RNS Number : 9265A
Quest Capital Corporation
08 August 2008
August 8, 2008
Stock Symbols: TSX: QC
AMEX/AIM: QCC
QUEST CAPITAL REPORTS STRONG GROWTH IN
SECOND QUARTER 2008
Interest Income Up 23%
Loan Portfolio Up 46%
Second Quarterly Dividend of $0.045 Per Share Declared
Vancouver, British Columbia - Quest Capital Corp. ("Quest" or the "Company") today reported its financial results for the three and six
months ended June 30, 2008 - including strong growth in interest income and mortgage loans - and expressed a confident outlook for the
second half of 2008. Quest's mortgage assets are located exclusively in Canada, it does not lend into the United States.
"Quest is firmly on track with the growth strategy we introduced for 2008," said Stephen Coffey, President and Chief Executive Officer.
"We are experiencing a significant increase in new lending opportunities from quality borrowers and are meeting this demand as a dedicated
Mortgage Investment Corporation or MIC."
A MIC is a tax-advantaged Canadian corporation through which the Canadian government encourages residential mortgage lending. As a MIC,
Quest can distribute its entire taxable income by way of dividends to shareholders and deliver increasing yield as compared to taxable
corporations, as dividends paid are tax deductible to the Company. Dividends received from a MIC are taxed as interest.
"Quest's results to date are satisfying and include growth in interest income, a sizeable increase in our loan portfolio based on good
funding volumes, a reduction in impaired loans and the payment of an attractive dividend, "said Mr. Coffey. "Our ability to reduce taxable
income through the payment of dividends to shareholders has helped us to increase shareholder yield and after-tax earnings. Net income for
the second quarter of 2008 is the highest since the fourth quarter of 2006. During the quarter, we also took the first steps towards
applying for a deposit-taking license. This is a major initiative that, if successful, will accelerate our growth potential in future
years."
Second Quarter Highlights
* Interest income increased 23% to $11.5 million in the second quarter of 2008, compared to $9.4 million during the same period in
2007. This increase was the result of a 38% year-over-year growth in average outstanding loans.
* The Company's loan portfolio grew to $350.4 million at June 30, 2008, representing a 26% increase from December 31, 2007 and a 46%
increase from June 30, 2007.
* Total loans funded during the quarter were $72 million compared to $59 million in the comparative period in 2007 - a 22% increase.
Quest also syndicated $5.7 million in loans, compared to $4.3 million a year ago.
* Net income was $7.5 million ($0.05 per share basic and diluted) compared to $7.4 million ($0.05 per share basic and diluted)
during the same period last year - despite an expected drop in other income from corporate finance and investment operations that were
discontinued late in 2007. The comparative period in 2007 also included a $3.6 million gain related to the sale of marketable securities.
Quarterly Dividend of $0.045 Per Share Declared
The Board of Directors declared a quarterly dividend of $0.045 per share, payable on September 30, 2008 to shareholders of record on
September 15, 2008. Quest's objective is to increase value for shareholders while reducing taxable corporate income. It accomplishes this
objective through its dividend strategy which involves achieving a high payout ratio each year. The current dividend declaration follows the
June 30, 2008 dividend payment of $0.045 per share which produced a payout ratio on income before taxes for the second quarter of 2008 of
82% compared to 34% a year earlier.
Six Month Highlights
For the six months ended June 30, 2008:
* Interest income was $22.7 million compared to $19.5 million last year, a 16.4% increase.
* Net income was $14.6 million, virtually unchanged from a year earlier.
* Earnings per share (basic and diluted) were $0.10, also unchanged from the same period in 2007.
* Total loans funded grew 77% to $149.4 million compared to $84.5 million during the comparative period in 2007.
Other Performance Metrics
* At June 30, 2008, total assets were $366.5 million representing a 24% increase from $295.8 million a year earlier.
* Shareholders' equity at June 30, 2008 was $295.5 million compared to $288.3 million a year earlier - a 2.5% increase.
* At June 30, 2008, impaired loans totalled $12.4 million, a significant improvement over impaired loans of $23.0 million a year
ago.
"With estimated underlying security of $20 million on our impaired loans, we expect to avoid losses and maintain our track record of
credit quality," said Jim Grosdanis, Chief Financial Officer. "Moreover, because we are targeting to achieve an increasing level of
geographic diversification within our portfolio, we have confidence that we can continue to achieve one of our main objectives: preservation
of capital."
Outlook
"Looking forward, we're confident about our prospects," said Mr. Coffey. "From a capital perspective, we have drawn down $66.5 million
of our $88.0 million revolving debt facility at June 30, 2008. So while we've been very efficient in using leverage, we still have room to
support the addition of quality mortgages including the use of syndication. From a market perspective, while we're cognizant of the fact
that Canadian real estate markets are not as strong as last year, they still provide more than adequate support for Quest. We're
particularly pleased with the reception we've been given in the selected locations in the Ontario market since opening there earlier this
year and expect our mortgage portfolio there to grow in the second half. This complements our additional penetration into the Saskatchewan
market. In terms of adding value to shareholders, we remain optimistic."
SECOND QUARTER CONFERENCE CALL
Quest Capital will host a conference call at 11 a.m. Eastern today to discuss its second quarter performance. To access the call live,
please dial 1-800-762-8908. The call will be recorded and a replay made available for one week ending Friday, August 15, 2008 at midnight.
The replay may be accessed approximately one hour after the call by dialing 416-640-1917 and entering passcode 21279182 followed by the
number sign (�).
About Quest
Quest Capital Corp. is a leading Mortgage Investment Corporation serving Canadian real estate markets. Quest's objective is to become
Canada's largest Mortgage Investment Corporation in terms of (i) equity, (ii) loans generated and (iii) profitability.
Quest's strategy is to deploy its financial capital at superior rates of return while minimizing risk in the process. The three
principles of Quest's investing strategy are capital preservation, obtaining an attractive yield on lending activities and profitable
growth.
For more information about Quest, please visit our website (www.questcapcorp.com) or SEDAR
(www.sedar.com) or contact:
Contact in Canada AIM NOMAD:
Stephen Coffey, President Canaccord Adams
& CEO Limited
(P): (416) 367-8383 Ryan Gaffney or
(F): (416) 367-4624 Robert Finlay
(P): 011 44 20
7050 6500
A. Murray Sinclair,
Co-Chairman
(P): 604-687-8378
Toll Free: (800) 318-3094
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.
Unaudited Interim Consolidated Financial Statements
June 30, 2008
(Expressed in thousands of Canadian dollars)
Quest Capital Corp.
Unaudited Interim Consolidated Balance Sheets
As at June 30, 2008 with comparative figures for December 31, 2007 and
June 30, 2007
(Expressed in thousands of Canadian dollars)
June 30, December 31, June 30,
2008 2007 2007
Assets
Cash and cash equivalents $ 3,101 $ 30,484 $ 26,163
Loans (note 5) 350,419 277,710 240,055
Future income taxes 2,981 3,916 9,000
Restricted cash (note 6) 8,763 12,452 2,279
Prepaid and other receivables 160 155 356
Capital assets 929 841 416
Other assets 186 186 1,262
Marketable securities - - 3,621
Investments - - 12,646
$ 366,539 $ 325,744 $ 295,798
Liabilities
Accounts payable and accrued $ 3,559 $ 7,081 $ 3,606
liabilities (note 10)
Income taxes payable 45 188 1,829
Future income taxes 879 904 1,212
Asset retirement obligation 522 572 840
Debt payable (note 7) 66,010 26,365 -
71,015 35,110 7,487
Shareholders' equity
Share capital (note 8) 207,161 207,161 203,590
Contributed surplus (note 8) 7,474 6,934 6,673
Accumulated other comprehensive - - 3,094
income
Retained earnings 80,889 76,539 74,954
295,524 290,634 288,311
$ 366,539 $ 325,744 $ 295,798
Contingencies and commitments (notes
5(d) 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 unaudited interim consolidated financial statements.
Quest Capital Corp.
Unaudited Interim Consolidated Statements of Retained Earnings
For the three and six months ended June 30, 2008 and 2007
(Expressed in thousands of Canadian dollars)
Three Months Six Months
Ended June 30 Ended June 30
2008 2007 2008 2007
Retained earnings - beginning $ 79,968 $ 71,218 $ 76,539 $ 65,137
of period
Adoption of financial - - - 1,591
instruments standards
Net income for the period 7,526 7,366 14,625 14,755
Dividends (6,605) (3,630) (10,275) (6,529)
Retained earnings - end of $ 80,889 $ 74,954 $ 80,889 $ 74,954
period
e accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Quest Capital Corp.
Unaudited Interim Consolidated Income Statements
For the three and six months ended June 30, 2008 and 2007
(Expressed in thousands of Canadian dollars, except per share amounts)
Three Months Six Months
Ended June 30 Ended June 30
2008 2007 2008 2007
Interest income $ 11,549 $ 9,356 $ 22,680 $ 19,480
Interest expense (726) (18) (1,149) (248)
Interest income, net 10,823 9,338 21,531 19,232
Provision for loan losses (246) - (450) -
(note 5)
Net interest income after 10,577 9,338 21,081 19,232
provision for loan losses
Other income
Syndication (note 10) 114 322 234 560
Management and finder's fees - 416 - 1,142
(note 10)
Gains on sale of securities - 3,578 - 5,735
(note 10)
Other - 20 - 20
114 4,336 234 7,457
Net interest and other income 10,691 13,674 21,315 26,689
Non-interest expense
Salaries and benefits 942 1,018 1,678 1,917
Bonuses 487 965 992 1,870
Stock-based compensation (note 268 366 540 566
8)
Office and other 452 389 1,038 722
Legal and professional 258 352 980 712
services
Regulatory and shareholder 155 150 358 421
relations
Directors' fees 65 44 118 110
Sales tax (recovery) - (344) - 306
Other expenses (recoveries) 11 (1) 74 15
relating to resource assets
2,638 2,939 5,778 6,639
Income before income taxes 8,053 10,735 15,537 20,050
Provision for income taxes 527 3,369 912 5,295
(note 9)
Net income for the period $ 7,526 $ 7,366 $ 14,625 $ 14,755
Earnings per share
Basic $ 0.05 $ 0.05 $ 0.10 $ 0.10
Diluted $ 0.05 $ 0.05 $ 0.10 $ 0.10
Weighted average number of
shares outstanding
Basic 146,789,711 145,118,549 146,789,711 145,037,733
Diluted 146,839,776 148,718,138 147,315,821 148,735,913
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Quest Capital Corp.
Unaudited Interim Consolidated Statements of Comprehensive Income and Accumulated Other Comprehensive Income
For the three and six months ended June 30, 2008 and 2007
(Expressed in thousands of Canadian dollars)
Three Months Six Months
Ended June 30 Ended June 30
2008 2007 2008 2007
Net income for the period $ 7,526 $ 7,366 $ 14,625 $ 14,755
Other comprehensive income
Net unrealized gains (losses) on - (533) - 1,429
available-for-sale financial assets
arising during the period
Reclassification adjustment for - (597) - (567)
gains recorded in net income
Other comprehensive income (loss) - (1,130) - 862
Comprehensive income $ 7,526 $ 6,236 $ 14,625 $ 15,617
Accumulated other comprehensive $ - $ 4,224 $ - $ -
income - beginning of period
Adoption of financial instruments - - - 2,232
standards
Other comprehensive income (loss) - (1,130) - 862
for the period
Accumulated other comprehensive $ - $ 3,094 $ - $ 3,094
income - end of period
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Quest Capital Corp.
Unaudited Interim Consolidated Statements of Cash Flows
For the three and six months ended June 30, 2008 and 2007
(Expressed in thousands of Canadian dollars)
Three Months Six Months
Ended June 30 Ended June 30
2008 2007 2008 2007
Cash flows from operating
activities
Net income for the period $ 7,526 $ 7,366 $ 14,625 $ 14,755
Adjustments to determine net
cash flows relating to
operating items:
Future income taxes 563 3,338 884 5,166
Stock-based compensation 268 366 540 566
Provision for loan losses 246 - 450 -
Amortization of deferred (1,281) (2,691) (2,931) (4,523)
interest and loan fees
Deferred interest and loans 1,685 1,069 4,241 1,295
fees received
Other 149 277 318 172
Activity in marketable
securities held for trading
Purchases - (752) - (2,437)
Proceeds on sales - 2,079 - 4,989
Gains on sale of marketable - (3,578) - (5,735)
securities and investments
Expenditures for asset (35) (62) (83) (117)
retirement obligation
Increase/(decrease) in prepaid 148 (36) (5) 328
and other receivables
Decrease in accounts payables (3,069) (2,162) (3,522) (651)
and accrued liabilities
Decrease in income taxes (120) (212) (141) (985)
payable
6,080 5,002 14,376 12,823
Cash flows from financing
activities
Proceeds from shares issued - 275 - 704
Dividends (6,605) (3,630) (10,275) (6,529)
Financing costs - - (664) -
Change in revolving debt 26,010 - 66,510 -
facility
Change in other debt facility - - (26,365) (22,000)
19,405 (3,355) 29,206 (27,825)
Cash flows from investing
activities
Activity in loans
Funded (72,043) (58,690) (149,436) (84,510)
Repayments 49,030 68,091 77,564 106,978
Other (969) 878 (2,597) 3,436
Activity in investments
Proceeds on sales - 4,574 - 5,876
Change in restricted cash (165) 103 3,745 74
Purchases of capital assets (133) (7) (235) (13)
(24,280) 14,949 (70,959) 31,841
Foreign exchange gain (loss) 2 (176) (6) (182)
on cash held in a
foreign subsidiary
Increase (decrease) in cash 1,207 16,420 (27,383) 16,657
and cash equivalents
Cash and cash equivalents - 1,894 9,743 30,484 9,506
beginning of period
Cash and cash equivalents - $ 3,101 $ 26,163 $ 3,101 $ 26,163
end of period
Supplemental cash flow
information (note 15)
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Quest Capital Corp.
Notes to Unaudited Interim Consolidated Financial Statements
For the three and six months ended June 30, 2008
(Expressed in thousands of Canadian dollars, 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 disclosures 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 interim
consolidated financial statements should be read in conjunction with the Company's 2007 audited annual financial statements and notes.
Certain comparative figures have been reclassified to conform to the current period's presentation and have been adjusted due to a prior
period classification error relating to cumulative translation adjustment and other comprehensive income as reported in the December 31,
2007 financial statements.
3. Significant accounting policies
These interim consolidated financial statements follow the same accounting policies and methods of application as the Company's audited
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.
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 13 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 notes 12 and 13 to these interim consolidated financial statements. Also, refer to "risk and uncertainties" section of the Company's
Management Discussion and Analysis ("MD&A") for the three and six months ended June 30, 2008.
5. Loans
(a) Loans and Allowance for Loan Losses
Loans outstanding as at June 30, 2008:
Gross Allowance for loan losses Net
Amount Specific General Total Amount
Mortgages $ 340,648 $ - $ 426 $ 426 $ 340,222
Bridge loans 18,846 - 24 24 18,822
Accrued interest and deferred (8,625) - - - (8,625)
loan fees
$ 350,869 $ - $ 450 $ 450 $ 350,419
Loans outstanding as at December 31, 2007:
Gross Allowance for loan losses Net
Amount Specific General Total Amount
Mortgages $ 279,644 $ - $ - $ - $ 279,644
Bridge loans 10,549 - - - 10,549
Accrued interest and deferred (12,483) - - - (12,483)
loan fees
$ 277,710 $ - $ - $ - $ 277,710
Loans outstanding as at June 30, 2007:
Gross Allowance for loan losses Net
Amount Specific General Total Amount
Mortgages $ 221,345 $ - $ - $ - $ 221,345
Bridge loans 30,560 - - - 30,560
Accrued interest and deferred (11,850) - - - (11,850)
loan fees
$ 240,055 $ - $ - $ - $ 240,055
(b) Past Due Loans that are not Impaired
Loans are classified as past due when the loan is outstanding past the contractual maturity date. This may arise in the normal course of
business as a result of various factors including construction or refinancing delays. These loans are not considered impaired as interest
payments are current and all other terms of the loan agreements are in good standing.
The Company's past due loans are as follows:
Days Outstanding June 30, December 31, June 30,
Past Maturity 2008 2007 2007
1 - 30 days $ 4,173 $ - $ -
31 - 60 days - 11,436 -
Over 60 days 9,615 - -
$ 13,788 $ 11,436 $ -
(c) Impaired Loans, Specific and General Allowances
Loans are classified as impaired when interest on the loan is over 90 days in arrears or when there is no reasonable assurance of the
collection of 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 collateral value of security pledged. Once a loan is
classified as impaired, the Company does not record any further interest until it has been repaid or the loan is brought back into good
standing.
During the period, the Company renegotiated a previously impaired loan of $11,436 which is no longer classified as impaired (December
31, 2007 - $nil, June 30, 2007 - $nil).
The Company's impaired loans and specific allowances are as follows:
June 30, December 31, June 30,
2008 2007 2007
Gross amount of impaired loans $ 12,391 $ 7,500 $ 22,960
Specific allowances - - -
$ 12,391 $ 7,500 $ 22,960
At June 30, 2008, the total estimated value of collateral of impaired loans is $20,358.
The Company has recorded specific allowances for loan losses as follows:
June 30, June 30,
2008 2007
Balance - beginning of period $ - $ 586
Specific allowances - -
Allowance applied - (586)
Balance - end of period $ - $ -
In addition, starting in 2008, the Company commenced providing for a general allowance for loan losses to reflect probable, but
unidentified losses in its loan portfolio. The Company has recorded a general allowance for loan losses as follows:
June 30, June 30,
2008 2007
Balance - beginning of period $ - $ -
General allowance for the period 450 -
Balance - end of period $ 450 $ -
(d) Loan Commitments
At June 30, 2008, the Company had entered into agreements to advance funds of $16.1 million and had committed to future advances,
primarily construction loans, of up to $78.9 million. These advances are subject to the completion of due diligence, no material adverse
change in the assets, business or ownership of the borrower and other terms.
6. Restricted cash
Restricted cash comprises:
June 30, December 31, June 30,
2008 2007 2007
Castle Mountain $ 1,899 $ 1,999 $ 2,279
Interest reserves on loans (held in 6,864 10,453 -
trust)
Total $ 8,763 $ 12,452 $ 2,279
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$1,859 ($1,899) as at June 30, 2008 (December 31, 2007 - US$2,016 or $1,999, June 30, 2007 - US$2,139 or $2,279) 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 applied 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 to a maximum of
$88,000. The facility bears interest based on prime rate and is collateralized by the Company's loan portfolio. As at June 30, 2008,
$66,510 was drawn down under the facility. The Company amortizes financing costs associated with the revolving debt facility over the term
of the facility, being 2 years.
June 30, December 31, June 30,
2008 2007 2007
Revolving debt facility drawn $ 66,510 $ - $ -
Other debt facility drawn - 26,365 -
Less: unamortized balance of
financing costs (500) - -
$ 66,010 $ 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 and closing balance 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 six months ended June 30, 2008, the change in stock options outstanding was as follows:
Number of shares Weighted average exercise price
Number of shares Weighted average exercise price
Common shares
Opening balance 10,553,000 $ 2.28
Granted 2,455,000 2.37
Exercised - -
Expired or cancelled (314,063) 3.06
Closing balance 12,693,937 $ 2.28
Options exercisable 9,477,589 $ 2.17
The following table summarizes information about stock options outstanding and exercisable at June 30, 2008:
Options outstanding Options exercisable
Range of Options Weighted Weighted Options Weighted
exercise outstandin average average exercisab average
prices g remaining exercise le exercise
contractua price price
l
life
(years)
$1.51 223,000 1.14 $ 1.51 223,000 $ 1.51
$1.52 to $1.95 6,150,000 0.64 1.95 6,150,000 1.95
$1.96 to $2.31 2,355,000 3.73 2.17 1,212,391 2.28
$2.32 to $3.24 3,965,937 3.85 2.89 1,892,198 2.91
12,693,937 2.22 $ 2.28 9,477,589 $ 2.17
d) Contributed surplus
Opening balance - at January 1, 2008 $ 6,934
Stock-*based compensation 540
Fair value of stock options exercised -
Ending balance - at June 30, 2008 $ 7,474
The fair values of options granted during the six months ended June 30, 2008 have been estimated using an option pricing model.
Assumptions used in the pricing model are as follows:
Risk-free interest rate 2.86%
Expected life of options 3.0 years
Expected stock price volatility 35%
Expected dividend yield 10%
Weighted average fair value of options $ 0.32
9. Income taxes
The Company has tax losses and other deductions in certain of its entities which are available 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 Months Six Months
Ended June 30 Ended June 30
2008 2007 2008 2007
Current tax expense (recovery)
Canada $ (26) $ 31 $ 23 $ 129
United States (10) - 5 -
Total current tax expense (recovery) (36) 31 28 129
Future tax expense (recovery)
Canada 570 3,338 934 5,166
United States (7) - (50) -
Total future tax expense 563 3,338 884 5,166
Total provision for income taxes $ 527 $ 3,369 $ 912 $ 5,295
10. Related party transactions
Included in accounts payable as at June 30, 2008 is $1,951 due to employees and officers for bonuses payable (December 31, 2007 -
$4,620, June 30, 2007 - $2,375).
For the six months ended June 30, 2008, the Company paid $89 for administration services to a party related by virtue of having certain
directors and officers in common. The Company was also reimbursed $20 in office and premises costs by the same related party.
Included in the loan portfolio as at June 30, 2008 is a $10,000 bridge loan (December 31, 2007 - $nil, June 30, 2007 - $nil) which is
serviced at market rates by a party related by having certain directors and officers in common.
For the six months ended June 30, 2008, the Company received $13 (June 30, 2007 - $40) in syndication loan administration fees from
parties related by virtue of having certain directors and officers in common.
For the six months ended June 30, 2008, the Company recorded a gain on disposal of securities and investments of $nil (June 30, 2007 -
$2,156) 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.
For the six months ended June 30, 2008, the Company received $nil (June 30, 2007 - $348) in management and finder's fees from parties
related by virtue of having certain directors and officers in common.
Included in accounts payable as at June 30, 2008 is $40 (December 31, 2007 - $41 June 30, 2007 - $25) in co-lender interest payable to
related parties.
11. Contingencies and commitments
a) Surety bond guarantees totalling US$2,405 have been provided by Castle Mountain Joint Venture for compliance with reclamation and
other environmental agreements.
b) The Company has entered into operating leases for office premises. Minimum annual lease payments required are approximately as
follows:
2008 (remaining six months) $ 313
2009 625
2010 548
2011 395
2012 395
c) Other commitments and contingencies are disclosed elsewhere in these interim consolidated financial statements and notes.
12. Interest rate sensitivity
The Company's exposure to interest rate changes results from the difference between assets and liabilities and their respective
maturities or interest rate repricing dates. Based on current differences as at June 30, 2008, the Company estimates that an immediate and
sustained 100 basis point increase in interest rates would decrease net interest income over the next 12 months by $338. An immediate and
sustained 100 basis point decrease in interest rates would increase net interest income over the next 12 months by $405.
The carrying amounts of assets and liabilities in the following table are presented in the periods in which they next reprice to market
rates or mature based on the earlier of contractual repricing and maturity dates, as at June 30, 2008:
Floating 0 to 6 6 to 12 1 to 3 Over Non - Interest Total
Rate Months Months Years 3 Years Sensitive
Total assets $44,990 $173,451 $53,732 $82,592 $- $11,774 $366,539
Total liabilities and equity 66,510 - - - - 300,029 $366,539
Difference $(21,520) $173,451 $53,732 $82,592 - $(288,255) $ -
Cumulative difference $(21,520) $151,931 $205,663 $288,255 $288,255 $ - $ -
Cumulative difference as a (5.9%) 41.4% 56.1% 78.6% 78.6% - -
percentage of total assets
13. 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
lending operations. A strong capital position also provides flexibility in considering accretive growth opportunities. As at June 30,
2008, the Company was in compliance with its revolving debt facility covenants.
Management considers the Company's capital to be comprised of debt payable of $66,010 at June 30, 2008 and all components of
shareholders' equity which amount to $295,524 as at June 30, 2008.
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 to
risk and how they arise; objectives, policies and
processes used for managing the risks; methods used to
measure the risk; and description of collateral
Credit risk
management
Liquidity risk
Market risk
Interest rate risk
Credit risk - gross exposure to credit risk, credit Credit risk
quality and concentration of exposures management
Market risk - value-at-risk, interest rate risk and Market risk
equity risk
Interest rate risk
Liquidity risk - liquid assets, maturity of financial Liquidity risk
liabilities and credit and liquidity commitments
14. Segmented information
The Company has primarily one operating segment, which is to provide mortgage financings. The Company's geographic location is Canada.
15. Supplemental cash flow information
a) Cash received or paid
Three Months Six Months
Ended June 30 Ended June 30
2008 2007 2008 2007
Interest received (non-loan) $ 88 $ 172 $ 342 $ 270
Interest paid 601 3 920 226
Income tax instalments - 850 67 870
Non-cash financing and investing activities
Three Months Six Months
Ended June 30 Ended June 30
2008 2007 2008 2007
Marketable securities and investments $ - $ 1,554 $ - $ 2,171
received as loan fees
16. Future accounting changes
The CICA plans to converge Canadian GAAP for public companies with International Financial Reporting Standards ("IFRS") over a
transition period effective for fiscal periods ending on or after January 1, 2011. Management is currently preparing a plan to adopt IFRS,
however, the impact of IFRS convergence of financial reporting standards on the Company's consolidated financial statements is not yet
determinable.
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE SECOND QUARTER ENDED JUNE 30, 2008
INTRODUCTION
The following information, prepared as of August 8, 2008, should be read in conjunction with the unaudited interim consolidated
financial statements of Quest Capital Corp. ("Quest" or the "Company") as at June 30, 2008 and for the three and six months ended June 30,
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 are 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.
As a mortgage investment corporation ("MIC"), Quest can decrease its taxable income through the payment of dividends to its shareholders
and to this end, 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.
The growth of its mortgage portfolio will be carried out prudently 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 $88 million for this purpose. In June 2008, Quest
began the process of applying for a deposit taking license from the Office of the Superintendent of Financial Institutions (Canada) in order
to access alternate sources of funding. If successful, Quest would envision accepting customer term deposits (through brokers and agents)
towards the end of 2009. Under MIC rules, the Company will be able to carry up to five times its equity in debt, including term deposits,
thereby allowing the Company to increase the loan portfolio proportionately.
NON-GAAP MEASURES
Basic earnings per share ("EPS") before taxes, return on equity before taxes, return on assets before taxes and payout ratio on earnings
before taxes do not have standardized meanings prescribed by GAAP and, therefore, may not be comparable to similar measures presented by
other companies. The fact that tax expense is for the most part a non-cash item to the Company is the major reason the Company calculates
and highlights various ratios on a before tax basis. Non-GAAP measures used in this management's discussion and analysis ("MD&A") are
calculated as follows:
* basic earnings per share before taxes - earnings before taxes divided by number of common shares outstanding for basic EPS purposes;
* return on equity before taxes - earnings before taxes divided by average shareholders' equity;
* return on assets before taxes - earnings before taxes divided by average total assets; and
* payout ratio on earnings before taxes - dividends paid per share divided by basic earnings per share before taxes.
Readers are cautioned not to view non-GAAP measures as alternatives to financial measures calculated in accordance with GAAP.
FINANCIAL PERFORMANCE
Table 1 - Selected Financial Information
($ thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
Key Performance Indicators
Interest income 11,549 9,356 22,680 19,480
Other income 114 4,336 234 7,457
Net interest and other income 10,691 13,674 21,315 26,689
Earnings before income taxes 8,053 10,735 15,537 20,050
Earnings per share before taxes(1) 0.05 0.07 0.11 0.14
Net earnings for the period 7,526 7,366 14,625 14,755
Earnings per share - basic 0.05 0.05 0.10 0.10
Earnings per share - diluted 0.05 0.05 0.10 0.10
Return on equity before taxes(1)(2) 11% 15% 11% 14%
Return on equity(1)(2) 10% 10% 10% 10%
Return on assets before taxes(1)(2) 9% 15% 9% 13%
Return on assets(1)(2) 8% 10% 8% 10%
Dividends paid per share 0.045 0.025 0.070 0.045
Payout ratio on earnings before 82% 34% 66% 33%
taxes(1)
Loans 350,419 240,055
Total assets 366,539 295,798
Shareholders' equity 295,524 288,311
Book value per share 2.01 1.99
1. See non-GAAP measures disclosed in this MD&A.
2. Annualized basis.
QUARTERLY DIVIDEND DECLARED
The Board declared a quarterly dividend of $0.045 per share at its meeting held August 7, 2008 payable September 30, 2008 to
shareholders of record on September 15, 2008. As a MIC, Quest may deduct dividends paid to shareholders in the computation of its taxable
income. During the course of this year, the Company has paid dividends of $0.045 and $0.025 per share in June and March, respectively and
expects to pay sufficient dividends during the remainder of 2008 and within 90 days of the end of 2008 to reduce its taxable income to a
negligible amount after first deducting any tax losses and other deductions carried forward.
OUTLOOK
As the credit market turmoil continues, Quest has seen an increasing number of new lending opportunities, as well as an increase in the
quality of borrowers. Quest expects this to continue throughout 2008.
The Company monitors very closely the credit quality of its loans and continues to focus on the loan to value and the location of its
collateral. Despite the credit market turmoil being negative for the broad industry, the Company's circumstances continue to remain strong.
As of June 30, 2008, the Company has three impaired loans totaling $12 million. Quest's management expects to recover the full amount of its
investment as the underlying security is estimated to be $20 million.
Quest has been successful in penetrating the Saskatchewan lending market and has also commenced lending in selected areas in the Ontario
market through its new originator located in the Toronto office. The Company expects to be able to increase its loan portfolio in these
regions throughout the remainder of the year.
RESULTS OF OPERATIONS
Table 2 - Condensed Income Statement
($ thousands)
For the three months ended June 30, 2008 For the three months ended June 30, 2007 For the six months
ended June 30, 2008 For the six months ended June 30, 2007
Net interest, other income and
provision for loan losses
Interest income 11,549 108% 9,356 68% 22,680
106% 19,480 73%
Other income 114 1% 4,336 32% 234
1% 7,457 28%
Interest on debt (726) (7)% (18) 0% (1,149)
(5%) (248) (1%)
Provision for loan losses (246) (2)% - 0% (450)
(2%) - 0%
10,691 100% 13,674 100% 21,315
100% 26,689 100%
Expenses
Salaries 942 36% 1,018 35% 1,678
29% 1,917 29%
Bonuses 487 18% 965 33% 992
17% 1,870 28%
Stock-based compensation 268 10% 366 12% 540
9% 566 9%
Legal and professional 258 10% 352 12% 980
17% 712 11%
services
Other 683 26% 238 8% 1,588
28% 1,574 23%
2,638 100% 2,939 100% 5,778
100% 6,639 100%
Net income before income 15,537
20,050
taxes 8,053 10,735
Income taxes 527 3,369 912
5,295
Net income for the period 7,526 7,366 14,625
14,755
The three months ended June 30, 2008 is Quest's second quarter operating as a MIC. There are some fundamental differences in operations
between this year's and last year's second 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 second quarter 2008 results. Also, while still eligible under MIC
rules when lending on Canadian assets, only one bridge loan was funded during the second quarter of 2008. These factors have led to a
decrease in net income before taxes, however, by utilizing the special taxation rules for MICs, income tax expense has decreased and the
Company's second quarter 2008 net income is $0.2 million or 2% greater than net income in the second quarter of 2007. On a sequential basis,
net income is $0.4 million or 6% greater than that of the first quarter of 2008.
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 $2.2 million or 23% to $11.5 million for three months ended June 30, 2008 as compared to $9.4 million during
the 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 $339 million during the second quarter of 2008, a $94 million or 38% increase
over the $245 million average balance outstanding during the second quarter of 2007. Based on these average outstanding portfolio balances,
interest yields were 13.6% in the second quarter of 2008 compared to 15.3% in the comparative period in 2007. The decrease in yield during
2008 as compared to 2007 reflects the decrease in bridge loan activity 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,
only one bridge loan was funded during the second quarter of 2008. Consequently, the only other income reported during the three months
ended June 30, 2008 relates to the service fees generated from syndicated loans. During the three months ended June 30, 2008, the Company
reported $0.1 million in servicing fees as compared to $0.3 million in the comparative period in 2007. Syndicated loan servicing fees have
decreased due to the Company choosing to fund loans with its revolving line of credit instead of increasing syndications. During the second
quarter of 2007, the Company recorded $3.6 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 in 2008 and other debt facility in 2007 used to assist in
funding its mortgage portfolio. This expense has grown 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 June 30, 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. As
at June 30, 2008, the Company's general allowance for loan losses is $0.5 million. There has been no specific loan loss provisions recorded
in 2008 or during the comparative period in 2007.
Salaries and bonuses
Salaries and benefits decreased $0.1 million or 7% during the three months ended June 30, 2008 as compared to the comparative period in
2007. As at June 30, 2008, the Company had 22 employees involved in lending operations as compared to 15 employees as at June 30, 2008. At
June 30, 2007, the Company also had 10 employees engaged in management and corporate finance operations.
Bonuses for the quarter ended June 30, 2008 were $0.5 million, a decrease of $0.5 million or 50% from $1.0 million in the comparative
period in 2007, primarily due to a decrease in bonuses paid to employees in 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 decreased $0.1 million or 27% to $0.3 million in the second quarter of 2008 as compared to $0.4 million in the
comparative period in 2007. 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 decreased $0.1 million or 27% to $0.3 million during the three months ended June 30, 2008 as compared to
$0.4 million in the comparative period in 2007. Approximately $0.1 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 increased $0.4 million or 187% to $0.7 million during the quarter ended June 30, 2008 as compared to $0.2 million in the comparative
period in 2007 which included a recovery of $0.3 for sales taxes.
Provision for income taxes
The Company has recognized a future tax asset based on the likely utilization of tax losses and other deductions which may be used to
reduce future taxable income. During the three months ended June 30, 2007, net income was reduced through the recording of a tax provision
as a result of the utilization of future tax assets previously set up. In the current period, tax expense has also been recorded based on
the utilization of this tax asset, however, the Company's ability to deduct dividend payments in the calculation of taxable income has
resulted in a much reduced tax provision. During the quarter, the Company utilized $0.7 million of tax losses. There is approximately a
further $1.7 million of losses carried forward available to be utilized during the remainder of 2008.
Net income
For the quarter ended June 30, 2008, the Company had consolidated net income of $7.5 million (or $0.05 basic EPS) compared to
consolidated net income of $7.4 million (or $0.05 basic EPS) during the comparative period in 2007 an increase of $0.2 million or 2%. On a
year to date basis, net income has decreased $0.1 million or 1%.
Comprehensive income
The Company did not have any available for sale assets or liabilities whose fair values differ from their original carrying value during
2008. As a result, there is no other comprehensive income to report during the period ended June 30, 2008. Other comprehensive loss for the
three months ended June 30, 2007 was $1.1 million and included $0.5 million of unrealized losses on available-for-sale financial assets.
FINANCIAL POSITION
Table 3 - Asset Components
($ thousands)
June 30, December 31, June 30,
2008 2007 2007
Asset mix
Cash and cash equivalents 3,101 1% 30,484 9% 26,163 9%
Loans 350,419 96% 277,710 85% 240,055 81%
Future tax asset 2,981 1% 3,916 1% 9,000 3%
Other 10,038 2% 13,634 5% 20,580 7%
366,539 100% 325,744 100% 295,798 100%
Cash
The Company's cash resources at June 30, 2008 were $3.1 million as compared to $30.5 million as at December 31, 2007 and $26.1 million
at June 30, 2007. Cash and cash equivalents include cash balances with a major Canadian chartered bank, and do not include any investments
in commercial paper. The Company attempts to keep its cash balances to a minimum during periods when it has drawn on its revolving debt
facility.
Loans
The Company's loan portfolio continued to grow during the second quarter of 2008 to $350.4 million representing a 26% increase over the
portfolio balance as at December 31, 2007 and a 46% increase over that at June 30, 2007. As at June 30, 2008, 95% of the Company's loan
portfolio was comprised of mortgages on real estate, compared to 96% at December 31, 2007 and 88% at June 30, 2007. As at June 30, 2008,
Quest's loan portfolio consisted of 63 loans of which 57 were mortgages secured by real estate and 6 were bridge loans secured by various
mining and energy related assets. The following table illustrates the composition of the Company's loan portfolio:
Table 4 - Loan Portfolio
($ thousands)
June 30, December 31, June 30,
2008 2007 2007
Principal Outstanding
Mortgages
Land under development 148,841 41% 151,607 52% 120,659 48%
Real estate - residential 39,923 11% 22,752 8% 49,957 20%
Real estate - commercial 68,359 19% 51,123 18% 48,589 19%
Construction 83,525 24% 54,162 18% 2,140 1%
Total mortgages 340,648 95% 279,644 96% 221,345 88%
Bridge loans 18,846 5% 10,549 4% 30,560 12%
Total principal outstanding 359,494 100% 290,193 100% 251,905 100%
Prepaid and accrued interest, (4,630) (8,877) (8,222)
net
Deferred loan fees and other, (3,995) (3,606) (3,628)
net
General allowance for loan (450) 0 0
losses
As recorded on the balance 350,419 277,710 240,055
sheet
The Company funded $72 million in loans during the three months ended June 30, 2008, an increase of $13 million or 22% over the loans
funded of $59 million in the comparative period in 2007. For the six months ended June 30, 2008, the Company's funded $149 million in loans,
representing an increase of $64 million or 75% over that funded during the six months ended June 30, 2007. The Company syndicated $5.7
million in loans during the quarter ended June 30, 2008 compared to $4.3 million loans syndicated during the same period in 2007. The
Company will syndicate a loan, in certain instances, if it does not have sufficient cash resources to fund the entire loan itself or if it
wishes to reduce its exposure to a borrower.
The following table illustrates the flow in the loan portfolio during 2007 and 2008. The Company collects commitment fees each time a
loan is funded or renewed. Hence the shorter the loan term, the greater the capacity to fund new loans and earn commitment fees.
Table 5 - Loan Principal Continuity
($ thousands)
For the three months ended For the six months
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
Principal balance, beginning 335,445 261,307 290,193 279,426
of period
Loans funded 72,043 58,690 149,436 84,510
Loans repaid and other (47,994) (68,092) (80,135) (112,031)
Principal balance, end of 359,494 251,905 359,494 251,905
period
As at June 30, 2008, the portfolio was comprised of 93% first mortgages and 7% 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 continuing
concentration on first mortgages:
Table 6 - Priority of Mortgage Security Charges(1)
($ thousands)
June 30, December 31, June 30,
2008 2007 2007
Principal secured by:
First mortgages 315,217 93% 259,344 93% 185,930 84%
Second mortgages 25,431 7% 20,300 7% 35,415 16%
Total mortgages 340,648 100% 279,644 100% 221,345 100%
1. Includes mortgage portion of loan portfolio only.
As at June 30, 2008, the mortgage portfolio is concentrated in western Canada, with loans in British Columbia representing 47% of the
portfolio, the Prairies 46% and Ontario 7%.
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)
June 30, December 31, June 30,
2008 2007 2007
Principal outstanding:
British Columbia 161,388 47% 160,986 58% 112,886 51%
Prairies 157,878 46% 94,440 34% 81,898 37%
Ontario 21,382 7% 17,500 6% 22,135 10%
Other - 0% 6,718 2% 4,426 2%
Total mortgages 340,648 100% 279,644 100% 221,345 100%
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 June 30, 2008, the Company had three impaired loans in the amount of $12.4 million (June 30, 2007 - $23.0 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.
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 2008 to date, $0.9 million of previously recognized future tax assets were
utilized and charged to expense in the income statement compared to $5.2 million in 2007. The Company has also recognized a future tax
liability related to its former U.S. based operations.
Other assets at June 30, 2008 include $8.8 million of restricted cash, of which $6.9 million was held in trust to fund borrower's future
interest payments.
Liabilities
Total liabilities at June 30, 2008 were $71 million as compared to $35.1 million, as at December 31, 2007 representing a 100% increase.
The largest component of total liabilities is the Company's revolving debt facility. As at June 30, 2008, $66.5 million had been drawn on
the Company's $88.0 million facility, as compared to $nil as at June 30, 2007. Debt facilities are used to fund loans, as well as to bridge
any gap between loan advances and loan repayments.
Capital management
Shareholders' equity as at June 30, 2008 of $295.5 million is $4.9 million or 2% greater than that as at December 31, 2007 and is $7.2
million or 3% greater than that as at June 30, 2007. During 2008, the Company has paid out $10.3 million in dividends, approximately 70% 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 $2.3 million. As well, the Company has committed to
fund loan principal as at June 30, 2008 in the amount of $95 million (see note 5(d) to the interim consolidated financial statements). The
following table illustrates these obligations by period due:
Table 8 - Contractual Obligations due by period
obligations
($ thousands)
Type of Contractual Obligation Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years
Office Leases 2,276 313 1,173 790 -
Loan Commitments 95,000 95,000 - - -
Total 97,276 95,313 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)
Second First Fourth Third Second First Fourth Third
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
2008 2008 2007 2007 2007 2007 2006 2006
Interest income 11,549 11,131 11,133 9,497 9,356 10,124 10,284 8,292
Other income 114 120 2,360 2,165 4,336 3,205 1,425 3,518
Income before taxes 8,053 7,484 8,156 7,782 10,735 9,315 7,918 9,087
Net Income 7,526 7,099 3,648 5,264 7,366 7,389 16,021 8,770
Basic Earnings Per Share 0.05 0.05 0.02 0.04 0.05 0.05 0.12 0.06
Total Assets 366,539 342,491 325,744 304,294 295,798 295,330 305,737 280,784
Total Liabilities 71,015 48,156 35,110 13,125 7,487 10,267 31,608 25,036
As disclosed previously, the Company divested itself of its management, corporate finance and investment operations during 2007.
Consequently, there are no revenues or expenses for such services for the three months ended June 30, 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 fourth quarter of 2006, net earnings were positively impacted by the recognition of a
future tax asset of $7.7 million, 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 the 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 13 to the interim consolidated financial statements for the three
and six months ended June 30, 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 notes 12 and 13 to the interim consolidated financial statements for the three and six months ended June 30, 2008
and 2007. 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 June 30, 2008
and for the three and six months ended June 30, 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 August 7, 2008, the Company had the following common shares and stock options outstanding:
Common shares 146,789,711
Stock options 12,693,937
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 June 30, 2008,
the largest loan in the Company's loan portfolio was $27 million (8% 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 June 30, 2008, the Company had drawn $66.5 million on its $88.0 million revolving debt facility and had future loan commitments of
up to $95 million. Further, as at June 30, 2008, 66% of the Company's loan portfolio, being $238.5 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 June 30, 2008, the Company had 11 variable rate loans priced off the Bank Prime Rate with an aggregate principal of $41.4 million
and 52 fixed rate loans with an aggregate principal of $318.1 million.
INTERNAL DISCLOSURE CONTROLS AND PROCEDURES
Changes in Internal Disclosure Controls and Procedures
Effective May 9, 2008, Jim Grosdanis was appointed Chief Financial Officer of the Company. There were no other changes in the Company's
internal disclosure controls and procedures that occurred during the second quarter ended June 30, 2008 that have materially affected, or
are reasonably likely to affect, the Company's internal disclosure controls and procedures. No changes were made in the Company's internal
controls over financial reporting during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial reporting.
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)
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