RNS Number:0467U
Quest Capital Corporation
09 May 2008
May 9, 2008 TSX: QC
AMEX/AIM: QCC
QUEST REPORTS ITS FINANCIAL RESULTS FOR FIRST QUARTER 2008
AND INCREASES DIVIDEND 80%
Vancouver, British Columbia - Quest Capital Corp. ("Quest" or the "Company")
today reported its unaudited financial results for the first quarter ended March
31, 2008 (a copy of which is attached hereto and is also available on SEDAR).
FINANCIAL HIGHLIGHTS
* Net earnings were $7.1 million for the first quarter of 2008 as
compared to $7.4 million during the comparative period in 2007 and $3.6
million during the fourth quarter of 2007;
* Earnings per share (diluted) were $0.05 for the quarter, unchanged
from that of $0.05 a year earlier. On a consecutive basis, EPS is up 150%
from the $0.02 earned during the fourth quarter of 2007;
* A dividend in the amount of $0.045 per share has been declared representing
an 80% increase over the previous dividend;
* Total loans funded during the first quarter of 2008 amounted to $77.4
million compared to $25.8 million funded during the comparative period in
2007 representing an 200% or $51.6 million increase;
* Loans outstanding were $327 million at March 31, 2008 an increase of
$77 million or 31% over the $250 million outstanding a year earlier and
total loans administered amounted to $382 million; and
* Earnings before income taxes were $7.5 million for the first quarter
of 2008 as compared to $9.3 million during the comparative period in 2007;
the decrease is largely due to the cessation of investment, corporate
finance and management activities in 2008. The Company ceased corporate
finance and management activities in the fourth quarter of 2007 in order to
help attain tax status in 2008 as a mortgage investment corporation ("MIC");
In commenting on the first quarter 2008 results, Stephen Coffey, President and
CEO stated, "This is Quest's first quarter of operations as a mortgage
investment corporation. As investors analyze our results, they will realize that
we have successfully transitioned to a more simplified Company and we are now
first and foremost a mortgage lender intent on distributing earnings to
shareholders and using leverage to grow our mortgage portfolio"
Murray Sinclair, Co-Chairman added, "Our objectives for 2008 are to continue to
increase both our growth and yield. Distributing the Company's earnings to
shareholders will succeed in both enhancing our yield and mitigating the
Company's tax obligations".
Mr. Coffey continued, "While we are very content with the portfolio growth of
the first quarter and with the lending opportunities that are being presented to
us, we are also very pleased with the strength of our loan portfolio and the
underlying collateral. We look forward to further increasing our business and
commencing our application process to become a federally regulated deposit
taking institution."
DIVIDEND DECLARED
The Board of Directors has today approved payment of the next quarterly dividend
of Cdn$0.045 per share on June 27, 2008 to shareholders of record at the close
of business on June 13, 2008. This dividend represents a Cdn$0.02 or 80%
increase over the Cdn$0.025 dividend paid March 31, 2008. These dividends will
be taxed as interest in the hands of Shareholders.
FIRST QUARTER CONFERENCE CALL
Quest Capital will host a conference call at 11 a.m. Eastern today to discuss
its first quarter performance. To access the call live, please dial 416 915
5761.
The call will be recorded and a replay made available for one week ending
Friday, May 16, 2008 at midnight. The replay may be accessed approximately one
hour after the call by dialing 416 640 1917 and entering passcode 21270939
followed by the number sign (#).
About Quest
Quest's expertise is in providing financing for the real estate sector with
emphasis on residentially oriented mortgages primarily in Western Canada.
For more information about Quest, please visit our website
(www.questcapcorp.com) or SEDAR (www.sedar.com) or contact:
Contact in Canada
-------------------
A. Murray Sinclair, Co-Chairman Stephen Coffey, President & CEO
(P): (604) 68-QUEST (P): (416) 367-8383
(604) 687-8378 (F): (416) 367-4624
Toll free: (800) 318-3094
Contacts in London
-------------------
AIM NOMAD:
Canaccord Adams Limited
Ryan Gaffney or Robert Finlay:
011.44.20.7050.6500
Forward Looking Statements
This press release includes certain statements that constitute "forward-looking
statements", and "forward-looking information" within the meaning of applicable
securities laws ("forward-looking statements" and "forward-looking information"
are collectively referred to as "forward-looking statements", unless otherwise
stated). Such forward-looking statements involve known and unknown risks and
uncertainties that may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Forward-looking
statements may relate to the Company's future outlook and anticipated events or
results and may include statements regarding the Company's future financial
position, business strategy, budgets, litigation, projected costs, financial
results, taxes, plans and objectives. We have based these forward-looking
statements largely on our current expectations and projections about future
events and financial trends affecting the financial condition of our business.
These forward-looking statements were derived utilizing numerous assumptions
regarding expected growth, results of operations, performance and business
prospects and opportunities that could cause our actual results to differ
materially from those in the forward-looking statements. While the Company
considers these assumptions to be reasonable, based on information currently
available, they may prove to be incorrect. Forward-looking statements should not
be read as a guarantee of future performance or results. Forward-looking
statements are based on information available at the time those statements are
made and/or management's good faith belief as of that time with respect to
future events, and are subject to risks and uncertainties that could cause
actual performance or results to differ materially from those expressed in or
suggested by the forward-looking statements. To the extent any forward-looking
statements constitute future-oriented financial information or financial
outlooks, as those terms are defined under applicable Canadian securities laws,
such statements are being provided to describe the current potential of the
Company and readers are cautioned that these statements may not be appropriate
for any other purpose, including investment decisions. Forward-looking
statements speak only as of the date those statements are made. Except as
required by applicable law, we assume no obligation to update or to publicly
announce the results of any change to any forward-looking statement contained or
incorporated by reference herein to reflect actual results, future events or
developments, changes in assumptions or changes in other factors affecting the
forward-looking statements. If we update any one or more forward-looking
statements, no inference should be drawn that we will make additional updates
with respect to those or other forward-looking statements. You should not place
undue importance on forward-looking statements and should not rely upon these
statements as of any other date. All forward-looking statements contained in
this press release are expressly qualified in their entirety by this cautionary
statement.
QUEST CAPITAL CORP.
Consolidated Financial Statements
March 31, 2008
(Unaudited - expressed in thousands of Canadian dollars)
Quest Capital Corp.
Consolidated Balance Sheets
(Unaudited - expressed in thousands of Canadian dollars)
March 31, December 31,
2008 2007
---------------------------
Assets
Cash and cash equivalents $ 1,894 $ 30,484
Loans (note 5) 327,087 277,710
Future income taxes 3,552 3,916
Restricted cash (note 6) 8,598 12,452
Prepaid and other receivables 308 155
Capital assets 866 841
Other assets 186 186
---------------------------
$ 342,491 $ 325,744
===========================
Liabilities
Accounts payable and accrued liabilities (note 10) $ 6,628 $ 7,081
Income taxes payable 165 188
Future income taxes 893 904
Asset retirement obligation 553 572
Debt payable (note 7) 39,917 26,365
---------------------------
48,156 35,110
---------------------------
Shareholders' equity
Share capital (note 8) 207,161 207,161
Contributed capital (note 8) 7,206 6,934
Retained earnings 79,968 76,539
---------------------------
294,335 290,634
---------------------------
$ 342,491 $ 325,744
===========================
Contingencies and commitments (notes 5(c) and 11)
Approved by the Board of Directors
"Stephen C. Coffey" Director "A. Murray Sinclair" Director
Stephen C. Coffey A. Murray Sinclair
The accompanying notes are an integral part of these consolidated financial
statements
Quest Capital Corp.
Consolidated Statements of Retained Earnings
For the three months ended March 31, 2008 and 2007
(Unaudited - expressed in thousands of Canadian dollars)
2008 2007
------------------------
Retained earnings - beginning of period $ 76,539 $ 65,137
Adoption of financial instruments standards - 1,591
Net earnings for the period 7,099 7,389
Dividends (3,670) (2,899)
-------------------------
Retained earnings - end of period $ 79,968 $ 71,218
==========================
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Earnings
For the three months ended March 31, 2008 and 2007
(Unaudited - expressed in thousands of Canadian dollars, except per share
amounts)
2008 2007
------------------------------
Interest income $ 11,000 $ 10,124
Interest expense (423) (230)
--------------------------------
Interest income, net 10,577 9,894
Provision for loan losses (note 5) (204) -
-------------------------------
Net interest income after provision for loan 10,373 9,894
losses
Other income
Syndication (note 10) 251 322
Management and finder's fees (note 10) - 726
Gains on sale of marketable securities and - 2,157
investments (note 10) -----------------------------
251 3,205
-----------------------------
Net interest and other income 10,624 13,099
-----------------------------
Non-interest expense
Salaries and benefits 736 899
Bonuses 505 989
Stock-based compensation (note 8) 272 200
Office and other 591 314
Legal and professional services 722 360
Regulatory and shareholder relations 203 271
Directors' fees 53 66
Sales tax - 650
Foreign exchange loss (gain) (5) 19
Other expenses relating to resource assets 63 16
-----------------------------
3,140 3,784
-----------------------------
Earnings before income taxes 7,484 9,315
Provision for income taxes (note 9) 385 1,926
-----------------------------
Net earnings for the period $ 7,099 $ 7,389
=============================
Weighted average number of shares outstanding
Basic 146,789,711 144,956,018
Diluted 147,716,083 148,654,198
Earnings per share
Basic $ 0.05 $ 0.05
Diluted $ 0.05 $ 0.05
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Comprehensive Income and Accumulated Other
Comprehensive Income
For the three months ended March 31, 2008 and 2007
(Unaudited - expressed in thousands of Canadian dollars)
2008 2007
--------------------------------
Net earnings for the period $ 7,099 $ 7,389
--------------------------------
Other comprehensive income
Unrealized gains on available-for-sale - 1,962
financial assets arising during the period
Reclassification adjustment for gains - 21
recorded included in net earnings
Other comprehensive income - 1,983
---------------------------------
Comprehensive income $ 7,099 $ 9,372
=================================
Accumulated other comprehensive income - $ - $ -
beginning of period
Adoption of financial instruments standards - 2,232
Other comprehensive income for the period - 1,983
------------------------------
Accumulated other comprehensive income - $ - $ 4,215
end of period ==============================
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Cash Flows
For the three months ended March 31, 2008 and 2007
(Unaudited - expressed in thousands of Canadian dollars)
2008 2007
--------------------------
Cash flows from operating activities
Net earnings for the period $ 7,099 $ 7,389
Adjustments to determine net cash flows relating
to operating items
Future income taxes 321 1,679
Stock-based compensation 272 200
Provision for loan losses 204 -
Amortization of deferred interest and loan (1,650) (1,832)
fees
Deferred interest and loan fees received 2,556 226
Other 166 44
Activity in marketable securities held for
trading
Purchases - (1,685)
Proceeds on sales - 2,910
Gains on sale of marketable securities and - (2,157)
investments
Expenditures for reclamation and closure (48) (55)
Changes in prepaid and other receivables (153) 364
Changes in accounts payable and accrued (461) 1,511
liabilities
Changes in income taxes payable (23) (773)
--------------------------
8,283 7,821
---------------------------
Cash flows from financing activities
Proceeds from shares issued - 429
Dividend payment (3,670) (2,899)
Financing costs (664) -
Proceeds from debt 26,500 8,000
Repayment of debt (12,365) (30,000)
-----------------------------
9,801 (24,470)
-----------------------------
Cash flows from investing activities
Activity in loans
Funded (77,393) (25,820)
Repayments 28,534 38,867
Other (1,628) 2,578
Activity in investments
Proceeds on sales - 1,302
Purchases - -
Change in restricted cash 3,923 (29)
Expenditures on capital assets (102) (6)
------------------------------
(46,666) 16,892
------------------------------
Foreign exchange loss on cash held in a foreign (8) (6)
subsidiary ------------------------------
(Decrease) increase in cash and cash equivalents (28,590) 237
Cash and cash equivalents - beginning of period 30,484 9,506
------------------------------
Cash and cash equivalents - end of period $ 1,894 $ 9,743
==============================
Supplemental cash flow information (note 14)
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Notes to Consolidated Financial Statements
Three months ended March 31, 2008
(Unaudited - expressed in Canadian dollars; tables in thousands, except share
capital information)
1. Nature of operations
Quest Capital Corp.'s ("Quest" or the "Company") focus is to provide mortgage
financings. Throughout 2007, the Company also provided a range of services
including corporate finance, consulting, management and administrative services
through its wholly-owned subsidiaries, Quest Management Corp. and Quest
Securities Corporation.
In December 2007, Quest reorganized its business, operations and assets in order
to qualify as a mortgage investment corporation ("MIC") for Canadian income tax
purposes. A MIC is a special-purpose corporation defined under Section 130.1 of
the Income Tax Act (Canada). A MIC does not pay corporate-level taxes when all
taxable income is distributed to shareholders as dividends during a taxation
year and within 90 days of its year end. Taxable Canadian shareholders will have
dividend payments subject to Canadian tax as interest income. As of January 1,
2008, the Company must continually meet the following criteria to maintain MIC
eligibility: (i) at least 50% of its assets must consist of residentially
oriented mortgages and/or cash; (ii) it must not directly hold any foreign
assets, including investments secured by real property located outside of
Canada; (iii) it must not engage in operational activities outside of the
business of lending and investing of funds; and (iv) no person may own more than
25% of the issued and outstanding shares.
2. Basis of presentation
The accompanying financial information does not include all disclosure required
under generally accepted accounting principles for annual financial statements.
The accompanying financial information reflects all adjustments, consisting
primarily of normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of results for the interim
periods. These consolidated financial statements should be read in conjunction
with the Company's 2007 audited annual financial statements and notes.
3. Significant accounting policies
These interim consolidated financial statements follow the same accounting
policies and methods of application as the Company's annual financial
statements, except as noted in Note 4 below. These interim consolidated
financial statements are prepared in accordance with Canadian generally accepted
accounting principles and include the Company's accounts and those of its
wholly-owned subsidiaries, QC Services Inc., Viceroy Capital Corp., Viceroy Gold
Corporation and its 75% proportionate joint venture interest in the Castle
Mountain property.
Certain comparative figures have been reclassified to conform to the current
period's presentation.
4. Changes in accounting policies
Effective January 1, 2008, the Company adopted the CICA handbook section 1535,
"Capital Disclosures", which requires an entity to disclose its objectives,
policies, and processes for managing capital. In addition, this section requires
disclosure of summary quantitative information about what an entity manages as
capital; see note 12 to these consolidated financial statements.
Effective January 1, 2008, the Company adopted the CICA handbook sections 3862
"Financial Instruments - Disclosures" and 3863 "Financial Instruments -
Presentation". These sections replace CICA handbook section 3861 "Financial
Instruments - Disclosure and Presentation", and enhance disclosure requirements
on the nature and extent of risks arising from financial instruments and how the
entity manages those risks; see note 12 to these consolidated financial
statements. Also, refer to "risk and uncertainties" section of the Company's
Management Discussion and Analysis ("MD&A") for the three months ended March 31,
2008.
5. Loans
a) Generally loans are repayable over terms of 6 to 24 months, and bear
interest at rates of between 10% and 14% per annum before commitment fees. Real
property, real estate, and/or corporate or personal guarantees are generally
pledged as security.
Loans outstanding as at March 31, 2008:
Allowance for loan losses
---------------------------
Gross Specific General Total Net
Amount Amount
--------------------------------------------------------------
Mortgages $ 325,936 $ - $ 198 $ 198 $ 325,738
Bridge loans 9,509 - 6 6 9,503
Accrued interest
and deferred loan
fees (8,154) - - - (8,154)
--------------------------------------------------------------
$ 327,291 $ - $ 204 $ 204 $ 327,087
=============================================================
Loans outstanding as at December 31, 2007:
Allowance for loan losses
---------------------------
Gross Specific General Total Net
Amount Amount
--------------------------------------------------------------
Mortgages $ 279,644 $ - $ - $ - $ 279,644
Bridge loans 10,549 - - - 10,549
Accrued interest
and deferred
loan fees (12,483) - - - (12,483)
---------------------------------------------------------------
$ 277,710 $ - $ - $ - $ 277,710
===============================================================
The Company had four impaired loans totalling approximately $12.6 million as at
March 31, 2008. Loans are classified as impaired when the principal is past due
or interest is 90 days in arrears, and there is no reasonable assurance of the
collection of the principal and interest. In determining the provision for
possible loan losses, management considers the length of time the loan has been
in arrears, the overall financial strength of borrowers and the residual value
of security pledged. The Company expects to collect the full carrying value of
its loan portfolio, accordingly no specific provision for loan losses has been
recorded. Once a loan is classified as impaired, the Company does not record any
further interest and related fees until it has been repaid or the loan is
brought back into good standing.
In addition, starting in 2008, the Company commenced providing for a general
allowance for loan losses.
The Company has recorded an allowance for loan losses as follows:
March 31, March 31,
2008 2007
-----------------------------------
Balance - Beginning of period $ - $ 586
General allowance for the period 204 -
Specific allowance applied - (586)
------------------------------------
Balance - End of period $ 204 $ -
====================================
b) At March 31, 2008, the Company had entered into agreements to advance
funds of $9.3 million. Advances under these agreements are subject to the
completion of due diligence, no material adverse change in the assets, business
or ownership of the borrower and other terms. In addition, at March 31, 2008,
the Company had committed to future advances, primarily construction loans, of
up to $73.2 million.
6. Restricted cash
Restricted cash is comprised of:
March 31, December 31,
2008 2007
-----------------------------------
Castle Mountain $ 1,955 $ 1,999
Interest reserves on loans (held
in trust) 6,643 10,453
-----------------------------------
Total $ 8,598 $ 12,452
===================================
a) Castle Mountain
Pursuant to an agreement among the partners of the Castle Mountain property, the
Company is required to set aside restricted cash of US$1,902,000 ($1,955,000) as
at March 31, 2008 (December 31, 2007 - US$2,016,000 or $1,999,000) in a fund to
fulfill reclamation and closure obligations at the Castle Mountain property.
b) Interest reserves on loans (held in trust)
Certain of the Company's loan agreements permit the Company to withhold a
portion of the total loan amount in trust as interest reserves. These amounts
are drawn down as interest payments are due. Amounts held in trust relating to
unearned interest are recorded as restricted cash.
7. Debt payable
In January 2008, the Company entered into a revolving debt facility syndicated
among three Canadian chartered banks for up to $88.0 million. The facility bears
interest based on prime rate and is collateralized by the Company's loan
portfolio. As at March 31, 2008, $40.5 million was outstanding under the
facility. The Company amortizes financing costs associated with the revolving
debt facility over the term of the loan, being 2 years.
March 31, December 31,
2008 2007
----------------------------------
Revolving debt facility drawn $ 40,500 $ 25,000
Other debt facility drawn - 1,365
Less: financing costs (583) -
----------------------------------
$ 39,917 $ 26,365
==================================
8. Share capital
a) Authorized
Unlimited First and Second Preferred Shares
Unlimited common shares without par value
b) Shares issued and outstanding
Number of Amount
Shares
--------------------------------------
Common shares
Opening balance - January 1, 2008 146,789,711 $ 207,161
Issued on exercise of stock - -
options
Transfer of fair value on exercise
of options - -
-------------------------------------
Ending balance - March 31, 2008 146,789,711 $ 207,161
=====================================
c) Stock options outstanding
The Company has a stock option plan under which the Company may grant options to
its directors, employees and consultants for up to 10% of the issued and
outstanding common shares. The exercise price of each option is required to be
equal to or higher than the market price of the Company's common shares on the
day of grant. Vesting and terms of the option agreement are at the discretion of
the Board of Directors.
During the three months ended March 31, 2008, the change in stock options
outstanding was as follows:
Number of Weighted
shares average
share price
----------------------------------
Common shares
Opening balance 10,553,000 $ 2.28
Granted 1,230,000 2.69
Exercised - -
Expired or cancelled - -
----------------------------------
Closing balance 11,783,000 $ 2.32
==================================
Options exercisable 9,166,245 $ 2.16
==================================
The following table summarizes information about stock options outstanding and
exercisable at March 31, 2008:
Options outstanding Options exercisable
Range of Options Weighted Weighted Options Weighted
exercise outstanding average average exercisable average
prices remaining exercise exercise
contracted price price
life
(years)
----------------------------------------------------------------------------
$1.51 223,000 1.39 $ 1.51 223,000 $ 1.51
$ 1.52 to $1.95 6,150,000 0.89 1.95 6,150,000 1.95
$ 1.96 to $2.31 1,180,000 2.76 2.30 1,157,500 2.30
$ 2.32 to $3.23 4,230,000 4.09 2.91 1,635,745 2.92
-------------------------------------------------------------------------------
11,783,000 2.23 $ 2.32 9,166,245 $ 2.16
===============================================================================
d) Contributed capital
Opening balance $ 6,934
Stock-based compensation 272
Fair value of stock options exercised -
-------------
Ending balance $ 7,206
=============
The fair values of options granted during the three months ended March 31, 2008
have been estimated using an option pricing model. Assumptions used in the
pricing model are as follows:
Risk-free interest rate 2.91%
Expected life of options 3.0 years
Expected stock price volatility 36%
Expected dividend yield 10%
Weighted average fair value of options $ 0.29
9. Income taxes
The Company has utilized tax losses in certain of its entities to reduce its
taxable income in Canada. The Company has recognized a future tax asset to the
extent that the amount is more likely than not to be realized from future
earnings.
The provision for income taxes consists of the following:
Three Three
months months
ended ended
March 31, March 31,
2008 2007
----------------------------------
Current
Canada $ 49 $ 98
United States 15 -
----------------------------------
Total current expenses 64 98
==================================
Future
Canada 364 1,828
United States (43) -
----------------------------------
Total future expenses (recoveries) 321 1,828
----------------------------------
Total provision for income taxes $ 385 $ 1,926
==================================
10. Related party transactions
a) For the three months ended March 31, 2008, the Company recorded a gain on
disposal of securities and investments of $nil (2007 - $213,000) in companies
related by virtue of having certain directors and officers in common. These
transactions were recorded at the exchange amount which management believes to
be a fair approximation of fair value.
b) Included in accounts payable as at March 31, 2008 is $4,278,000 (December
31, 2007 - $4,620,000) due to employees and officers for bonuses payable.
c) For the three months ended March 31, 2008, the Company received $nil (
2007 - $180,000) in management and finder's fees from parties related by virtue
of having certain directors and officers in common.
d) For the three months ended March 31, 2008, the Company received $5,000
(2007 - $12,000) in syndication loan administration fees from related parties.
11. Contingencies and commitments
a) Surety bond guarantees totalling US$2,405,000 have been provided by Castle
Mountain Joint Venture for compliance with reclamation and other environmental
agreements.
b) On March 22, 2002, Quest Investment Corporation, a predecessor corporation,
and other parties were named as defendants in a lawsuit filed in the Supreme
Court of British Columbia. The plaintiff has claimed approximately $410,000 plus
interest due for consulting services. Management intends to fully defend this
claim. Accordingly, no provision has been made for this claim in the
consolidated financial statements. The ultimate outcome of this claim is not
determinable at the time of issue of these consolidated financial statements and
the costs, if any, will be charged to earnings in the period(s) in which they
are finally determined.
c) The Company has entered into operating leases for office premises. Minimum
annual lease payments required are approximately as follows:
2008 $ 469
2009 625
2010 548
2011 395
2012 395
d) Other commitments and contingencies are disclosed elsewhere in these interim
consolidated financial statements and notes.
12. Risk management
The primary goals of the Company's risk management are to ensure that the
outcomes of activities involving elements of risk are consistent with the
Company's objectives and risk tolerance, and to maintain an appropriate risk/
reward balance while protecting the Company's financial operations from events
that have the potential to materially impair its financial strength. Balancing
risk and reward is achieved through aligning risk tolerance with the Company's
business strategy, diversifying risk, pricing appropriately for risk, mitigating
risk through preventative controls and transferring risk to third parties.
Capital Management
The Company's capital management objectives are to maintain a strong and
efficient capital structure to provide liquidity to support continued asset
growth. A strong capital position also provides flexibility in considering
accretive growth opportunities. As at March 31, 2008, the Company was in
compliance with its revolving debt facility covenants.
The Company's dividend policy is to distribute sufficient dividends to
shareholders throughout 2008 and within 90 days after the end of 2008 to reduce
its taxable income to a negligible amount, after first deducting all available
loss carry forwards and other deductions against 2008 taxable income.
Financial Instruments
Effective January 1, 2008, the Company adopted the CICA handbook section 3862,
"Financial Instruments - Disclosures". As permitted by the standard, the
disclosures required under this section can be found in the Company's MD&A
section "risks and uncertainties". The following table provides a cross
referencing of those disclosures from the MD&A.
Description Section
-----------------------------------------------------------------------------
For each type of risk arising from financial Risk management
instruments, an entity shall disclose: the exposure Credit risk management
to risk and how they arise; objectives, policies and Liquidity risk
processes used for managing the risks; methods used Market risk
to measure the risk; and description of collateral
------------------------------------------------------------------------------
Credit risk - gross exposure to credit risk, credit Credit risk management
quality and concentration of exposures
------------------------------------------------------------------------------
Market risk - value-at-risk, interest rate risk and Market risk
equity risk
------------------------------------------------------------------------------
Liquidity risk - liquid assets, maturity of Liquidity risk
financial liabilities and credit and liquidity
commitments
13. Segmented information
The Company has primarily one operating segment, which is to provide mortgage
financings. The Company's geographic location is Canada.
14. Supplemental cash flow information
a) Cash received or paid
Three Three
months months
ended ended
March 31, March 31,
2008 2007
---------------------------------
Interest received (non-loan) $ 254 $ 98
Interest paid 319 223
Income tax instalments 67 20
b) Non-cash financing and investing activities
Three Three
months months
ended ended
March 31, March 31,
2008 2007
---------------------------------
Marketable securities and $ - $ 617
investments received as loan
fees
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE FIRST QUARTER ENDED MARCH 31, 2008
INTRODUCTION
The following information, prepared as of May 8, 2008, should be read in
conjunction with the unaudited interim consolidated financial statements of
Quest Capital Corp. ("Quest" or the "Company") as at March 31, 2008 and for the
three months ended March 31, 2008 and 2007 and its audited annual consolidated
financial statements as at December 31, 2007 and 2006 and for the years ended
December 31, 2007, 2006 and 2005, and the related notes attached thereto, which
were prepared in accordance with Canadian generally accepted accounting
principles ("GAAP"). All amounts are expressed in Canadian dollars unless
otherwise indicated.
Additional information relating to the Company, including the Company's 2007
Annual Information Form, is available on SEDAR at www.sedar.com.
BUSINESS PROFILE AND STRATEGY
Quest's primary business focus is mortgage lending on the security of Canadian
real estate. The Company's primary lending activity is to provide first
mortgages concentrating on residentially oriented real estate. In general, a
loan is residentially oriented, if, at the time the loan is made, the real
estate on which the loan is secured is, or is intended to be, devoted to
residential purposes. This includes financing the development or acquisition of
single family, apartment, condominium, social housing and nursing/retirement
residences. A secondary lending activity is to provide mortgages secured by
commercial or industrial properties. The Company also participates in bridge
lending to Canadian companies secured by resource assets located in Canada.
Quest plans to grow its mortgage portfolio safely and profitably through the use
of increased leverage as opposed to any increase in its equity. In January 2008,
the Company arranged bank lines totaling $88 million for this purpose. Through
its wholly-owned subsidiary, QC Services Inc., the Company will also engage in
loan syndication and earn syndication fees on loans which it has chosen not to
finance itself.
In December 2007, the Company reorganized its business, operations and assets in
order to qualify as a mortgage investment corporation ("MIC") for Canadian
income tax purposes. A MIC can decrease its taxable income through the payment
of dividends to its shareholders.
Quest's goal is to enhance shareholder value by increasing dividend
distributions to its shareholders and in the process reduce its corporate taxes.
It is the Company's intention to further enhance shareholder distributions by
increasing profitability through the use of leverage to grow its mortgage
portfolio.
NON-GAAP MEASURES
Basic earnings per share ("EPS") before taxes, return on equity before taxes,
return on assets before taxes and payout ratio on earnings before taxes do not
have standardized meanings prescribed by GAAP and, therefore, may not be
comparable to similar measures presented by other companies. The fact that tax
expense is for the most part a non-cash item to the Company is the major reason
the Company calculates and highlights various ratios on a before tax basis.
Non-GAAP measures used in this management's discussion and analysis ("MD&A") are
calculated as follows:
* basic earnings per share before taxes - earnings before taxes divided
by number of common shares outstanding for basic EPS purposes;
* return on equity before taxes - earnings before taxes divided by
average shareholders' equity;
* return on assets before taxes - earnings before taxes divided by
average total assets; and
* payout ratio on earnings before taxes - dividends paid per share
divided by basic earnings per share before taxes.
Readers are cautioned not to view non-GAAP measures as alternatives to financial
measures calculated in accordance with GAAP.
FINANCIAL PERFORMANCE
Table 1 - Selected Quarterly Financial Information
($ thousands, except per share amounts)
March 31, March 31, Change from
2008 2007 March 31, 2007
----------------------------------------------
Key Performance Indicators
Interest income 11,000 10,124 876 9%
Other income 251 3,205 (2,954) (92%)
Net interest and other income 10,624 13,099 (2,475) (19%)
Earnings before income taxes 7,484 9,315 (1,831) (20%)
Earnings per share before taxes 0.05 0.06 (0.01) (20%)
(1)
Net earnings for the period 7,099 7,389 (290) (4%)
Earnings per share - basic 0.05 0.05 - 0%
Earnings per share - diluted 0.05 0.05 - 0%
Return on equity before taxes 10% 13%
(1)(2)
Return on assets before taxes 9% 12%
(1)(2)
Dividends paid per share 0.025 0.020 0.005 25%
Payout ratio on earnings before 51% 37%
taxes(1)
Loans 327,087 250,274 76,813 31%
Total assets 342,491 295,330 47,161 16%
Shareholders' equity 294,335 285,063 9,272 3%
Book value per share 2.01 1.97
1. See non-GAAP measures disclosed in this MD&A.
2. Annualized basis.
DIVIDEND POLICY FOR 2008
Dividend payments reduce the taxable income of a MIC. Dividends are taxed as
interest in the hands of shareholders. Consistent with its MIC status for
taxation purposes, Quest's dividend policy is to distribute sufficient dividends
to shareholders throughout 2008 and within 90 days after the end of 2008 to
reduce its taxable income to a negligible amount, after first deducting all
available loss carry forwards and other deductions against 2008 taxable income.
The Board declared a dividend of $0.045 per share at its meeting held May 8,
2008. The Company has utilized its March 31, 2008 dividend payment of $3.7
million and $4.3 million of its non-capital losses carried forward from 2007 to
reduce first quarter taxable income of the MIC to nil.
OUTLOOK
Activity in Quest's chosen lending niches continues at a robust level. After the
quarter end, the Company expanded its lending operations into Saskatoon,
Saskatchewan and has succeeded in penetrating that marketplace. The Company has
also hired a mortgage originator to operate out of its Toronto office to expand
funding activity in southern Ontario.
There has been contraction in the number of lenders in Quest's niche market and
the Company continues to attract new lending opportunities as they arise. Growth
in the mortgage portfolio subsequent to the quarter end has been significant
through increased utilization of Quest's revolving debt facility. The amount of
bank debt at March 31, 2008 was $40.5 million. This has increased to above $60
million at time of writing. Quest's debt facility is priced off of bank prime
rate which decreased 75 basis points during the first quarter and decreased a
further 50 basis points after the end of the quarter.
Quest's Board of Directors has authorized management to make an application for
a deposit taking license from the Office of the Superintendent of Financial
Institutions (Canada) in order to utilize the leverage allowed for a MIC. The
process of obtaining a deposit taking license is expected to take approximately
18 to 24 months. If successful, it will allow Quest to accept deposits from
customers which, under MIC rules, will permit the Company to carry up to five
times equity in debt or deposits in order to lever up the loan portfolio.
During this time of credit market turmoil, the Company continues to monitor very
closely the credit quality of its loans. Despite this turmoil being negative for
the broad market, circumstances continue to present the Company with profitable
niche lending opportunities. This is expected to continue during the remainder
of 2008.
RESULTS OF OPERATIONS
Table 2 - Condensed Income Statement
($ thousands)
Three months ended Three months ended
March 31, March 31,
2008 2007
--------------------------------------------
Net interest, other income and
provision for loan losses
Interest income 11,000 104% 10,124 77%
Other income 251 2% 3,205 24%
Interest on debt (423) (4%) (230) (1%)
Provision for loan losses (204) (2%) - 0%
--------------------------------------------
10,624 100% 13,099 100%
--------------------------------------------
Expenses
Salaries 736 23% 899 24%
Bonuses 505 16% 989 26%
Stock-based compensation 272 9% 200 5%
Legal and professional services 722 23% 360 10%
Other 905 29% 1,336 35%
---------------------------------------------
3,140 100% 3,784 100%
---------------------------------------------
Earnings before income taxes 7,484 9,315
Income taxes 385 1,926
------------ ------------
Net earnings for the period 7,099 7,389
============ ============
The three months ended March 31, 2008 is Quest's first quarter operating as a
MIC. There are some fundamental differences in operations between this year's
and last year's first quarter. The Company is no longer providing corporate
finance, management and investment services and accordingly, there are no
revenues or expenses for such activities in first quarter 2008 results. Also,
while still eligible under MIC rules when lending on Canadian assets, there were
no bridge loans funded during the first quarter of 2008. These factors have led
to a decrease in earnings before taxes, however, by utilizing the special
taxation rules for MICs, income tax expense has decreased and the Company's
first quarter 2008 net earnings were down only 4% from last year.
Interest income
Interest income includes loan interest at the stated loan rate excluding
interest that has not been accrued on impaired loans plus loan commitment fees
net of originators' fee expense. Interest is calculated using the effective
interest rate method.
Interest income increased $0.9 million or 9% to $11.0 million for three months
ended March 31, 2008 as compared to $10.1 million during comparative period in
2007. This increase was largely due to greater average loan balances in 2008 as
compared to 2007. Measured on a quarterly basis, the average outstanding loan
portfolio was $302.4 million during the first quarter of 2008, a $44.8 million
or 17% increase over the $257.6 million average balance outstanding during the
first quarter of 2007. Based on these average outstanding portfolio balances,
interest yields were 14.5% in 2008 compared to 15.7% in 2007. The decrease in
yield during 2008 as compared to 2007 reflects the decrease in bridge loan
activity during the first quarter of 2008 as compared to the comparative period
in 2007.
Other income
The Company divested itself of its management, corporate finance and investment
operations during 2007 as previously disclosed. As well, there were no bridge
loans funded during the first quarter of 2008. Consequently, the only other
income reported during the three months ended March 31, 2008 relates to the
service fees generated from syndicated loans. During the three months ended
March 31, 2008, the Company reported $0.3 million in servicing fees as compared
to $0.3 million in the comparative period in 2007. In the first quarter of 2007
the Company recorded $2.9 million in gains on sale of marketable securities and
investments and management and finder's fees.
Interest expense and provision for loan losses
Interest expense relates to interest on Quest's revolving debt facility and
other debt in 2007 used to fund its mortgage portfolio. This expense will grow
with increased utilization of the facility. Commencing in 2008, the Company
established a general allowance for loan losses to be consistent with industry
practice. During the three months ended March 31, 2008, the Company has taken a
charge for a general allowance for loan losses of $0.2 million as compared to
$nil in the comparative period in 2007. Further general loan loss provisions
will be recorded during the remainder of 2008. There has been no specific loan
loss provisions recorded during the first quarter of 2008 or during the
comparative period in 2007.
Salaries and bonuses
Salaries and benefits decreased $0.2 million or 18% during the three months
ended March 31, 2008 as compared to the comparative period in 2007. As at March
31, 2008, the Company had 25 employees involved in lending operations as
compared to 15 employees as at March 31, 2007. At March 31, 2007, the Company
also had 10 employees engaged in management and corporate finance operations.
Bonuses for the three months ended March 31, 2008 were $0.5 million, a decrease
of $0.5 million or 49% from $1.0 million in the comparative period in 2007,
primarily due to a decrease in bonuses paid to employees in the corporate
finance operations. Bonuses represent amounts under the Company's incentive
plans paid to officers and employees of the Company. The Company's incentive
plans include discretionary and non-discretionary components. Discretionary
payments and allocations are subject to the approval of the Compensation
Committee and the Board of Directors. Non-discretionary amounts relate to the
originators' fees which have been netted against commitment fee income and
included as a component of interest income.
Stock-based compensation
Stock-based compensation increased $0.1 million or 36% to $0.3 million in the
first quarter of 2008 as compared to $0.2 million in the comparative period in
2007, as a result of a greater number of options being granted to new employees
and directors. The expense related to options is recorded on a straight line
basis over the expected vesting term of the option (usually three years),
therefore the current expense relates to options vesting over a three year
period.
Legal and professional fees
Legal and professional fees increased $0.36 million or 100% to $0.7 million
during the three months ended March 31, 2008 as compared to $0.36 million in the
comparative period in 2007. Approximately $0.4 million of these legal and
professional fees are non-recurring expenses related to special advisory work
carried over from 2007.
Other expenses
Other expenses include general and office expenses, directors' remuneration,
regulatory and other miscellaneous expenses. These expenses have decreased $0.4
million or 32% to $0.9 million during the three months ended March 31, 2008 as
compared to $1.3 million in the comparative period in 2007 largely due to a
non-recurring sales tax expense of $0.6 million in the 2007 period.
Provision for income taxes
During prior years, the Company recognized a future tax asset based on the
likely realization of tax losses which were to be utilized against future
taxable earnings. During the three months ended March 31, 2007, net earnings
have been reduced through the recording of a tax provision as a result of the
utilization of the future tax assets previously set up. In the current period,
taxable income is reduced through the utilization of these prior years' losses
carried forward and, under MIC rules, through the payment of dividends during
the three months ended March 31, 2008. The utilization of the losses carried
forward has resulted in a tax provision. During the first quarter of 2008, the
Company utilized $4.3 of tax losses. There is approximately a further $3.5
million of losses carried forward available to be utilized during the remainder
of 2008.
Net earnings
For the three months ended March 31, 2008, the Company had consolidated net
earnings of $7.1 million (or $0.05 basic EPS) compared to consolidated net
earnings of $7.4 million (or $0.05 basic EPS) during the comparative period in
2007.
Comprehensive income
The Company had no available for sale assets or liabilities whose fair values
differ from their original carrying value during the first quarter of 2008. As a
result, there is no other comprehensive income to report during the period ended
March 31, 2008. Comprehensive income for the three months ended March 31, 2007
was $9.4 million and included $2.0 million of unrealized gains on
available-for-sale financial assets for the three months ended March 31, 2007.
FINANCIAL POSITION
Table 3 - Asset
Components
($ thousands)
March 31, December 31, March 31,
2008 2007 2007
------------------------------------------------------------
Asset mix
Cash and cash 1,894 1% 30,484 9% 9,743 3%
equivalents
Loans 327,087 95% 277,710 85% 250,274 85%
Future tax asset 3,552 1% 3,916 1% 11,805 4%
Other 9,958 3% 13,634 5% 23,508 8%
342,491 100% 325,744 100% 295,330 100%
Cash
The Company's cash resources at March 31, 2008 were $1.9 million as compared to
$30.5 million as at December 31, 2007 and $9.7 million at March 31, 2007. Cash
and cash equivalents include cash balances with a major Canadian chartered bank,
and do not include any investments in commercial paper.
Loans
The Company's loan portfolio continued to grow during the first quarter of 2008
to $327.1 million representing an 18% increase over the portfolio balance as at
December 31, 2007 and a 31% increase over that at March 31, 2007. As at March
31, 2008, 97% of the Company's loan portfolio was comprised of mortgages on real
estate, compared to 96% at December 31, 2007 and 89% at March 31, 2007. As at
March 31, 2008, Quest's loan portfolio consisted of 60 loans of which 55 were
mortgages secured by real estate and 5 were bridge loans secured by various
mining and energy related assets. The following table illustrates the
composition of the Company's loan portfolio:
Table 4 - Loan Portfolio
($ thousands)
March 31, December 31, March 31,
2008 2007 2007
--------------------------------------------------
Principal Outstanding
Mortgages
Land under development 168,372 50% 151,607 52% 137,254 53%
Real estate -
residential 24,671 7% 22,752 8% 14,090 5%
Real estate - 57,097 17% 51,123 18% 70,312 27%
commercial
Construction 75,796 23% 54,162 18% 10,390 4%
------------------------------------------------------
Total mortgages 325,936 97% 279,644 96% 232,046 89%
Bridge loans 9,509 3% 10,549 4% 29,261 11%
-------------------------------------------------------
Total principal 335,445 100% 290,193 100% 261,307 100%
outstanding ======= ====== =====
Prepaid and accrued (3,284) (8,877) (7,409)
interest, net
Deferred loan fees and (4,870) (3,606) (3,624)
other, net
General allowance for (204) 0 0
loan losses ----------- ------------ ----------
As recorded on the 327,087 277,710 250,274
balance sheet ============ ============ ===========
The Company funded $77.4 million in loans during the three months ended March
31, 2008, an increase of $51.6 million or 200% over the loans funded of $25.8
million in the comparative period in 2007. The Company did not syndicate any
loans during the first quarter of 2008 compared to $23.7 million loans
syndicated during the first quarter of 2007. The Company will syndicate a loan,
in certain instances, if it does not have sufficient cash resources to fund the
entire loan itself or if it wishes to reduce its exposure to a borrower.
The following table illustrates the flowin the loan portfolio during the first
quarters for 2007 and 2008. The Company collects commitment fees each time a
loan is funded or renewed. Hence the shorter the loan term, the greater the
capacity to fund new loans and earn commitment fees.
Table 5 - Loan Principal Continuity
($ thousands)
March 31, March 31,
2008 2007
----------------------------------
Principal balance, beginning of period 290,193 279,426
Loans funded 77,393 25,820
Loans repaid and other (32,141) (43,939)
-----------------------------------
Principal balance, end of period 335,445 261,307
===================================
As at March 31, 2008, the portfolio was comprised of 92% first mortgages and 8%
second mortgages. The amount of the Company's loans, secured by first or second
mortgages, generally do not exceed 75% of the collateral value. The following
table outlines Quest's evolution towards concentrating on first mortgages:
Table 6 - Priority of Mortgage Security Charges(1)
($ thousands)
March 31, December 31, March 31,
2008 2007 2007
------------------ ---------------- ------------------
Principal secured by:
First mortgages 299,136 92% 259,344 93% 190,295 82%
Second mortgages 26,800 8% 20,300 7% 41,751 18%
------------------ ----------------- ------------------
Total mortgages 325,936 100% 279,644 100% 232,046 100%
================== ================== ==================
1. Includes mortgage portion of loan portfolio only.
As at March 31, 2008, the mortgage portfolio is concentrated in western Canada,
with loans in British Columbia representing 53% of the portfolio, the Prairies
41% and Ontario 6%.
The following table indicates the geographical composition of the Company's
mortgages at the stated period ends.
Table 7 - Geographic Location of Mortgages(1)
($ thousands)
March 31, December 31, March 31,
2008 2007 2007
-------------------- ---------------- ----------------
Principal outstanding:
British Columbia 171,044 53% 160,986 58% 114,485 49%
Prairies 133,722 41% 94,440 34% 88,575 38%
Ontario 21,170 6% 17,500 6% 28,555 13%
Other - 0% 6,718 2% 431 0%
--------------------- ----------------- ---------------
Total mortgages 325,936 100% 279,644 100% 232,046 100%
====================== ================= ================
1. Includes mortgage portion of loan portfolio only.
Management reviews the geographical composition of the loan portfolio on a
regular basis and adjusts lending policies to reflect market conditions.
Credit quality and impaired loans
As part of the Company's security, corporate and/or personal guarantees are
generally required from the borrower. Where in Quest's opinion the real estate
security alone is not as strong as management may require, additional collateral
is obtained by way of collateral charges on other real estate and assets owned
by the borrower or by letters of credit. Management reviews the portfolio on a
regular basis to confirm whether the quality of the underlying security is
maintained and if credit conditions have deteriorated, suitable action is taken.
As at March 31, 2008, the Company had four non-performing loans in the amount of
$12.6 million (March 31, 2007 - $24.8 million) on which remedial action has been
undertaken. In management's opinion, the underlying security on these loans is
of sufficient value to cover the Company's investment.
The Company has commenced providing for a general allowance for loan losses in
2008. This general allowance represents a provision for unknown or unidentified,
but probable, credit losses in the portfolio. It is the Company's intention to
increase this allowance throughout 2008.
Quest has no exposure to US sub-prime mortgages or to any structured investment
vehicles. Quest also has no derivative instruments.
Future income taxes and other assets
Tax assets are comprised of losses carried forward and other tax deductions (see
Critical Accounting Policies and Estimates). The set up and utilization of
future tax assets are non-cash items. The Company has recognized a future tax
asset based on the likely realization of tax losses to be utilized against
future taxable income. In prior periods, the provision for income taxes on the
statements of earnings was charged for the amount of this asset, as represented
by tax losses carried forward, required to reduce taxable income to nil. In
2008, an additional $0.9 million in future tax assets were recognized, with the
off-set to this recognition to the provision for taxes on the statement of
earnings. Additionally, $1.3 million of previously recognized future tax assets
were utilized in the first quarter of 2008 to assist in reducing taxable income
for the quarter to nil. The Company has also recognized a future tax liability
related to its former U.S. based operations.
Other assets at March 31, 2008 include $8.6 million of restricted cash, of which
$6.6 million was held in trust to fund borrower's future interest payments.
Liabilities
Total liabilities at March 31, 2008 were $48.2 million as compared to $35.1
million, as at December 31, 2007 representing a 37% increase. The largest
component of total liabilities was the Company's revolving debt facility. As at
March 31, 2008, $40.5 million had been drawn on the Company's $88.0 million
revolving debt facility, as compared to $25.0 million as at December 31, 2007.
This facility is used to fund loans, as well as to bridge any gap between loan
advances and loan repayments.
Capital management
Quest's shareholders' equity as at March 31, 2008 of $294.3 million is $3.7
million or 1% greater than that as at December 31, 2007 and is $9.2 million or
3% greater than that as at March 31, 2007. During the first quarter of 2008, the
Company paid out $3.7 million in dividends, approximately 51% of its earnings
before taxes. As discussed above, as a MIC, the Company intends to pay out
sufficient dividends in 2008 and within 90 days after the end of 2008 to reduce
taxable income to a negligible amount, after first deducting available losses
and other tax deductions carried forward. The Company's current strategy is to
grow through use of leverage and not through further accumulation of earnings or
the issue of equity.
Contractual obligations
The Company has contractual obligations for its leased office space in Vancouver
and Toronto. The Company's Calgary office is leased on a month to month basis.
The total minimum lease payments for the years 2008 - 2012 are $2.4 million. As
well, the Company has committed to fund loan principal as at March 31, 2008 in
the amount of $82.5 million (see note 5(b) to the interim consolidated financial
statements). The following table illustrates these obligations by period due:
Table 8 - Contractual
obligations
Obligations due by period
----------------------------
($ thousands)
Type of Contractual Total Less than 1 - 3 3 - 5 More
Obligation 1 Year Years Years than 5
Years
-----------------------------------------------------
Office Leases 2,432 469 1,173 790 -
Loan Commitments 82,459 82,459 - - -
Total 84,891 82,928 1,173 790 -
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
SUMMARY OF QUARTERLY RESULTS
Table 9 - Summary Of Quarterly Results
($ thousands, except per share amounts)
First Fourth Third Second First Fourth Third Second
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
2008 2007 2007 2007 2007 2006 2006 2006
------------------------------------------------------------------
Interest 11,000 11,133 9,497 9,267 10,124 10,284 8,292 6,866
income
Other income 251 2,360 2,165 4,252 3,205 1,425 3,518 8,049
Earnings 7,484 8,156 7,782 10,735 9,315 7,918 9,087 11,664
before taxes
Net earnings 7,099 3,648 5,264 7,366 7,389 16,021 8,770 10,882
Basic 0.05 0.02 0.04 0.05 0.05 0.12 0.06 0.08
Earnings Per
Share
Total Assets 342,491 325,744 304,294 295,798 295,330 305,737 280,784 265,614
Total 48,156 35,110 13,125 7,487 10,267 31,608 25,036 20,264
Liabilities
==============================================================================
As disclosed previously, the Company divested itself of its management,
corporate finance and investments operations during 2007. Consequently, there
are no revenues or expenses for such services for the three months ended March
31, 2008. Historically, other income from these operations varied by quarter
depending on the amount of management, advisory, and finder's fees received and
gains on sale of marketable securities and investments. During the second
quarter of 2006 and fourth quarter of 2006, net earnings were positively
impacted by the recognition of a future tax asset of $0.8 million and $7.7
million, respectively, as a result of the likely realization of unused tax
losses from future earnings.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's accounting policies are described in Note 3 of its audited
consolidated financial statements as at December 31, 2007 and 2006 and for the
years ended December 31, 2007, 2006 and 2005. Management considers the following
policies to be the most critical in understanding the judgments and estimates
that are involved in the preparation of its consolidated financial statements
and the uncertainties which could materially impact its results, financial
condition and cash flows. Management continually evaluates its assumptions and
estimates; however, actual results could differ materially from these
assumptions and estimates.
Provision for Loan Losses
Loans are stated net of a general allowance for loan losses, and, where
required, specific allowances on impaired loans. Such allowances reflect
management's best estimate of the credit losses in the Company's loan portfolio
and judgments about economic conditions. This evaluation process involves
estimates and judgments, which could change in the near term, and result in a
significant change to a recognized allowance.
The Company's Credit Committee reviews its loan portfolio on at least a
quarterly basis and specific provisions are established where required on a
loan-by-loan basis. In determining the provision for possible loan losses, the
Company considers the following:
* the nature and quality of collateral and, if applicable, any
guarantee;
* secondary market value of the loan and the related collateral;
* the overall financial strength of the borrower;
* the length of time that the loan has been in arrears; and
* the borrower's plan, if any, with respect to restructuring the loan.
Commencing in 2008, the Company is establishing a general allowance for loan
losses in order to be consistent with industry practice.
Future Tax Assets and Liabilities
The Company has recognized a future tax asset based on the likely realization of
tax losses to be utilized against future earnings. The Company will reassess at
each balance sheet date its existing future income tax assets, as well as
potential future income tax assets that have not been previously recognized. In
determining whether an additional future income tax asset is to be recognized,
the Company will assess its ability to continue to generate future earnings
based on its current loan portfolio, expected rate of return, the quality of the
collateral security and ability to reinvest funds. If an asset has been recorded
and the Company assesses that the realization of the asset is no longer viable,
the asset will be written down. Conversely, if the Company determines that there
is an unrecognized future income tax asset which is more-likely-than-not to be
realized, it will be recorded in the balance sheet and statement of earnings.
The Company has also recognized a future tax liability related to its former
U.S. based operations.
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
Effective January 1, 2008, the Company adopted the CICA handbook section 1535,
"Capital Disclosures", which requires an entity to disclose its objectives,
policies, and processes for managing capital. In addition, this section requires
disclosure of summary quantitative information about what an entity manages as
capital; see note 12 to the interim consolidated financial statements for the
three months ended March 31, 2008.
Effective January 1, 2008, the Company has adopted the CICA handbook sections
3862 "Financial Instruments - Disclosures" and 3863 "Financial Instruments -
Presentation". These sections replace CICA handbook section 3861 "Financial
Instruments - Disclosure and Presentation", and enhance disclosure requirements
on the nature and extent of risks arising from financial instruments and how the
entity manages those risks; see note 12 to the interim consolidated financial
statements for the three months ended March 31, 2008. Also, refer to "risk and
uncertainties" section of this MD&A.
TRANSACTIONS WITH RELATED PARTIES
The Company's related party transactions are described in Note 10 of its interim
consolidated financial statements as at March 31, 2008 and for the three months
ended March 31, 2008 and 2007. Historically, certain directors or officers of
Quest joined the boards of companies in which Quest had invested or to which
Quest had provided bridge loan financing to ensure Quest's interests were
represented. This strategy resulted in a number of related party transactions.
DISCLOSURE OF OUTSTANDING SHARE DATA
As at May 8, 2008, the Company had the following common shares and stock options
outstanding:
Common shares 146,789,711
Stock options 12,264,250
RISKS AND UNCERTAINTIES
Additional risk factors are disclosed under "Risk Factors" in the 2007 Annual
Information Form filed on SEDAR at www.sedar.com.
Risk Management
The success of Quest is dependent upon its ability to assess and manage all
forms of risk that affect its operations. Like other financial institutions,
Quest is exposed to many factors that could adversely affect its business,
financial conditions or operating results. Developing policies and procedures to
identify risk and the implementation of appropriate risk management policies and
procedures is the responsibility of senior management and the Board of
Directors. The Board directly, or through its committees, reviews and approves
these policies and procedures, and monitors their compliance with them through
ongoing reporting requirements. A description of the Company's most prominent
risks follows.
Credit Risk Management
Credit risk is the risk that a borrower will not honour its commitments and a
loss to the Company may result. Senior management is committed to several
processes to ensure that this risk is appropriately mitigated. These include:
* the employment of qualified and experienced loan originators and
underwriters;
* the investigation of the creditworthiness of all borrowers;
* the engagement of qualified independent consultants such as lawyers,
quantity surveyors, real estate appraisers and insurance consultants
dedicated to protecting the Company's interests;
* the segregation of duties to ensure that qualified staff are satisfied
with all due diligence requirements prior to funding; and
* the prompt initiation of recovery procedures on overdue loans.
The Board of Directors has the responsibility of ensuring that credit risk
management is adequate. The Board has delegated much of this responsibility to
its Credit Committee, which is comprised of three independent directors. They
are provided monthly with a detailed portfolio analysis including a report on
all overdue and impaired loans, and meet on a quarterly basis, to review and
assess the risk profile of the loan portfolio. The Credit Committee is required
to approve all loan applications between $15 million and $25 million, and any
loan application for amounts greater than $25 million must be approved by the
Board. The Board has delegated approval authority for all loans less than $15
million to an approval committee comprised of senior management. In addition,
the Company does not allow any one loan to exceed 10% of the Company's equity
and restricts lending to any one borrower to 20% or less of the Company's
equity. As at March 31, 2008, the largest loan in the Company's loan portfolio
was $24.5 million (7% of the Company's loan portfolio); this was also the
largest aggregate amount owing by any one borrower. Also, the Company will
syndicate loans in certain circumstances if it wishes to reduce its exposure to
a borrower. The Company reviews its policies regarding its lending limits on an
on-going basis.
The amount of the Company's loans, secured by first or second mortgages,
generally do not exceed 75% of the collateral value.
Liquidity Risk
Liquidity risk is the risk that the Company will not have sufficient cash to
meet its obligations as they become due. This risk arises from fluctuations in
cash flows from making loan advances and receiving loan repayments. The goal of
liquidity management is to ensure that adequate cash is available to honour all
future loan commitments. As well, effective liquidity management involves
determining the timing of such commitments to ensure cash resources are
optimally utilized. Quest manages its liquidity risk by monitoring scheduled
mortgage fundings and repayments, and whenever necessary, accessing its debt
facility to bridge any gaps in loan maturities and funding obligations. In
addition, the Company will syndicate a portion of its loans as part of its
liquidity risk management.
As at March 31, 2008, the Company had drawn $40.5 million on its $88.0 million
revolving debt facility and had future loan commitments of up to $82.5 million.
Further, as at March 31, 2008, 71% of the Company's loan portfolio, being $239.4
million, was due within a year. In managements' opinion, the Company has
sufficient resources to meet its current cash flow requirements.
Market Risk
Market risk arises as a result of changes in conditions which affect real estate
values. These market changes may be regional, national or international in
nature or may revolve around a specific product type. Risk is incurred if the
value of real estate securing the Company's loans falls to a level approaching
the loan amounts. Quest is subject to risks in its construction lending business
if borrowers are not able to absorb rising costs of labour and materials. In
addition, the Company has loaned funds to a number of companies, which funds are
used for development including the re-zoning in respect of the relevant project.
Any decrease in real estate values may delay the development process and will
adversely affect the value of the Company's security. To manage these risks,
management ensures that its mortgage origination team is aware of the market
conditions that affect each mortgage application and the impact that any changes
may have on security for a particular loan. Management and the Board monitor
changes in the market on an ongoing basis and adjust the Company's lending
practices and policies when necessary to reduce the impact of the above risks.
Interest Rate Risk
Interest rate risk is the risk that a lender's earnings are exposed to
volatility as a result of sudden changes in interest rates. This occurs, in most
circumstances, when there is a mismatch between the maturity (or re-pricing
characteristics) of loans and the liabilities or resources used to fund the
loans. For loans funded using bank debt priced off of Bank Prime Rate, the
Company manages this risk through the pricing of certain of its loans also being
based upon the Bank Prime Rate. In addition, the Company will in some cases have
minimum rates or an interest rate floor in its variable rate loans. The Company
is also exposed to changes in the value of a loan when that loan's interest rate
is at a rate other than current market rate. Quest currently mitigates this risk
by lending for short terms, with terms at the inception of the loan varying from
six months to two years, charging prepayment penalties and upfront commitment
fees.
As at March 31, 2008, the Company had 14 variable rate loans priced off the Bank
Prime Rate with an aggregate principal of $50.7 million and 46 fixed rate loans
with an aggregate principal of $284.7 million.
INTERNAL DISCLOSURE CONTROLS AND PROCEDURES
Changes in Internal Disclosure Controls and Procedures
Effective March 17, 2008, Stephen Coffey was appointed Chief Executive Officer
of the Company, replacing Brian Bayley who remains as a Co-Chairman. There were
no other changes in the Company's internal disclosure controls and procedures
that occurred during the first quarter ended March 31, 2008 that have materially
affected, or are reasonably likely to affect, the Company's internal disclosure
controls and procedures.
Internal Disclosure Controls and Procedures
The Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") are
responsible for establishing and maintaining adequate disclosure controls and
procedures. Disclosure controls and procedures are designed to ensure that
information required to be disclosed in the Company's filings under applicable
securities legislation is properly accumulated and communicated to management,
including the CEO and CFO as appropriate, to allow timely decisions regarding
public disclosure. They are designed to provide reasonable assurance that all
information required to be disclosed in these filings is recorded, processed,
summarized and reported within the time periods specified in securities
legislation. The Company reviews its disclosure controls and procedures;
however, it cannot provide an absolute level of assurance because of the
inherent limitations in control systems to prevent or detect all misstatements
due to error or fraud.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Internal control over financial
reporting includes those policies and procedures that: (1) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of the assets of the Company, (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company, and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
The Company reviews its controls and procedures over financial reporting.
However, because of the inherent limitations in a control system, any control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that it will prevent or detect all misstatements, due to
error or fraud, from occurring in the financial statements.
FORWARD LOOKING INFORMATION
This MD&A includes certain statements that constitute "forward-looking
statements", and "forward-looking information" within the meaning of applicable
securities laws ("forward-looking statements" and "forward-looking information"
are collectively referred to as "forward-looking statements", unless otherwise
stated). These statements appear in a number of places in this MD&A and include
statements regarding our intent, beliefs or current expectations of our officers
and directors. Such forward-looking statements involve known and unknown risks
and uncertainties that may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this MD&A,
words such as "believe", "anticipate", "estimate", "project", "intend",
"expect", "may", "will", "plan", "should", "would", "contemplate", "possible",
"attempts", "seeks" and similar expressions are intended to identify these
forward-looking statements. Forward-looking statements may relate to the
Company's future outlook and anticipated events or results and may include
statements regarding the Company's future financial position, business strategy,
budgets, litigation, projected costs, financial results, taxes, plans and
objectives. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends
affecting the financial condition of our business. These forward-looking
statements were derived utilizing numerous assumptions regarding expected
growth, results of operations, performance and business prospects and
opportunities that could cause our actual results to differ materially from
those in the forward-looking statements. While the Company considers these
assumptions to be reasonable, based on information currently available, they may
prove to be incorrect. Forward-looking statements should not be read as a
guarantee of future performance or results. Forward-looking statements are based
on information available at the time those statements are made and/or
management's good faith belief as of that time with respect to future events,
and are subject to risks and uncertainties that could cause actual performance
or results to differ materially from those expressed in or suggested by the
forward-looking statements. To the extent any forward-looking statements
constitute future-oriented financial information or financial outlooks, as those
terms are defined under applicable Canadian securities laws, such statements are
being provided to describe the current potential of the Company and readers are
cautioned that these statements may not be appropriate for any other purpose,
including investment decisions. Forward-looking statements speak only as of the
date those statements are made. Except as required by applicable law, we assume
no obligation to update or to publicly announce the results of any change to any
forward-looking statement contained or incorporated by reference herein to
reflect actual results, future events or developments, changes in assumptions or
changes in other factors affecting the forward-looking statements. If we update
any one or more forward-looking statements, no inference should be drawn that we
will make additional updates with respect to those or other forward-looking
statements. You should not place undue importance on forward-looking statements
and should not rely upon these statements as of any other date. All
forward-looking statements contained in this MD&A are expressly qualified in
their entirety by this cautionary statement.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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Quest Capital (LSE:QCC)
과거 데이터 주식 차트
부터 5월(5) 2024 으로 6월(6) 2024
Quest Capital (LSE:QCC)
과거 데이터 주식 차트
부터 6월(6) 2023 으로 6월(6) 2024
