
Trust's activities. AGF Trust's policy is to maintain its regulatory capital
ratios consistent with requirements as laid out by the Company's principal
regulator. As of January 1, 2008, AGF Trust is monitoring its regulatory
capital based on the Bank for International Settlements (BIS) regulatory
risk-based capital framework (commonly known as Basel II). AGF Trust uses the
Standardized Approach for credit risk and the Basic Indicator Approach for
operational risk. During the third quarter of 2008, AGF Trust has complied
with these Basel II requirements. Refer to the following section for more
information on Basel II and to Note 13 of the Q3 2008 Consolidated Financial
Statements.
A capital plan prepared annually specifies the target capital ratios by
taking into account the projected risk-weighted asset levels and expected
capital management initiatives. Regulatory capital ratios are reported monthly
to management. Regulatory capital ratio monitoring reports are provided on a
quarterly basis to the Trust Board.
AGF Trust - Basel II Capital Accord
AGF Trust is subject to the Basel II framework, which was developed by
the Basel Committee on Banking Supervision. Its objectives are to improve the
consistency of capital requirements internationally and make required
regulatory capital more risk sensitive. Basel II sets out several options,
which represent increasingly risk-sensitive approaches to calculating credit,
market and operational risk-based regulatory capital. AGF Trust uses the
Standardized Approach for credit risk under the Basel II capital adequacy
regime. It is the simplest approach, which uses supervisory determined risk
weights to measure risk-weighted assets. The Standardized Approach under Basel
II is principally distinguished from the prior capital adequacy regime for AGF
Trust in the following ways: Basel II allows some recognition of the credit
risk mitigation provided by mutual funds as collateral for secured investment
loans and imposes a somewhat lower risk weight for retail credit exposures.
AGF Trust uses the Basic Indicator Approach under the Basel II capital
adequacy regime to determine the capital required for operational risk. The
Basic Indicator Approach uses gross income as a proxy for the institution's
overall operation risk. The capital required for operational risk is
determined by multiplying the average of the trailing three years' gross
income by a fixed percentage.
Regulatory capital at AGF Trust is detailed as follows:-------------------------------------------------------------------------
As at As at
August 31, November 30,
($ thousands) 2008 2007(1)
-------------------------------------------------------------------------
Tier 1 capital
Common shares $ 82,768 $ 82,768
Contributed surplus 1,234 910
Retained earnings 105,299 79,863
Non-cumulative preferred shares 64,000 49,000
Less: securitization and other (18,802) -
-------------------------------------------------------------------------
234,499 212,541
Tier 2 capital
Subordinated debentures 109,500 89,500
General allowances 18,357 15,277
Less: securitization and other (7,165) (26,669)
-------------------------------------------------------------------------
120,692 78,108
-------------------------------------------------------------------------
Total capital $ 355,191 $ 290,649
-------------------------------------------------------------------------
(1) Information based on capital adequacy requirements in force at
that date.Dividends
On September 23, 2008, we declared a 25-cents-per-share dividend on Class
A and Class B shares, which approximates a 4.0% dividend yield. This dividend
will be payable on October 21, 2008, to shareholders of record on October 10,
2008.
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 Toronto Stock
Exchange (TSX) during the 10 trading days immediately preceding the record
date applicable to such dividend.
The following table sets forth the dividends paid by AGF on Class B
shares and Class A shares for the periods indicated:-------------------------------------------------------------------------
Years Ended
November 30 2008(*) 2007 2006 2005 2004
-------------------------------------------------------------------------
Per share $ 0.950 $ 0.780 $ 0.690 $ 0.560 $ 0.410
-------------------------------------------------------------------------
Percentage
increase 22% 13% 23% 37% 39%
-------------------------------------------------------------------------
(*) Subject to quarterly review and approval by AGF's Board of Directors.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.
Normal Course Issuer Bid
In February 2008, the Company's Board of Directors authorized the renewal
of AGF's normal course issuer bid for the purchase of up to 7,253,822 Class B
shares, or 10% of the public float for such shares. The Company received
approval from the TSX on February 22, 2008, for the renewal of its normal
course issuer bid. This allows AGF to purchase up to 7,253,822 Class B shares
through the facilities of the TSX (or as otherwise permitted by the TSX)
between February 26, 2008 and February 25, 2009. The Class B shares may be
repurchased from time to time at prevailing market prices or such other price
as may be permitted by the TSX.
As at August 31, 2008, under this current normal course issuer bid, no
Class B shares have been repurchased. AGF's previous normal course issuer bid,
initiated on February 26, 2007, allowed for the repurchase of up to 7,303,844
Class B shares between February 26, 2007 and February 25, 2008, at prevailing
market prices. Under the previous normal course issuer bid, AGF purchased an
aggregate of 1,437,800 Class B shares, for a total consideration of
$45.5 million at an average price of $31.67 per share.
Outstanding Share Data
Set out below is our outstanding share data as at August 31, 2008. For
additional details, see Note 9 of the Q3 2008 Consolidated Financial
Statements.-------------------------------------------------------------------------
As at August 31, 2008 2007
-------------------------------------------------------------------------
Shares
Class A voting common shares 57,600 57,600
Class B non-voting shares 89,442,224 90,290,515
Stock Options
Outstanding options 3,909,948 3,547,766
Exercisable options 1,943,192 1,545,034
-------------------------------------------------------------------------
Selected Quarterly Information
-------------------------------------------------------------------------
($ 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 from
continuing
operations(1) 66.2 71.5 82.3 90.7
EBITDA (continuing
operations)(2) 81.5 88.6 89.5 87.5
Pre-tax income
(continuing operations) 51.3 57.9 56.6 53.9
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ millions, except
per share amounts)
For the three-month Aug. 31, May 31, Feb. 28, Nov. 30,
period ended 2007 2007 2007 2006
-------------------------------------------------------------------------
Revenue (continuing
operations) $ 199.2 $ 204.9 $ 177.0 $ 158.5
Cash flow from
operations(1) 69.7 84.4 68.7 53.1
EBITDA (continuing
operations)(2) 91.3 98.0 80.4 60.3
Pre-tax income
(continuing operations) 57.3 63.3 49.1 26.2
Net income 39.4 53.6 36.3 21.0
Earnings per share
Basic $ 0.44 $ 0.60 $ 0.41 $ 0.24
Diluted $ 0.43 $ 0.59 $ 0.40 $ 0.23
Weighted average
basic shares 90,299,033 89,798,419 89,474,827 89,174,064
Weighted average fully
diluted shares 91,847,103 91,316,967 90,640,734 89,890,105
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 August 31, 2008, our 2007 annual MD&A and Consolidated
Financial Statements, our 2007 Annual Information Form (AIF) and other
documents filed with applicable securities regulators in Canada. They may be
accessed at www.sedar.com.AGF Management Limited
Consolidated Balance Sheets
-------------------------------------------------------------------------
($ thousands) August 31, November 30,
(unaudited) 2008 2007
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 733,597 $ 827,874
Investments available for sale 163,429 26,149
Accounts receivable and prepaid expenses 78,078 93,141
Current portion of retained interest
from securitization (note 2) 6,258 7,501
Real estate secured and investment loans
due within one year (note 7) 627,043 492,756
-------------------------------------------------------------------------
1,608,405 1,447,421
Retained interest from securitization (note 2) 40,549 43,424
Real estate secured and investment
loans (note 7) 3,780,550 3,187,605
Investment in associated company 102,664 102,600
Management contracts 504,269 504,269
Customer contracts, net of accumulated
amortization 59,981 65,805
Deferred selling commissions, net of
accumulated amortization 313,104 315,275
Property, equipment and computer software,
net of accumulated amortization 20,276 20,812
Goodwill 180,058 180,058
Trademarks 1,935 1,935
Other assets (notes 3 and 7(e)) 45,403 7,608
-------------------------------------------------------------------------
Total assets $ 6,657,194 $ 5,876,812
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current Liabilities
Accounts payable and accrued liabilities $ 304,636 $ 261,115
Future income taxes (note 12) 40,383 48,304
Long-term debt due within one year (note 8) 25,325 25,611
Deposits due within one year (note 7) 2,472,708 1,847,494
-------------------------------------------------------------------------
2,843,052 2,182,524
Deposits (note 7) 2,317,434 2,235,848
Long-term debt (note 8) 147,759 184,486
Future income taxes (note 12) 183,966 202,923
Other long-term liabilities (note 9 (e)) 5,510 1,638
-------------------------------------------------------------------------
Total liabilities 5,497,721 4,807,419
-------------------------------------------------------------------------
Non-controlling interest 242 391
Shareholders' equity
Capital stock (note 9) 436,149 421,923
Contributed surplus 16,062 14,948
Retained earnings 720,728 635,369
Accumulated other comprehensive income (13,708) (3,238)
-------------------------------------------------------------------------
Total shareholders' equity 1,159,231 1,069,002
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 6,657,194 $ 5,876,812
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(The accompanying notes are an integral part of these Consolidated
Financial Statements.)
AGF Management Limited
Consolidated Statements of Income
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
------------------------------------------------
($ thousands) 2008 2007 2008 2007
(unaudited) (note 3) (note 3)
-------------------------------------------------------------------------
Revenue
Management and
advisory fees $ 146,827 $ 166,609 $ 457,201 $ 482,919
Deferred sales charges 6,375 4,998 18,597 15,007
Gain on RSP loan
securitization and
related income (loss),
net of impairment (note 2) 163 1,424 250 11,404
Investment income and
other revenue 5,737 5,754 23,877 14,850
-------------------------------------------------------------------------
159,102 178,785 499,925 524,180
-------------------------------------------------------------------------
AGF Trust interest
income (note 11) 76,293 62,549 229,048 164,785
AGF Trust interest
expense (note 11) (50,729) (42,151) (155,620) (107,812)
-------------------------------------------------------------------------
AGF Trust net
interest income 25,564 20,398 73,428 56,973
-------------------------------------------------------------------------
Total Revenue 184,666 199,183 573,353 581,153
-------------------------------------------------------------------------
Expenses
Selling, general and
administrative 55,296 58,161 168,069 168,499
Trailing commissions 40,746 43,700 124,191 124,566
Investment advisory fees 3,719 3,615 11,516 10,815
Amortization of deferred
selling commissions 23,907 27,502 74,760 81,209
Amortization of
customer contracts 1,856 1,976 5,825 5,944
Amortization of property,
equipment, computer
software and other
intangible assets 2,339 1,822 5,832 5,946
Interest expense 2,098 2,754 7,494 7,030
Provision for AGF Trust
loan losses 3,396 2,412 9,857 7,597
-------------------------------------------------------------------------
133,357 141,942 407,544 411,606
Income from continuing
operations before
income taxes and
non-controlling interest 51,309 57,241 165,809 169,547
Income tax expense
(reduction) (note 12)
Current 17,813 22,150 42,281 38,996
Future (7,793) (4,471) (24,763) 3,391
-------------------------------------------------------------------------
10,020 17,679 17,518 42,387
-------------------------------------------------------------------------
Non-controlling interest
(note 4) 150 211 446 678
-------------------------------------------------------------------------
Net income from continuing
operations for the period 41,139 39,351 147,845 126,482
-------------------------------------------------------------------------
Loss on dissolution of
Limited Partnerships,
net of tax (note 6) - - - (2,128)
Gain on sale of
discontinued operations,
net of tax (note 3) - - - 4,702
Net earnings from
discontinued operations,
net of tax (note 3) - - - 247
-------------------------------------------------------------------------
Net income for the period $ 41,139 $ 39,351 $ 147,845 $ 129,303
-------------------------------------------------------------------------
Earnings per share
(note 9)
Basic from continuing
operations $ 0.46 $ 0.44 $ 1.66 $ 1.41
Diluted from
continuing operations $ 0.46 $ 0.43 $ 1.65 $ 1.39
Basic $ 0.46 $ 0.44 $ 1.66 $ 1.44
Diluted $ 0.46 $ 0.43 $ 1.65 $ 1.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(The accompanying notes are an integral part of these Consolidated
Financial Statements.)
AGF Management Limited
Consolidated Statements of Changes in Shareholders' Equity
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
($ thousands) ------------------------------------------------
(unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Common shares
Balance, beginning
of period $ 434,621 $ 425,122 $ 421,923 $ 403,566
Issued through dividend
reinvestment plan 819 594 3,989 3,069
Stock options exercised 709 285 5,121 13,694
Issued on acquisition
of Highstreet Partners
Limited (note 4) - - 5,116 5,672
Issued for Cypress
contingent consideration
(note 5) - 1,200 - 1,200
-------------------------------------------------------------------------
Balance, end of period 436,149 427,201 436,149 427,201
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning
of period 14,962 12,720 14,948 10,470
Stock options 1,100 1,072 1,114 3,322
-------------------------------------------------------------------------
Balance, end of period 16,062 13,792 16,062 13,792
-------------------------------------------------------------------------
Retained earnings
Balance, beginning
of period 701,947 621,477 635,369 565,576
Transitional adjustment
on adoption of new
accounting policies - - - (25)
-------------------------------------------------------------------------
Balance, beginning of
period, as restated 701,947 621,477 635,369 565,551
Net income for the period 41,139 39,351 147,845 129,303
Dividends on AGF Class A
voting common shares
and AGF Class B non-
voting shares (22,358) (18,057) (62,486) (52,083)
-------------------------------------------------------------------------
Balance, end of period 720,728 642,771 720,728 642,771
-------------------------------------------------------------------------
Accumulated other
comprehensive income (loss)
Balance, beginning
of period (10,444) 2,917 (3,238) 3,792
Other comprehensive
income (loss) (3,264) (1,774) (10,470) (2,649)
-------------------------------------------------------------------------
Balance, end of period (13,708) 1,143 (13,708) 1,143
-------------------------------------------------------------------------
Total shareholders'
equity $1,159,231 $1,084,907 $1,159,231 $1,084,907
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(The accompanying notes are an integral part of these Consolidated
Financial Statements.)
AGF Management Limited
Consolidated Statements of Comprehensive Income
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
($ thousands) ------------------------------------------------
(unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net income $ 41,139 $ 39,351 $ 147,845 $ 129,303
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other comprehensive
income (losses),
net of tax
Foreign currency
translation adjustments
related to net
investments in self-
sustaining foreign
operations(1) (1,594) 293 (5,570) (5,276)
Reclassification of
realized loss to
earnings - (509) - -
-------------------------------------------------------------------------
(1,594) (216) (5,570) (5,276)
-------------------------------------------------------------------------
Net unrealized gains
(losses) on available
for sale securities
Unrealized gains
(losses)(2) (2,112) (1,554) (4,276) 2,631
Reclassification of
realized loss or other
than temporary
impairment to earnings - (4) (77) (4)
-------------------------------------------------------------------------
(2,112) (1,558) (4,353) 2,627
-------------------------------------------------------------------------
Net unrealized gains
(losses) on cash
flow hedges
Unrealized gains
(losses)(3) 291 - (946) -
Reclassification of
realized gain on cash
flow hedges 151 - 399 -
-------------------------------------------------------------------------
442 - (547) -
-------------------------------------------------------------------------
Total other
comprehensive income
(loss), net of tax $ (3,264) $ (1,774) $ (10,470) $ (2,649)
-------------------------------------------------------------------------
Comprehensive income $ 37,875 $ 37,577 $ 137,375 $ 126,654
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net of income tax reduction of $0.2 million and $0.9 million for the
three and nine months ended August 31, 2008. Net of income tax
expense of $0.1 million and income tax reduction of $1.0 million for
the three and nine months ended August 31, 2007.
(2) Net of income tax reduction of $0.4 million and $0.9 million for the
three and nine months ended August 31, 2008. Net of income tax
reduction of $0.6 million and income tax expense of $0.5 million for
the three and nine months ended August 31, 2007.
(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) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating Activities
Net income for the
period $ 41,139 $ 39,351 $ 147,845 $ 129,303
Loss on dissolution of
limited partnerships,
net of tax - - - 2,128
Gain on sale of
discontinued operation,
net of tax - - - (4,702)
Earnings from
discontinued operations,
net of tax - - - (247)
-------------------------------------------------------------------------
Net income from
continuing operations 41,139 39,351 147,845 126,482
Items not affecting cash
Amortization 28,102 31,300 86,417 93,099
Future income taxes (7,793) (4,471) (24,763) 3,391
Gain on RSP loan
securitization and
related income (loss),
net of impairment (163) (1,424) (250) (11,404)
Stock-based
compensation 2,225 1,593 6,684 4,841
Provision for AGF Trust
loan losses 3,396 2,412 9,857 7,597
Other (660) 941 (5,701) (1,226)
-------------------------------------------------------------------------
66,246 69,702 220,089 222,780
Net increase in non-cash
balances related to
operations 30,810 60,341 62,888 65,712
-------------------------------------------------------------------------
Net cash provided by
continuing operating
activities 97,056 130,043 282,977 288,492
Net cash used in
discontinued operating
activities - - - (1,271)
-------------------------------------------------------------------------
Net cash provided by
operating activities 97,056 130,043 282,977 287,221
-------------------------------------------------------------------------
Financing Activities
Issue of Class B
non-voting shares 581 286 2,483 13,694
Dividends (21,539) (17,464) (58,497) (49,014)
Increase (decrease)
in bank loan (24,209) 5,000 (12,133) 89,000
Net increase in AGF
Trust deposits 74,945 413,995 669,068 1,093,648
-------------------------------------------------------------------------
Net cash provided by
continuing financing
activities 29,778 401,817 600,921 1,147,328
Investing Activities
Deferred selling
commissions paid (17,574) (31,589) (72,242) (124,901)
Proceeds of RSP loan
securitization - - - 252,878
Acquisition of
subsidiaries, net of
cash acquired - (7,800) (20,784) (27,673)
Proceeds of sale of
discontinued operations - - - 2,747
Purchase of property,
equipment and other
intangible assets (2,553) (3,503) (5,296) (6,101)
Other investment
activities (2,543) (2,070) (142,709) (5,440)
Net increase in AGF
Trust real estate
secured and
investment loans (119,058) (390,986) (737,144) (1,325,964)
-------------------------------------------------------------------------
Net cash used in
continuing investing
activities (141,728) (435,948) (978,175) (1,234,454)
-------------------------------------------------------------------------
Increase (decrease) in
cash and cash equivalents
during the period (14,894) 95,912 (94,277) 200,095
Balance of cash and cash
equivalents beginning
of period 748,491 508,298 827,874 404,115
-------------------------------------------------------------------------
Balance of cash and cash
equivalents, end of
period $ 733,597 $ 604,210 $ 733,597 $ 604,210
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents
related to:
Continuing operations $ 733,597 $ 604,210
Discontinued operations - -
-------------------------------------------------------------------------
$ 733,597 $ 604,210
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Represented by:
Cash and cash equivalents $ 43,821 $ 52,001
AGF Trust cash and cash
equivalents 689,776 552,209
-------------------------------------------------------------------------
$ 733,597 $ 604,210
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, 2008, and August 31, 2007
(tabular amounts in thousands of dollars, except per share amounts)
(unaudited)
These unaudited Q3 2008 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, 2007. 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,
2007, published in AGF's 2007 Annual Report. Certain comparative amounts
in these financial statements have been reclassified to conform to the
current year's presentation.
Note 1: Changes in Accounting Policy
Capital Disclosures
Effective December 1, 2007, the CICA's new accounting standard "Handbook
Section 1535, Capital Disclosures" was adopted. This requires the
disclosure of both qualitative and quantitative information to enable
users of financial statements to evaluate the entity's objectives,
policies and processes for managing capital. The new standard did not
have any impact on the financial position or earnings of the Company.
Refer to Note 13.
Financial Instruments Disclosures and Presentation
Effective December 1, 2007, the accounting and disclosure requirements of
the CICA's two new accounting standards were adopted: "Handbook Section
3862, Financial Instruments - Disclosures" and "Handbook Section 3863,
Financial Instruments - Presentation". The new standards did not have any
impact on the financial position or earnings of the Company. Refer to
Note 14.
Future Accounting Changes
The Canadian Accounting Standards Board (AcSB) confirmed a plan to adopt
the International Financial Reporting Standards (IFRS) in 2011, for
interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2011. The Company will adopt IFRS. The
impact of the adoption of IFRS is not known at this time.
On December 1, 2008, the Company will adopt "CICA 3064, Goodwill and
Intangible Assets". This standard contains revised rules on the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The adoption of this standard is not expected to have
a significant impact on the Company's financial position or results of
operation.
Note 2: Securitization of AGF Trust Loans
The Company, through its wholly-owned subsidiary AGF Trust Company (AGF
Trust), has securitized RSP loans through the sale of these loans to a
securitization trust. As at August 31, 2008, $186.7 million (November 30,
2007 - $291.1 million) of securitized loans were outstanding.
On March 30, 2007, AGF Trust securitized $263.6 million of RSP loans.
Cash flows of $252.9 million were received and a gain of $8.0 million was
recorded, net of transaction fees of $0.1 million.
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.
The Company has recorded retained interests of $46.8 million
(November 30, 2007 - $50.9 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
$14.7 million (November 30, 2007 - $20.4 million), ii) cash collateral of
$11.9 million (November 30, 2007 - $11.3 million) and iii) over-
collateralization of $20.2 million (November 30, 2007 - $19.2 million).
As at August 31, 2008, the impaired loans included in the securitized
balances were equal to $0.3 million (November 30, 2007 - $0.7 million),
and during the three and nine months ended August 31, 2008, $0.6 million
(2007 - $0.5 million) and $2.2 million (2007 - $1.1 million) of
securitized RSP loans were written off.
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, 2008, cash flows of $1.9 million (2007 -
$5.7 million) were received on the securitized loans. Of this,
$1.9 million was related to the interest-only strip (2007 - $3.4 million)
and none related to the over-collateralization (2007 - $2.3 million). For
the nine months ended August 31, 2008, cash flows of $6.1 million (2007 -
$13.4 million) were received on the securitized loans, of which
$6.1 million was related to the interest-only strip (2007 - $8.6 million)
and none related to the over-collateralization (2007 - $4.8 million). The
total other expense recognized from securitization during the three
months ended August 31, 2008, was $0.2 million (2007 - $1.4 million
income), net of securitization writedown. The total other income
recognized from securitization during the nine months ended August 31,
2008, was $0.3 million (2007 - $3.4 million), net of securitization
writedown.
The significant assumptions used to value the sold and retained interests
were as follows:
Excess spread 3.7% - 3.9%
Discount rate on interest-only strip 7.5%
Expected credit losses 0.8%
Prepayment rate 16.3% - 18.3%
Expected weighted average life of RSP loans 23 - 25 months
The Trust Company retained servicing responsibilities for the securitized
loans. A servicing liability of $1.2 million was recorded as at
August 31, 2008 (November 30, 2007 - $1.8 million). This amount
represents the estimated future cost of servicing the securitized loans
and has been offset against the gain on the sale of the RSP loans. The
amount amortized related to the servicing liability during the three and
nine months ended August 31, 2008, was $0.2 million (2007 - $0.3 million)
and $0.6 million (2007 - $0.7 million).
The following table presents key economic assumptions and the sensitivity
of the current fair value of retained interests to two adverse changes in
each key assumption, as at August 31, 2008. Since the sensitivity is
hypothetical, it should be used with caution. The effect of changes in
the fair value of retained interests was calculated using a discounted
cash flow analysis.
-------------------------------------------------------------------------
($ thousands)
-------------------------------------------------------------------------
Discount rate
+10% $ 137
+20% 271
Prepayment rate
+10% $ 290
+20% 517
Expected credit losses
+10% $ 267
+20% 535
Excess spread
+10% $ 1,117
+20% 2,246
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 3: Discontinued Operations
On April 30, 2007, AGF sold 100% of Investmaster for $6.8 million and the
additional contingent consideration that is not determinable at this
time, recognizing a gain on the sale of $4.7 million. The purchase
consideration included $5.0 million in cash and two notes receivable from
the buyer. The two notes receivable, totalling $1.8 million at the time
of sale, are included in account receivables and in other assets and are
due on April 30, 2009, and April 30, 2010. The contingent consideration
will be payable to AGF in 2009 and 2010 if certain working capital and
revenue targets are reached by Investmaster. Accordingly, Investmaster's
operations for the 2007 period have been reported as discontinued
operations.
-------------------------------------------------------------------------
Three months Nine months
ended ended
August 31, August 31,
($ thousands, except ---------------------------
per share amounts) 2007 2007
-------------------------------------------------------------------------
Revenue $ - $ 4,342
Net earnings (loss) from discontinued
operations, net of tax $ - $ 247
Basic net earnings per share $ - $ -
Diluted net earnings per share $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 4: Acquisition of Highstreet Partners Limited
On December 1, 2006, AGF acquired 79.9% of Highstreet Partners Limited
(Highstreet), which wholly owns Highstreet Asset Management Inc., an
investment counsel firm based in London, Ontario. The purchase
consideration is payable in a combination of cash and the issue of
Class B non-voting shares (Class B shares). As at August 31, 2008, AGF
has made payments of $41.0 million in cash and $10.8 million through the
issue of 440,999 AGF Class B shares, which approximates 66.6% of the
expected total payments. An additional payment of $25.9 million
(principal and imputed interest) is due on February 28, 2009, for total
minimum consideration, including acquisition costs, of $74.4 million. In
addition, a contingent consideration will be paid in 2010 if certain
financial profitability targets are achieved by Highstreet. At this time,
the amount of the contingent consideration is not determinable.
The fair value of the net assets acquired and consideration paid are
summarized as follows:
-------------------------------------------------------------------------
($ thousands)
-------------------------------------------------------------------------
Net assets acquired
Cash $ 354
Other assets 3,011
Management contracts 26,010
Customer contracts 14,160
Goodwill 45,895
Trademarks 1,935
Current liabilities (2,955)
Future income taxes (14,014)
-------------------------------------------------------------------------
$ 74,396
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration paid (including acquisition costs)
Cash $ 20,228
Issue of Class B shares (note 9) 5,672
Payments subsequent to acquisition date (note 8) 47,896
Acquisition costs 600
-------------------------------------------------------------------------
$ 74,396
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 5: Acquisition of Cypress Capital Management Limited
On June 30, 2004, AGF acquired 100% of the shares of Cypress Capital
Management Limited (Cypress). At the time of purchase, contingent
consideration of up to $9.0 million was due to the vendors, subject to
Cypress achieving certain revenue levels over the three-year period ended
June 30, 2007. During 2007, AGF determined that these revenue levels were
exceeded, and the consideration of $9.0 million was paid. The payment
consisted of $7.8 million in cash and the issue of 33,367 Class B shares
valued at $1.2 million. The payment was recorded as an increase in
goodwill on June 30, 2007.
Note 6: Dissolution of Partnerships
On February 28, 2007, the unitholders and the respective boards of
directors of the following limited partnerships (LPs) - AGF Limited
Partnership 1990, AGF Limited Partnership 1991, 20/20 Group 1990 Private
Limited Partnership, 20/20 Group 1990 Limited Partnership and 20/20 Group
1992 Limited Partnership - approved dissolution of each LP. On March 1,
2007, as part of the LP dissolution process, AGF purchased the future
distribution fees remaining payable by AGF to the LPs or purchased the
outstanding units for total cash consideration of $3.2 million
($2.1 million net of taxes). As a result of the aforementioned
transaction, no further distribution will be made to these LPs.
Note 7: AGF Trust
AGF Trust's principal business activities are originating real estate
secured loans and investment loans and deposit taking. Details relating
to these activities are as follows:
-------------------------------------------------------------------------
Term to contractual repricing
-----------------------------------------------------------
August November
Variable 1 year or 1 to 5 31, 30,
($ thousands) rate less years 2008 2007
-------------------------------------------------------------------------
Mortgage
loans $ 1,567 $ 565,149 $ 865,756 $1,432,472 $1,326,327
Home equity
lines of
credit (HELOC) 615,942 - - 615,942 449,151
-------------------------------------------------------------------------
Total real
estate secured
loans 617,509 565,149 865,756 2,048,414 1,775,478
Investment
loans 2,356,987 5,084 7,938 2,370,009 1,914,686
-----------------------------------
-----------------------------------
2,974,496 570,233 873,694 4,418,423 3,690,164
-----------------------------------
Less:
allowance for
loan losses (20,319) (17,137)
Add: net
deferred sales
commissions and
commitment fees 9,489 7,334
-----------------------
4,407,593 3,680,361
Less: current
portion (627,043) (492,756)
-----------------------
-----------------------
$3,780,550 $3,187,605
-------------------------------------------------------------------------
Impaired loans
included in
above $ 23,448 $ 25,821
Less: specific
allowance for
loan losses (1,962) (1,860)
-----------------------
-----------------------
$ 21,486 $ 23,961
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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, 2008, were
$627.0 million (November 30, 2007 - $492.8 million).
As at August 31, 2008, AGF Trust's mortgage portfolio comprises a
combination of fixed rate and variable rate residential mortgages, of
which $626.2 million (November 30, 2007 - $563.5 million) is insured,
with a weighted average term to repricing of 2.0 years (November 30,
2007 - 2.0 years) and a weighted average yield of 7.17% (November 30,
2007 - 7.20%). Investment loans have interest rates based on prime.
As at August 31, 2008, the average interest rate on HELOCs was 4.79%
(November 30, 2007 - 6.30%) and on investment loans was 6.09%
(November 30, 2007 - 7.60%). Mortgage and HELOC loans are secured
primarily by residential real estate. Investment loans, excluding RSP
loans, are secured primarily by the investment made using the initial
loan proceeds.
(b) Loans Past Due but Not Impaired
Loans are considered to be past due where repayment of principal or
interest is contractually in arrears. Loans are classified as
impaired when, in the opinion of management, there is reasonable
doubt as to the collectability, either in whole or in part, of
principal or interest, or when principal or interest is 90 days past
due, except where the loan is both well-secured and in the process of
collection. The following table provides an analysis of loans that
are past due but not impaired:
-------------------------------------------------------------------------
($ thousands) 31 to 61 to
As at August 31, 2008 60 days 90 days Total
-------------------------------------------------------------------------
Mortgage loans $ 22,459 $ 10,586 $ 33,045
Investment loans 2,207 997 3,204
RSP loans 4,024 1,830 5,854
HELOC receivable 147 - 147
-------------------------------------------------------------------------
$ 28,837 $ 13,413 $ 42,250
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ thousands) 31 to 61 to
As at November 30, 2007 60 days 90 days Total
-------------------------------------------------------------------------
Mortgage loans $ 15,840 $ 12,297 $ 28,137
Investment loans 1,882 580 2,462
RSP loans 2,796 1,260 4,056
HELOC receivable 970 294 1,264
-------------------------------------------------------------------------
$ 21,488 $ 14,431 $ 35,919
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Allowance for Credit Losses
The change in the allowance for loan losses is as follows:
-------------------------------------------------------------------------
August 31, 2008
---------------------------------------
Specific General Total
($ thousands) allowances allowances allowances
-------------------------------------------------------------------------
Balance, beginning of the year $ 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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
August 31, 2007
---------------------------------------
Specific General Total
($ thousands) allowances allowances allowances
-------------------------------------------------------------------------
Balance, beginning of the year $ 2,448 $ 10,251 $ 12,699
Amounts written off (4,890) (4,890)
Recoveries 2,006 - 2,006
Reduction due to RSP loan
securitization - (1,766) (1,766)
Provision for loan losses 1,981 5,616 7,597
-------------------------------------------------------------------------
$ 1,545 $ 14,101 $ 15,646
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(d) AGF Trust Deposits
-------------------------------------------------------------------------
Term to maturity
-----------------------------------------------------------
August November
1 year or 1 to 5 31, 30,
($ thousands) Demand less years 2008 2007
-------------------------------------------------------------------------
Deposits $ 5,244 $2,467,464 $2,332,195 $4,804,903 $4,099,663
Less:
deferred
selling
commissions (14,761) (16,321)
Less: current
portion (2,472,708) (1,847,494)
-------------------------------------------------------------------------
Long-term
deposits $2,317,434 $2,235,848
-------------------------------------------------------------------------
As at August 31, 2008, deposits were substantially comprised of GICs
with a weighted average term to maturity of 1.4 years (November 30,
2007 - 1.8 years) and a weighted average interest rate of 4.30%
(November 30, 2007 - 4.38%).
(e) 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 2008 and October 2012. They involve the exchange of either
the one-month bankers' acceptance rate or the three-month bankers'
acceptance 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, 2008, the aggregate
notional amount of the swap transactions was $3.3 billion
(November 30, 2007 - $2.8 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, 2008,
was $44.6 million (November 30, 2007 - $6.7 million).
-------------------------------------------------------------------------
Notional amount Fixed interest
of swap Fair value Maturity date rate received
-------------------------------------------------------------------------
($ thousands)
$ 833,000 $ 1,980 2008 3.39% - 4.73%
1,197,000 7,842 2009 2.74% - 4.97%
775,000 16,334 2010 3.08% - 5.05%
375,000 14,207 2011 3.38% - 5.08%
140,000 4,267 2012 3.60% - 5.01%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(f) Interest Rate Sensitivity
For AGF Trust, the impact of a 1% change in interest rates either up
or down would be an increase or decrease of annual net interest
income of approximately $3.7 million. This sensitivity analysis is
based on an immediate parallel shift of the yield curve and assumes
no change in the repricing profile of the balance sheet after the
balance sheet date.
Note 8: Long-Term Debt
-------------------------------------------------------------------------
August 31, November 30,
($ thousands) 2008 2007
-------------------------------------------------------------------------
Revolving term loan $ 147,759 $ 160,000
Payment related to acquisition of Highstreet
Partners Limited (note 4)
February 28, 2008 - 25,611
February 28, 2009 25,325 24,486
-------------------------------------------------------------------------
173,084 210,097
Less: amount included in current liabilities 25,325 25,611
-------------------------------------------------------------------------
$ 147,759 $ 184,486
-------------------------------------------------------------------------
(a) Revolving Term Loan
The Company has arranged a six-year prime-rate-based revolving term
loan to a maximum of $300.0 million (Facility 1) (November 30, 2007 -
$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 June 30, 2009. However, AGF may
request by April 15, 2009, and prior to April 15 in any calendar year
thereafter, a recommencement of the six-year term at the expiry of
the then current commitment period. No repayment of the principal
amount outstanding pursuant to the revolving term loan is required
during the first three years of the then applicable term. Thereafter,
the loan balance shall be repaid in minimum monthly instalments of at
least one thirty-sixth of the amount of the principal outstanding.
On May 26, 2008, the Company, under its current loan agreement,
arranged an additional three-year prime rate based reducing term loan
to a maximum of $60.0 million (Facility 2). Facility 2 will be used
to finance share repurchases. Under this facility, AGF is permitted
to draw down the reducing term loan by direct advances and/or BAs.
The reducing term loan is available to the latest of December 31,
2008, or the date that the facility is fully drawn. Following this
date, Facility 2 is payable in equal quarterly instalments over
twelve quarters. Any undrawn portion of the facility at the end of
the availability date will be permanently cancelled.
As at August 31, 2008, AGF has drawn $147.8 million (2007 -
$160.0 million) against Facility 1 in the form of four to 55-day BAs
at an effective average interest rate of 3.87% per annum. No amounts
were drawn against Facility 2 as at August 31, 2008.
Security for the bank loans includes 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 (Note 4). On
February 29, 2008, a payment of $25.9 million was paid. The payment
consisted of $20.8 million in cash and the issuance of 215,883
Class B shares valued at $5.1 million. A final payment of
$25.9 million, which includes principal and imputed interest at the
rate of 4.5% per annum, is due to the vendors on February 28, 2009
and will be satisfied through a combination of cash and Class B
shares.
Note 9: Capital Stock
(a) Authorized Capital
The authorized capital of AGF consists of an unlimited number of
Class B non-voting shares (Class B shares) and an unlimited number of
Class A voting common shares (Class A shares). The Class B shares are
listed for trading on the Toronto Stock Exchange (TSX).
(b) Change During the Period
The change in capital stock during the nine months ended August 31,
2008, and 2007 is as follows:
-------------------------------------------------------------------------
Nine months ended
August 31, 2008 2007
------------------------------------------------
($ thousands, except Stated Stated
per share amounts) Shares value Shares value
-------------------------------------------------------------------------
Class A shares 57,600 $ - 57,600 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Class B shares
Balance, beginning
of period 88,922,157 $ 421,923 89,171,997 $ 403,566
Issued through dividend
reinvestment plan 174,034 3,989 94,435 3,069
Stock options exercised 130,150 5,121 765,600 13,694
Issued on acquisition
of Highstreet Partners
Limited (note 4) 215,883 5,116 225,116 5,672
Issued for Cypress
contingent consideration
(note 5) - - 33,367 1,200
-------------------------------------------------------------------------
Balance, end of period 89,442,224 $ 436,149 90,290,515 $ 427,201
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Class B Shares Purchased for Cancellation
AGF has obtained regulatory approval to purchase for cancellation,
from time to time, certain of its Class B shares through the
facilities of the TSX (or as otherwise permitted by the TSX). 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 7,253,822 shares through to February 25, 2009. No
Class B shares were purchased during the nine months ended August 31,
2008 and August 31, 2007.
(d) Stock Option Plans
AGF has established stock option plans for senior employees under
which stock options to purchase an aggregate maximum of 6,761,002
Class B shares could have been granted as at August 31, 2008 (2007 -
7,303,584). The stock options are issued at a price not less than the
market price of these 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 the nine months ended August 31,
2008 and 2007, is summarized as follows:
-------------------------------------------------------------------------
Nine months ended
August 31, 2008 2007
------------------------------------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
-------------------------------------------------------------------------
Class B share options
Balance, beginning
of period 4,268,765 $ 22.50 4,324,084 $ 19.93
Options granted 40,000 22.36 12,732 35.70
Options cancelled (268,667) 26.54 (23,450) 19.93
Options exercised (130,150) 19.08 (765,600) 17.89
-------------------------------------------------------------------------
Balance, end of period 3,909,948 $ 22.33 3,547,766 $ 20.41
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months ended August 31, 2008, AGF granted 40,000
options (2007 - Nil) and recorded $1.3 million (2007 - $1.1 million)
in compensation expense and contributed surplus.
During the nine months ended August 31, 2008, AGF granted 40,000
options (2007 - 12,732) and recorded $3.8 million (2007 -
$3.3 million) in compensation expense and contributed surplus.
The following assumptions were used to determine the fair value of
the options granted during the quarter:
Risk-free interest rate 3.4%
Expected dividend yield 4.7%
Expected share price volatility 26.0%
Option term 4.8 years
(e) Restricted Share Unit (RSU) and Performance Share Unit (PSU) Plans
Under the Company's RSU and PSU plans, certain senior employees are
issued either RSUs or PSUs. These units vest three years from the
grant date provided the employee meets certain performance criteria.
On the vesting dates, AGF will redeem all of the participants' share
units in cash equal to the value of one Class B share for each RSU or
PSU as applicable.
The changes in share units during the nine months ended August 31,
2008 and August 31, 2007, are as follows:
-------------------------------------------------------------------------
Nine months ended
August 31, 2008 2007
------------------------------------------------
Weighted Weighted
average average
Number of grant date Number of grant date
share units fair value share units fair value
-------------------------------------------------------------------------
Outstanding, beginning
of period
Non-vested 345,257 $ 29.65 142,992 $ 23.33
Issued
Initial allocation - - 57,953 -
In lieu of dividends 10,180 - 2,664 -
Settled in cash (340) - (334) -
Forfeited and cancelled (19,650) - (1,929) -
-------------------------------------------------------------------------
Outstanding, end
of period 335,447 - 201,346 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Compensation expense for the three months ended August 31, 2008,
related to these units was $0.9 million (2007 - $0.5 million), and
for the nine months ended August 31, 2008, was $1.4 million (2007-
$1.4 million). AGF has entered into a swap agreement to fix the cost
of compensation related to certain RSUs and PSUs, a portion of which
has been designated as a cash flow hedge. As at August 31, 2008, a
$2.6 million liability (2007 - $0.7 million) related to the swap
agreement has been included under other long-term liabilities.
Compensation expense includes the effect resulting from the change in
fair value of the swap held to economically hedge the RSU and PSU
plans. As at August 31, 2008, AGF has hedged 312,295 share units at a
fixed cost between $30.36 and $34.03.
(f) Deferred Share Unit (DSU) Plan
Under the Company's DSU plan for non-employee directors, AGF
directors may elect to receive their remuneration in DSUs. On
termination, AGF will redeem all of the participants' DSUs in cash or
shares equal to the value of one Class B share at the termination
date for each DSU. There is no unrecognized compensation related to
directors' DSUs since these awards vest immediately when granted. As
at August 31, 2008, 14,411 (2007 - 1,699) DSUs were outstanding.
Compensation expense related to these DSUs for the three months ended
August 31, 2008, was $0.1 million (2007 - $0.1 million), and for the
nine months ended August 31, 2008, was $0.3 million (2007 -
$0.1 million).
(g) Earnings Per Share
The following table sets forth the calculation of both basic and
diluted earnings per share and earnings per share and diluted
earnings per share from continuing operations.
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
($ thousands, except ------------------------------------------------
per share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
Numerator
Net income from
continuing operations
for the period $ 41,139 $ 39,351 $ 147,845 $ 126,482
Loss on dissolution
of partnerships,
net of tax (note 6) - - - (2,128)
Gain on sale of
discontinued operations,
net of tax (note 3) - - - 4,702
Net earnings from
discontinued operations,
net of tax (note 3) - - - 247
-------------------------------------------------------------------------
Net income for the
period $ 41,139 $ 39,351 $ 147,845 $ 129,303
Denominator
Weighted average number
of shares - basic 89,451,578 90,299,033 89,280,734 89,860,219
Dilutive effect of
employee stock options 418,897 1,548,070 518,892 1,363,927
-------------------------------------------------------------------------
Weighted average number
of shares - diluted 89,870,475 91,847,103 89,799,626 91,224,146
Earnings per share
Basic from continuing
operations $ 0.46 $ 0.44 $ 1.66 $ 1.41
Diluted from continuing
operations $ 0.46 $ 0.43 $ 1.65 $ 1.39
Basic $ 0.46 $ 0.44 $ 1.66 $ 1.44
Diluted $ 0.46 $ 0.43 $ 1.65 $ 1.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 10: Supplemental Disclosure of Cash Flow Information
Interest payments for the three months ended August 31, 2008, were
$46.4 million (2007 - $41.8 million). Interest payments for the nine
months ended August 31, 2008 were $144.3 million (2007 - $102.3 million).
Income tax payments for the three months ended August 31, 2008, were
$7.9 million (2007 - $0.1 million). Income tax payments for the nine
months ended August 31, 2008 were $29.0 million (2007 - $15.6 million).
Note 11: AGF Trust Net Interest Income
The breakdown of net interest income is as follows:
-------------------------------------------------------------------------
Three months ended Nine months ended
August 31, August 31,
------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
AGF Trust interest income:
Loan interest 68,576 $ 56,492 203,784 $ 150,556
Investment interest 7,717 6,057 25,264 14,229
-------------------------------------------------------------------------
76,293 62,549 229,048 164,785
AGF Trust interest expense:
Deposit interest 52,557 36,236 149,926 93,491
Other interest expense (1,828) 5,915 5,694 14,321
-------------------------------------------------------------------------
50,729 42,151 155,620 107,812
AGF Trust net
interest income 25,564 $ 20,398 73,428 $ 56,973
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 12: Income Tax
On October 30, 2007, the Department of Finance Canada proposed to reduce
the federal corporate income tax rate to 15% from 18.5% by January 1,
2012. The change was substantively enacted in December 2007. Accordingly,
the Company has recognized a $19.5 million reduction in future income tax
liabilities.
Note 13: Capital Management
The Company's objectives when managing capital are to:
- Provide returns for shareholders through the payment of dividends,
the repurchase of Class B shares and the reasonable use of leverage.
- Ensure that AGF Trust maintains the level of capital to meet the
requirements of its principal regulator, the Office of the
Superintendent of Financial Institutions Canada (OSFI).
The Company's capital consists of shareholders' equity. The AGF Capital
Committee is responsible for the management of capital. The AGF Board of
Directors is responsible for overseeing the Company's capital policy and
management. The Company reviews its five-year capital plan annually.
AGF Trust's regulatory capital requirements are determined in accordance
with guidelines issued by OSFI, which are based on a framework of risk-
based capital standards developed by the Bank for International
Settlements (BIS). Effective January 1, 2008, AGF Trust is monitoring its
regulatory capital based on the BIS regulatory risk-based capital
framework (Basel II). BIS standards require that AGF Trust maintain
minimum Tier 1 and Total capital ratios of 4% and 8%. OSFI has
established that Canadian deposit-taking financial institutions maintain
Tier 1 and Total capital ratios of at least 7% and 10%. During the
quarter, AGF Trust has complied with these regulatory capital
requirements.
A capital plan prepared annually specifies the target capital ratios by
taking into account the projected risk-weighted asset levels and expected
capital management initiatives. Regulatory capital ratios are reported
monthly to management. Regulatory capital ratio monitoring reports are
provided on a quarterly basis to AGF Trust's Board of Directors.
Regulatory capital for AGF Trust is detailed as follows:
-------------------------------------------------------------------------
As at As at
August 31, November 30,
($ thousands) 2008 2007(1)
-------------------------------------------------------------------------
Tier 1 capital
Common shares $ 82,768 $ 82,768
Contributed surplus 1,234 910
Retained earnings 105,299 79,863
Non-cumulative preferred shares 64,000 49,000
Less: securitization and other (18,802) -
-------------------------------------------------------------------------
234,499 212,541
Tier 2 capital
Subordinated debentures 109,500 89,500
General allowances 18,357 15,277
Less: securitization and other (7,165) (26,669)
-------------------------------------------------------------------------
120,692 78,108
-------------------------------------------------------------------------
Total capital $ 355,191 $ 290,649
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Information based on capital adequacy requirements in force at that
date.
Note 14: Financial Instruments
The carrying values of the Company's financial instruments approximate
their fair value. Financial instruments are classified based on
categories according to CICA Handbook Section 3855 "Financial
Instruments - Recognition and Measurement" as follows:
-------------------------------------------------------------------------
($ thousands) Loans and
Receivables
or Other
Available Held for Financial
As at August 31, 2008 for Sale Trading Liabilities
-------------------------------------------------------------------------
Cash and cash equivalents $ - $ 733,597 $ -
Investments 163,429 - -
Retained interest from
securitization 46,807 - -
Accounts receivable - - 74,553
Real estate secured and
investment loans - - 4,407,593
Other assets - - 45,403
-------------------------------------------------------------------------
Total financial assets $ 210,236 $ 733,597 $ 4,527,549
-------------------------------------------------------------------------
Accounts payable and accrued
liabilities - - 304,636
Long-term debt - - 173,084
Deposits - - 4,790,142
Other long-term liabilities - - 5,510
-------------------------------------------------------------------------
Total financial liabilities $ - $ - $ 5,273,372
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ thousands) Loans and
Receivables
or Other
Available Held for Financial
As at November 30, 2007 for Sale Trading Liabilities
-------------------------------------------------------------------------
Cash and cash equivalents $ - $ 827,874 $ -
Investments 26,149 - -
Retained interest from
securitization 50,925 - -
Accounts receivable - - 91,107
Real estate secured and
investment loans - - 3,680,361
Other assets - - 7,608
---------------------------------------
Total financial assets $ 77,074 $ 827,874 $ 3,779,076
---------------------------------------
Accounts payable and accrued
liabilities $ - $ - $ 261,115
Long-term debt - - 210,097
Deposits - - 4,083,342
Other long-term liabilities - - 1,638
-------------------------------------------------------------------------
Total financial liabilities $ - $ - $ 4,556,192
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Available for sale financial assets are measured at fair value with
unrealized gains and losses, including changes in foreign exchange rates,
recognized in other comprehensive income (OCI) until the financial asset
is disposed of or becomes impaired.
Held for trading assets are measured at fair value, with the changes in
fair value reported in earnings. Loans and receivable and other financial
liabilities are measured at amortized costs using the effective interest
method.
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 because of changes in market factors. These include fair value
risk, interest rate risks and foreign currency risk. The Company is
exposed to these risks directly through its financial instruments.
Fair Value Risk
The Company is exposed to fair value risk on its investments available
for sale and retained interest from securitization. Any unrealized gains
or losses arising from changes in the fair value of these financial
instruments available for sale are recorded in other comprehensive
income. Based on the carrying value of these investments at August 31,
2008, the effect of a 10% decline or increase in the value of securities
would result in a $16.3 million unrealized gain or loss to other
comprehensive income. Refer to Note 2 for the effect of changes to key
assumptions on the fair value of retained interests.
The Company uses derivative financial instruments held for fair value
hedging purposes to manage its exposure to interest rate risks and cash
flow hedges to manage its exposure to increases in compensation costs
arising from certain share-based compensation. The Company does not enter
into derivative financial instruments for trading or speculative
purposes. When derivative instruments are used, the Company determines
whether hedge accounting can be applied. If it is determined that hedge
accounting is applicable, a hedge relationship is designated as a fair-
value or a cash-flow hedge. The hedge is documented at inception,
detailing the particular risk management objective and the strategy for
undertaking the hedge transaction. The derivative instrument must be
highly effective in accomplishing the objective of offsetting either
changes in the fair value or forecasted cash flows attributable to the
risk being hedged both at inception and over the life of the hedge. The
accumulated ineffectiveness of hedging relations is measured, and the
ineffective portion of changes in fair value is recognized in the income
statement through investment income and other revenue. Fair-value hedges
are recognized at fair value and the changes in fair value are recognized
through net interest income. Cash-flow hedges are held at fair value and
the changes in fair value are recognized through OCI.
At August 31, 2008, details of the Company's derivative instruments are
as follows:
-------------------------------------------------------------------------
Hedging item
maximum
maturity Notional Fair
($ thousands) Interest Rate date amount Value
-------------------------------------------------------------------------
Derivatives used to
manage interest rate
exposure: 2.74% - 5.08% 2008-2012 3,320,000 44,630
Derivatives used to
manage changes in
share-based
compensation: 2009-2010 10,275 (2,633)
-------------------------------------------------------------------------
Interest Rate Risk
The Company, through AGF Trust, is exposed to interest rate risk through
its real estate secured and investment loans receivable. AGF Trust's
management of this risk is supervised by AGF Trust's Asset and Liability
Management Committee. AGF Trust employs a number of techniques to manage
this risk, including the matching of asset and liability terms, that
measure changes in the portfolios and the impact this will have on AGF
Trust's earning capacity. AGF Trust also uses interest rate swaps to
manage any residual mismatches.
A 1% change in interest rates, either up or down, would result in an
increase or decrease in annual net interest income of approximately
$3.8 million. The Company is also exposed to interest rate risk through
its floating rate debt. As at August 31, 2008, the effect of a 1% change
in the variable interest rates on the average loan balance outstanding
for the year would have resulted in an annualized change in interest
expense of approximately $1.5 million.
Foreign Exchange Risk
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, which are paid for the most part monthly,
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.
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 Note 13. Through
its Investment Management segment, it manages 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 payout maturing GICs. AGF Trust's overall liquidity risk is
managed by its treasury department and is supervised by AGF Trust's Asset
and Liability Management Committee in accordance with the policies for
management of assets and liabilities, liquidity and loan financing
activities. These policies 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 maintains 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 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.
The following table presents contractual terms to maturity of the
financial liabilities owed by the Company at August 31, 2008:
-------------------------------------------------------------------------
1 Year 1 to
Demand or Less 5 Years
-------------------------------------------------------------------------
Accounts payable and accrued
liabilities $ - $ 304,636 $ -
Long-term debt - 25,325 147,759
Deposits(*) 5,244 2,467,464 2,332,195
Other liabilities - - 5,510
-------------------------------------------------------------------------
Total $ 5,244 $ 2,797,425 $ 2,485,464
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(*) Excluding deferred commission.
Credit Risk
Credit risk is the potential of financial loss arising from a
counterparty's inability or refusal to honour its contractual obligations
to the Company. As at August 31, 2008, financial assets of $5.5 billion,
consisting of cash and cash equivalents, investments, retained interests
from securitization, real estate secured and investment loans, accounts
receivable and other assets, were exposed to credit risk.
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,
BA's and floating rate notes.
Investments 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 and equity
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 and counterparties,
which are review at least annually by the Trust Board.
The Company's most significant credit risk is through AGF Trust's real
estate secured and investment loans. AGF Trust mitigates this risk
through credit policies and lending practices. These policies 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's credit risk on these loans is also mitigated through the use
of collateral, primarily in the form of residential real estate and
mutual fund investments. Risk is also mitigated through residential
mortgage insurance through Canada Mortgage and Housing Corporation (CMHC)
or another insurer. As at August 31, 2008, $626.2 million of AGF Trust's
residential mortgage portfolio was insured.
Derivative financial instruments expose AGF Trust to credit risk to the
extent that if a counterparty default occurs, market conditions are such
that AGF Trust would incur a loss in replacing the defaulted transaction.
AGF Trust negotiates derivative master netting agreements with
counterparties with which it contracts. These agreements reduce credit
risk exposure. AGF Trust assesses the credit worthiness of the
counterparties in order to minimize the risk of counterparty default
under the agreements. AGF Trust only uses major Chartered banks as
counterparties with a minimum credit rating of AA.
Note 15: Segment Information
AGF has three reportable segments: Investment Management Operations,
Trust Company Operations and Other. The reportable segments are strategic
business units that offer different products and services. The Investment
Management Operations segment provides investment management and advisory
services and is responsible for the management and distribution of AGF
investment products. AGF Trust Company offers a wide range of trust
services, including GICs, term deposits, real estate secured loans,
investment loans and HELOC loans. The results of our equity interest in
Smith and Williamson Holding Limited (S&WHL) are included in Other.
The results of the reportable segments are based on AGF's internal
financial reporting systems. The accounting policies used in these
segments are generally consistent with those described in the "Summary of
Significant Accounting Policies" detailed in AGF's 2007 Annual Report.
-------------------------------------------------------------------------
($ thousands) Investment Trust
Three months ended Management Company
August 31, 2008 Operations Operations Other Total
-------------------------------------------------------------------------
Revenue $ 155,168 $ 28,356 $ 1,142 $ 184,666
Operating expenses 89,190 13,967 - 103,157
Amortization and other 27,182 920 2,098 30,200
-------------------------------------------------------------------------
Segment income (loss) from
continuing operations
before taxes $ 38,796 $ 13,469 $ (956) $ 51,309
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ thousands) Investment Trust
Three months ended Management Company
August 31, 2007 Operations Operations Other Total
-------------------------------------------------------------------------
Revenue $ 173,410 $ 24,176 $ 1,597 $ 199,183
Operating expenses 96,827 11,061 - 107,888
Amortization and other 30,873 427 2,754 34,054
-------------------------------------------------------------------------
Segment income (loss) from
continuing operations
before taxes $ 45,710 $ 12,688 $ (1,157) $ 57,241
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ thousands) Investment Trust
Nine months ended Management Company
August 31, 2008 Operations Operations Other Total
-------------------------------------------------------------------------
Revenue $ 483,274 $ 82,332 $ 7,747 $ 573,353
Operating expenses 270,963 42,670 - 313,633
Amortization and other 84,474 1,943 7,494 93,911
-------------------------------------------------------------------------
Segment income (loss) from
continuing operations
before taxes $ 127,837 $ 37,719 $ 253 $ 165,809
Total assets $1,289,849 $5,367,345 $ - $6,657,194
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ thousands) Investment Trust
Nine months ended Management Company
August 31, 2007 Operations Operations Other Total
-------------------------------------------------------------------------
Revenue(1) $ 501,659 $ 73,439 $ 6,055 $ 581,153
Operating expenses 277,422 34,055 - 311,477
Amortization and other 92,016 1,083 7,030 100,129
-------------------------------------------------------------------------
Segment income from
continuing operations
before taxes $ 132,221 $ 38,301 $ (975) $ 169,547
Total assets $1,332,327 $4,000,706 $ - $5,333,033
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The Trust Company results for the nine months ended August 31, 2007
include an $8.0 million securitization gain.This report contains forward-looking statements with respect to AGF,
including its business operations and strategy and 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 Canada and subsidiaries around the world. AGF's
products and services include a diversified family of more than 50 mutual
funds, the evolutionary AGF Elements portfolios, the Harmony asset management
program, AGF Asset Management Group services for institutional and high-net-
worth clients, as well as AGF Trust GICs, loans and mortgages. With
approximately $49 billion in total assets under management, AGF serves more
than one million investors. AGF trades on the Toronto Stock Exchange under the
symbol AGF.B.
For further information: AGF Management Limited shareholders and
analysts, please contact: Greg Henderson, CA, Senior Vice-President and Chief
Financial Officer, (416) 865-4156, greg.henderson@AGF.com; Deirdre Neary,
Director, Investor Relations, (416) 815-6268, deirdre.neary@AGF.com; Media,
please contact: Lucy Becker, Vice-President, Corporate Communications, (416)
865-4284, lucy.becker@AGF.com
