VANCOUVER, BRITISH COLUMBIA (AMEX: QCC)(AIM: QCC) ("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).
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 losses 10,373 9,894
Other income
Syndication (note 10) 251 322
Management and finder's fees (note 10) - 726
Gains on sale of marketable securities and
investments (note 10) - 2,157
------------- -------------
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
financial assets arising during the period - 1,962
Reclassification adjustment for gains
recorded included in net earnings - 21
------------- -------------
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 -
end of period $ - $ 4,215
------------- -------------
------------- -------------
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 fees (1,650) (1,832)
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 investments - (2,157)
Expenditures for reclamation and closure (48) (55)
Changes in prepaid and other receivables (153) 364
Changes in accounts payable and
accrued liabilities (461) 1,511
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 subsidiary (8) (6)
------------- -------------
(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 Net
Amount Specific General Total 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 Net
Amount Specific General Total 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
Shares Amount
----------------------------
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:
Weighted
Number of average share
shares 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
--------------------------------------------------- -----------------------
Weighted
average
remaining Weighted Weighted
contracted average average
Range of Options life exercise Options exercise
exercise prices outstanding (years) price exercisable price
$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 to risk and how they arise; objectives, Credit risk management
policies and processes used for managing -----------------------
the risks; methods used to measure the risk; Liquidity risk
and description of collateral -----------------------
Market risk
--------------------------------------------------------------------------
Credit risk - gross exposure to credit risk, Credit risk management
credit quality and concentration of exposures
--------------------------------------------------------------------------
Market risk - value-at-risk, interest rate risk Market risk
and 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 investments
received as loan fees $ - $ 617
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(1) 0.05 0.06 (0.01) (20%)
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(1)(2) 10% 13%
Return on assets
before taxes(1)(2) 9% 12%
Dividends paid per share 0.025 0.020 0.005 25%
Payout ratio on earnings
before taxes(1) 51% 37%
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 equivalents 1,894 1% 30,484 9% 9,743 3%
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 - commercial 57,097 17% 51,123 18% 70,312 27%
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 outstanding 335,445 100% 290,193 100% 261,307 100%
---- ---- ----
---- ---- ----
Prepaid and accrued
interest, net (3,284) (8,877) (7,409)
Deferred loan fees and
other, net (4,870) (3,606) (3,624)
General allowance for
loan losses (204) 0 0
-------- -------- --------
As recorded on the
balance sheet 327,087 277,710 250,274
-------- -------- --------
-------- -------- --------
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 $82.5 million (see note 5(b) to the interim consolidated
financial statements). The following table illustrates these
obligations by period due:
Table 8 - Contractual obligations
($ thousands) Obligations due by period
-----------------------------------------
Less More
than 1 1 - 3 3 - 5 than 5
Type of Contractual Obligation Total Year Years Years 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
income 11,000 11,133 9,497 9,267 10,124 10,284 8,292 6,866
Other
income 251 2,360 2,165 4,252 3,205 1,425 3,518 8,049
Earnings
before
taxes 7,484 8,156 7,782 10,735 9,315 7,918 9,087 11,664
Net
earnings 7,099 3,648 5,264 7,366 7,389 16,021 8,770 10,882
Basic
Earnings
Per Share 0.05 0.02 0.04 0.05 0.05 0.12 0.06 0.08
Total
Assets 342,491 325,744 304,294 295,798 295,330 305,737 280,784 265,614
Total
Liabilities 48,156 35,110 13,125 7,487 10,267 31,608 25,036 20,264
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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.
Contacts: Quest Capital Corp. - Contact in Canada A. Murray
Sinclair Co-Chairman (604) 68-QUEST, (604) 687-8378 or Toll Free:
1-800-318-3094 (604) 682-3941 (FAX) Quest Capital Corp. - Contact
in Canada Stephen Coffey President & CEO (416) 367-8383 (416)
367-4624 (FAX) Website: www.questcapcorp.com Quest Capital Corp. -
Contact in London AIM NOMAD: Canaccord Adams Limited Ryan Gaffney
011.44.20.7050.6500 Quest Capital Corp. - Contact in London AIM
NOMAD: Canaccord Adams Limited Robert Finlay
011.44.20.7050.6500
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