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VANCOUVER, BRITISH COLUMBIA -- (MARKET WIRE) -- 05/09/08 -- Quest Capital Corp. (TSX: QC)(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%
-------------- --------------- ---------
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