Quest Capital Corp. (TSX: QC)(AIM: QCC)(NYSE Amex: QCC) ("Quest" or
the "Company") today announced its financial results for the three
months ended March 31, 2009.
Financial Summary
- Net income was $1.4 million ($0.01 per diluted share) compared
to $1.8 million ($0.01 per diluted share) in the fourth quarter of
2008 and $7.1 million ($0.05 per diluted share) in the first
quarter of 2008
- In reflection of deterioration in real estate values in
markets in which Quest lends, the Company took specific loan losses
of $2.6 million in the first quarter of 2009 compared to $nil in
the comparable 2008 quarter
- Shareholders' equity was $293.8 million at March 31, 2009 -
$2.7 million higher than at year end and $0.5 million less than the
$294.3 million as at March 31, 2008
- Debt to shareholders' equity at March 31, 2009 was 0.3:1,
while total assets as a multiple of equity was 1.3 times
- The Company paid down its revolving debt facility from $51
million as at December 31, 2009 to $47 million as at March 31,
2009. The Company's current amount outstanding on its revolving
debt facility as of May 14, 2009 is $nil.
"While our first quarter results do not reflect the significant
measures we announced earlier this month to reduce costs, they do
reflect the realities of Canada's real estate markets so far this
year," said Stephen Coffey, President and CEO. "Through these
actions, which included streamlining the executive team, reducing
costs and syndicating loans, we intend to continue to protect
shareholders' equity and complete our plan to extinguish bank debt
by year end."
Loan Syndication and Debt Reduction
Quest began to reduce its revolving debt facility in the fourth
quarter of 2008 and to that end, subsequent to quarter end, the
Company syndicated $30 million of its loan portfolio, which was
used to pay down the Company's revolving debt. As at May 14, 2009,
the balance drawn had been reduced to $nil from $51 million and $47
million, as at December 31, 2008 and March 31, 2009, respectively.
The revolving debt facility will continue to be utilized to fund
outstanding loan obligations. The Company continues to have $40
million in preferred shares outstanding that were raised in
December 2008.
Loan Performance
Due to the continued restrictive credit environment and lower
real estate values in certain markets, Quest had 15 non-performing
(impaired) loans amounting to $113 million at March 31, 2009, up
from 14 loans totaling $107 million at December 31, 2008. The
Company's specific allowance of $16.3 million as at March 31, 2009
is $2.6 million greater than as at December 31, 2008.
Dividend Policy and Tax Loss Carry Forwards
At March 31, 2009, there were $7.9 million of tax losses carried
forward which may be utilized further in 2009 and future years to
offset taxable income. As a result of utilizing tax losses, Quest
reduced its taxable income in the first quarter of 2009 to $nil and
decided to forego paying a quarterly common share dividend on March
31, 2009 - a move that increased its liquidity. The Company intends
to reinstate its common share dividend as soon as it is prudent to
do so, however, at its May 14th, 2009 meeting, the Board of
Directors of Quest did not declare a dividend on its common
shares.
Preferred share dividends were $1.4 million for the first
quarter of 2009. On April 9, 2009, the Company arranged to pay the
declared dividend on the cumulative preferred shares in common
shares of the Company. Quest has declared a dividend on its 13.50%
First Preferred Shares, Series A to be paid June 30, 2009.
Looking Ahead
To date in 2009, the real estate markets have not yet improved
significantly and as a result, the Company's loans continue to be
exposed to further potential devaluation and loss. Management
therefore believes Quest shareholders will best be served this year
by aggressive measures (recently adopted) that are designed to
reduce costs, improve the balance sheet and protect shareholders'
equity. The estimated one-time cost of implementing these measures
is $1.5 million ($0.01 per share) and will be charged against
second quarter 2009 results. Expected annualized overhead cost
(non-interest expense) savings amounting to $1.7 million will
commence in the second quarter 2009 and are expected to benefit the
Company in subsequent financial periods.
During this challenging period, the Company will continue to
concentrate on curing its impaired loans, reducing its existing
debt, managing its expenses and preserving its capital.
Cancellation of AIM Listing
The Company also announces the cancellation of the trading of
its common shares on the Alternative Investment Market ("AIM") of
the London Stock Exchange, to take effect from 7 a.m. (GMT) on
Tuesday, June 16, 2009 (the "Cancellation Date"), the decision to
cancel trading on AIM is being implemented in conjunction with
other cost reduction measures in response to current economic
volatility and credit market weakness.
This decision was based on several factors, including low
trading volumes in the UK, and the cost and management resources
involved in maintaining the AIM listing. The Company will maintain
its listing on the Toronto Stock Exchange ("TSX") and the
NYSE-AMEX, and UK shareholders wishing to trade Quest's common
shares after the Cancellation Date will be able to do so through
the TSX. Quest does not expect the liquidity or marketability of
the Company's common shares to be materially affected by the AIM
delisting.
Annual Meeting
The Company will hold its Annual General Meeting of shareholders
on Thursday, May 21 at 2:30 pm EDT at the TSX Broadcast Centre in
Toronto. The Company's Notice of Meeting and Management Proxy
Circular have now been filed with securities administrators and are
available on the Company's website.
Conference Call
A conference call will be hosted by A. Murray Sinclair,
Co-Chair, Stephen Coffey, President and Chief Executive Officer and
Jim Grosdanis, Chief Financial Officer. It will begin at 10:00 a.m.
Eastern Daylight Savings Time on Friday, May 15th, 2009 and can be
accessed by dialing (416) 644-3425. The call will be recorded and a
replay made available for one week ending Friday, May 22, 2009 at
midnight. The replay can be accessed about one hour after the call
by dialing (416) 640-1917 and entering passcode 21306078 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. For more
information about Quest, please visit our website
(www.questcapcorp.com) or www.sedar.com.
Forward Looking Statements
This press release may include 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 notice.
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE FIRST QUARTER ENDED MARCH 31, 2009
INTRODUCTION
The following information, prepared as of May 14, 2009, should
be read in conjunction with the unaudited interim consolidated
financial statements of Quest Capital Corp. ("Quest" or the
"Company") as at March 31, 2009 and for the three months ended
March 31, 2009 and 2008 and its audited annual consolidated
financial statements as at December 31, 2008 and 2007 and for the
years ended December 31, 2008, 2007 and 2006, 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 2008 Annual Information Form, is available on SEDAR at
www.sedar.com.
BUSINESS PROFILE AND STRATEGY
Quest's primary business focus is to utilize its common share
equity base of $294 million, augmented by prudent leverage in the
form of preferred shares and minimal bank debt, to invest in first
mortgages secured by Canadian real estate. The Company also uses,
as required, loan syndication as a tool to strengthen liquidity
while at the same time providing flexibility to improve its balance
sheet. However, recent events in the credit and real estate markets
have resulted in Quest focusing on the collection of its loan
portfolio and not the origination of new loans.
In December 2008, Quest commenced reducing its revolving debt
facility and as at May 14, 2009, has reduced the balance drawn to
$nil. In December 2008, the Company completed a $40 million
preferred share issuance which was primarily used to reduce the
revolving debt facility and in April 2009, the Company syndicated
$30 million of its loan portfolio which was used to further reduce
its revolving debt facility.
Since the onset of the credit crisis, take-out financing from
conventional sources has become more difficult to obtain for many
of Quest's borrowers, and real estate sales have slowed
considerably. As a result of this, the Company is experiencing
delays in repayments and in receiving its interest payments on
certain of its loans. As at December 31, 2008, this has led to a
significant increase in the number of impaired loans (loans on
which the recording of interest income has ceased) in Quest's
portfolio. Most of these loans continued to be impaired as at March
31, 2009. Deterioration in real estate values in markets where
Quest operates has resulted in specific loan losses being charged
in the first quarter in the amount of $2.6 million with total
allowance for loan losses of $16.3 million as at March 31,
2009.
Quest did not originate any new loans in the first quarter of
2009 as the receipt of payments from loan maturities which could be
used to fund new loans could not be accurately predicted and
certain borrowers have been requesting an extension to the maturity
date of their loans. Management has determined it is prudent to not
commit to new loans in a declining real estate market and instead
to reduce the Company's revolving debt facility and preferred share
liability. Currently, Quest intends to fund only existing loan
commitments and any appropriate protective disbursements.
Quest is requesting the repayment of all loans on their
maturity. Where this is not possible, Quest works closely with
borrowers to extend the maturity for those who are acting in good
faith and have a reasonable business plan that demonstrates a
viable repayment strategy which includes the pledging of additional
collateral where possible. In other circumstances, Quest will
proceed with an orderly disposition of the real estate properties
securing the impaired loans in order to mitigate loan losses.
Upon repayment of the Company's revolving debt and preferred
share liabilities, Quest will review its business plan within the
context of the credit and real estate markets prior to initiating
any further new lending activities.
As noted in its May 4, 2009 press release, Quest is streamlining
its executive team and implementing cost reduction measures.
As a mortgage investment corporation ("MIC"), Quest's balance
sheet is dominated by residentially oriented loans. In general, a
loan is residentially oriented if, at the time the loan is made,
greater than 80% of the real estate by which the loan is secured,
is, or is intended to be, devoted to residential purposes. This
includes loans for the development or financing of single family,
apartment, condominium, social housing and nursing/retirement
residences. Quest also invests in first mortgages secured by
commercial real estate and, to a much lesser extent, in loans to
the Canadian resource sector.
As a MIC, Quest is able to reduce its taxable income through the
payment of dividends to its common and preferred shareholders. A
MIC is a special-purpose corporation defined under Section 130.1 of
the Income Tax Act (Canada) (the "Tax Act"). 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. 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 any
class of the issued and outstanding shares.
NON-GAAP MEASURES
Return on equity ("ROE"), return on assets ("ROA") and payout
ratio on income before taxes do not have standardized meanings
prescribed by GAAP and, therefore, may not be comparable to similar
measures presented by other companies. ROE and ROA are commonly
used measures to compare the performance of lenders. The fact that
the Company is a MIC is the major reason the Company calculates
payout ratio on income before taxes. These non-GAAP measures used
in this management's discussion and analysis ("MD&A") are
calculated as follows:
- return on equity - net income divided by average shareholders'
equity.
- return on assets - net income divided by average total
assets.
- payout ratio on income before taxes - dividends paid divided
by income 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
2009 2008 March 31, 2008
--------------------- ----------------
Key Performance Indicators
Net interest income 6,573 10,577 (4,004) (38%)
Other income 13 251 (238) (95%)
Income before income taxes 2,066 7,484 (5,418) (72%)
Net income 1,383 7,099 (5,716) (81%)
Earnings per share - basic 0.01 0.05 (0.04) (80%)
Earnings per share - diluted 0.01 0.05 (0.04) (80%)
Return on equity(1)(2) 2% 10%
Return on assets(1)(2) 1% 8%
Dividends paid per share - 0.03 (0.03) (100%)
Payout ratio on income before
taxes(1) - 49%
Loans receivable 370,382 327,087 43,295 13%
Total assets 382,824 342,491 40,333 12%
Revolving debt facility 46,323 39,917 6,406 16%
Preferred share liability 38,863 - 38,863 100%
Total liabilities 89,062 48,156 40,906 85%
Shareholders' equity 293,762 294,335 (573) 0%
Book value per share 1.98 2.01 (0.03) (1%)
Impaired loans - gross outstanding
principal 113,171 12,568 100,603 800%
Allowance for loan losses 16,332 204 16,128 n/a
Allowance as a % of impaired loans 14% 2%
(1) See non-GAAP measures disclosed in this MD&A.
(2) Annualized basis.
Quest's shareholders' equity has remained at a consistent level
of $293.8 million at March 31, 2009, down marginally from $294.3
million a year earlier. As a MIC, Quest's retained earnings are not
expected to grow since any taxable income is distributed in the
form of dividends.
Quest's debt facility and preferred share liability to equity
ratio as at March 31, 2009 is 0.3 to 1 compared to 0.1 to 1 a year
earlier. Total assets as a multiple of equity was 1.3 times as at
March 31, 2009, up from 1.2 at March 31, 2008. These low ratios
should assist the Company in the current economic climate.
Net income decreased $5.7 million or 81% in 2009 to $1.4 million
as compared to $7.1 million in 2008 while diluted earnings per
share ("EPS") of $0.01 per share decreased from $0.05 in 2008. The
Company recorded specific loan losses of $2.6 million in 2009
compared to $nil in 2008.
Quest's total assets have increased $40.3 million or 12% to
$382.8 million at March 31, 2009 compared to $342.5 million a year
earlier. Performing loans at March 31, 2009 were $273.0 million
compared to $322.8 million at March 31, 2008, a decrease of $49.8
million or 15.4%. The gross principal outstanding of impaired
(non-performing) loans amounted to $113.2 million at March 31, 2009
compared to $12.6 million a year earlier. The increase in impaired
loans is the result of the restrictive credit environment and
declining real estate market values in certain markets.
Net interest income has decreased by $4.0 million or 38% to $6.6
million in the three month period ended March 31, 2009 compared to
$10.6 million in 2008 as a result of interest income not being
recorded on the increased impaired mortgages in the portfolio.
DIVIDEND POLICY FOR 2009
Quest's common share dividend policy is guided by its status as
a MIC. This status allows the Company to reduce its taxable income
to a negligible amount through the payment of dividends to common
and preferred shareholders after first utilizing any tax losses and
other tax deduction carry forwards. At March 31, 2009, there are
$7.8 million of tax losses carried forward from 2008 and prior
years which may be utilized in 2009. As a result of its ability to
utilize these tax losses, Quest did not have taxable income in the
first quarter of 2009 and decided to forego paying a quarterly
common share dividend on March 31, 2009, thereby increasing its
liquidity. The Company has the option to pay the 2009 dividends on
its preferred shares in common shares of Quest. These preferred
share dividends are cumulative and serve to reduce Quest's taxable
income. The Company will monitor its 2009 taxable position and
liquidity closely to determine if and when a common share dividend
will be paid. Quest's taxable income in 2009 will be subject to
many factors, not the least of which is the amount of any
additional specific loan loss provisions the Company might incur
and any reduction in recording interest income as a result of any
increase in impaired loans.
OUTLOOK
In Quest's "Outlook" section of its Management Discussion and
Analysis for December 31, 2008, issued March 26, 2009, management
stated that the repayment of loans by the Company's borrowers is
contingent for the most part on an efficient credit market and a
healthy real estate market. These markets have yet to improve
significantly and Quest's loans continue to be exposed to further
possible devaluation and as a consequence further loan losses.
And as further reiterated in its May 4, 2009 press release, in
the view of management, Quest shareholders will best be served in
2009 by protecting the Company's balance sheet position and further
preserving its capital to deal with continued economic turmoil.
There will very likely be further loan losses but the Company has a
sufficient capital and working capital bases to absorb these
losses. In 2009, the Company will concentrate on curing its
impaired loans, reducing existing debt, expense reductions and as
always, preserving capital.
RESULTS OF OPERATIONS
Table 2 - Condensed Income Statement
($ thousands)
Three months ended Three months ended
March 31, March 31,
2009 2008
--------------------- --------------------
Interest income, other income,
interest expense and
provision for loan losses
Interest income 8,697 218% 11,000 104%
Other income 13 0% 251 2%
Interest expense (2,124) (53%) (423) (4%)
Provision for loan losses (2,597) (65%) (204) (2%)
--------------------- --------------------
3,989 100% 10,624 100%
--------------------- --------------------
Expenses
Salaries and benefits 874 45% 736 23%
Bonuses - - 505 16%
Stock-based compensation 200 10% 272 9%
Legal and professional services 222 12% 722 23%
Resource asset related expenses 85 4% 63 2%
Other 542 29% 842 27%
--------------------- --------------------
1,923 100% 3,140 100%
--------------------- --------------------
Income before income taxes 2,066 7,484
Income tax expense 683 385
-------- --------
Net income for the period 1,383 7,099
-------- --------
-------- --------
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 decreased $2.3 million or 21% to $8.7 million
for three months ended March 31, 2009 as compared to $11.0 million
during comparative period in 2008. Additionally, interest yields
were 9% in 2009 compared to 15% in 2008. This decrease was
primarily due to an increase in impaired loans and ceasing to
accrue interest income on these loans. Measured on a quarterly
basis, the average outstanding loan portfolio was $371.2 million
during the first quarter of 2009, a $68.8 million or 23% increase
over the $302.4 million average balance outstanding during the
first quarter of 2008.
Other income
Other income relates to the service fees generated from
syndicated loans. During the three months ended March 31, 2009, the
Company reported $0.01 million in servicing fees as compared to
$0.25 million in the comparative period in 2008. The decrease is a
result of an increase in the required return by syndicate partners.
The syndicated loan portfolio was $51.4 million as at March 31,
2009, a $3.5 million or 6% decrease from $54.9 million at March 31,
2008.
Interest expense
Interest expense for the first quarter 2009 of $2.1 million
relates to $0.6 million of interest on Quest's revolving debt
facility, up from $0.4 million in the comparable 2008 quarter and
$1.5 million of expense on its cumulative preferred shares. At
March 31, 2009 the available debt facility was $70 million of which
$46.9 million has been drawn. Subsequent to the end of the quarter,
the Company renegotiated the revolving debt facility whereby the
authorized available debt facility amounts will be reduced during
the current year up to its original expiry date in January 2010. In
addition, certain covenants were removed and the facility spread,
which bears interest based upon bank prime rate plus a spread, was
increased.
Preferred share dividends were $1.4 million for the three months
ended March 31, 2009 compared to $nil for the comparative period.
On April 9, 2009 the Company arranged to pay the declared dividend
on the cumulative preferred shares in common shares of the
Company.
Provision for loan losses
Quest has recorded $2.6 million in specific provisions for loan
losses in 2009 as compared to $nil in 2008. The loan losses are
primarily a result of the continued deterioration of the credit
markets and a reduction in the property values held as collateral
in certain markets in which the Company operates. The Company has
reviewed its entire loan portfolio and estimated a specific
provision on a loan by loan basis and as a result, management
believes there is no need for a general allowance for loan losses
for the period ended March 31, 2009. As at March 31, 2008 the
Company had established a general provision of $0.20 million to
absorb probable losses that had not yet been identified by
management and which were not associated with specific loans.
Salaries and bonuses
Salaries and benefits increased $0.14 million or 19% during the
three months ended March 31, 2009 compared to 2008. The increase
relates to net additions in loan remediation, internal audit and
contract systems consultants and severance related to loan
origination staff. As at March 31, 2009, the Company had 24
employees as compared to 25 employees as at March 31, 2008.
Bonus expense was $nil compared to $0.51 million for the three
months ended March 31, 2009 and 2008, respectively. During 2008,
bonuses represented amounts under the Company's discretionary
incentive plans accrued for officers and employees of the Company;
the Board determined that no bonuses would be paid to executives
for 2008 and any accruals for this expense were reversed.
Discretionary payments and allocations are subject to the approval
of the Compensation Committee and the Board of Directors. For 2009,
the bonus plan is currently being amended to be consistent with the
Company's focus on the collection of its loan portfolio. The
Compensation Committee is reviewing a proposed new bonus plan which
is primarily based on funds collected by Quest from the successful
remediation of its loan portfolio. The new bonus plan is subject to
the approval of the Compensation Committee and the Board of
Directors.
Subsequent to March 31, 2009, the Company announced a reduction
to executive salaries and headcount and a streamlining of the
executive team. As a result of these announcements, the Company
will incur an estimated cost of $1.5 million which will be charged
to expenses in the second quarter of 2009.
Stock-based compensation
Stock-based compensation decreased $0.1 million or 26% to $0.2
million in the first quarter of 2009 as compared to 2008. The
expense is recorded on a straight line basis over the expected
vesting term of the option (usually three years). The decrease in
expense is a result of no options being granted in the current
period.
Legal and professional fees
Legal and professional fees decreased $0.5 million or 69% to
$0.2 million during the three months ended March 31, 2009 as
compared to $0.7 million in the comparative period in 2008.
Approximately $0.4 million of the legal and professional fees in
the prior period related to special advisory work related to the
MIC reorganization late in 2007.
Resource asset related expenses
These expenses relate to the costs to fund reclamation and
closure obligations at the Castle Mountain property and are over
and above the amounts set aside in the asset retirement obligation
("ARO") account. The increase of $0.02 million in 2009 to $0.8
million compared to $0.06 million in the comparative period relates
mainly to compliance and professional fees.
Other expenses
Other expenses include general and office expenses, directors'
remuneration, regulatory and other miscellaneous expenses. These
expenses have decreased $0.3 million or 36% to $0.5 million during
the three months ended March 31, 2009 as compared to $0.8 million
in the comparative period in 2008 largely due to cost
containment.
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. The provision for income
taxes in the statement of income reflects the utilization of future
tax assets as non-capital losses were applied to reduce current
period taxable income to nil. During the first quarter of 2009, the
Company utilized $1.4 million of tax losses. There is approximately
$7.8 million of loss carry-forwards available to be utilized during
the remainder of 2009 and future years.
Net income
For the three months ended March 31, 2009, the Company had net
income of $1.4 million (or $0.01 EPS - diluted) compared to net
income of $7.1 million (or $0.05 EPS - diluted) during the
comparative period in 2008.
Comprehensive income
At March 31, 2009 and 2008, the Company had no
available-for-sale assets or liabilities whose fair values differ
from their original carrying value. As a result, there is no
accumulated other comprehensive income to report for the period
ended March 31, 2009 and 2008.
FINANCIAL POSITION
Table 3 - Asset Components
($ thousands)
March 31, December 31, March 31,
2009 2008 2008
---------------- ---------------- --------------
Asset mix
Cash deposits 3,875 1% 1,621 1% 1,894 1%
Loans receivable 370,382 97% 372,084 97% 327,087 95%
Future income tax 4,232 1% 4,944 1% 3,552 1%
Other 4,335 1% 5,606 1% 9,958 3%
---------------- ---------------- --------------
382,824 100% 384,255 100% 342,491 100%
---------------- ---------------- --------------
---------------- ---------------- --------------
Cash deposits
The Company's cash resources at March 31, 2009 were $3.9 million
as compared to $1.6 million as at December 31, 2008 and $1.9
million at March 31, 2008. Cash deposits include cash balances with
major Canadian chartered banks. The Company's cash balances will
vary depending on the timing of loans funded and repaid.
Loans receivable
The outstanding balance of the Company's loan portfolio
decreased $1.7 million or 1% during the first quarter of 2009 as a
result of management restricting new loan fundings. Compared to
March 31, 2008, the loan portfolio increased $43.3 million or 13%.
As at March 31, 2009 and December 31, 2008, 99% of the Company's
loan portfolio was comprised of mortgages on real estate, compared
to 97% at March 31, 2008. As at March 31, 2009, Quest's loan
portfolio consisted of 54 loans of which 51 were mortgages secured
by real estate and 3 were bridge loans secured by various mining
and energy related assets. The following table illustrates the
evolution of the Company's loan portfolio:
Table 4 - Loan Portfolio
($ thousands)
March 31, December 31, March 31,
2009 2008 2008
------------- -------------- -------------
Principal Outstanding
Mortgages
Land under development 176,070 46% 172,076 45% 168,372 50%
Real estate - residential 8,461 2% 13,704 4% 24,671 7%
Real estate - commercial 63,591 16% 64,784 17% 57,097 17%
Construction 133,652 35% 131,917 33% 75,796 23%
------------- -------------- -------------
Total mortgages 381,774 99% 382,481 99% 325,936 97%
Bridge loans 4,404 1% 5,106 1% 9,509 3%
------------- -------------- -------------
Total principal outstanding 386,178 100% 387,587 100% 335,445 100%
---- ---- ----
---- ---- ----
Prepaid and accrued interest, net 2,434 952 (3,284)
Deferred loan fees and other, net (1,898) (2,720) (4,870)
Allowance for loan losses (16,332) (13,735) (204)
-------- ------- --------
As recorded on the balance sheet 370,382 372,084 327,087
-------- ------- --------
-------- ------- --------
For the period ended March 31, 2009, funding decreased $50.7
million or 82% to $11.0 million compared to March 31, 2008. The
fundings in the first quarter are the result of prior commitments
made by the Company in respect of construction loans and protective
disbursements intended to control or protect the value of the
underlying security of the loan during the remediation process.
The amounts are net of syndication and, as mentioned above, 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. Subsequent to March
31, 2009, the Company syndicated $30 million of its loan portfolio.
This syndication has been effected through a structure involving
senior and subordinated positions, whereby the syndicate partners
taking the senior position and Quest the subordinated position. The
effects of this syndication are not reflected in the loan portfolio
disclosed herein.
The following table illustrates loan continuity on a net basis.
The decrease in repayments and other in 2009 to $12.4 million from
$16.4 million in 2008 is due, in part, to certain loans not being
repaid at their 2009 maturity dates as a result of certain
borrowers' inability to obtain alternative financing to make these
payments.
Table 5 - Loan Principal Continuity
($ thousands)
March 31, March 31,
2009 2008
--------- ---------
Principal balance, beginning of period 387,587 290,193
Loans funded (net) 11,016 61,693
Loans repaid and other (net) (12,425) (16,441)
--------- ---------
Principal balance, end of period 386,178 335,445
--------- ---------
--------- ---------
As at March 31, 2009, the mortgage portfolio was comprised of
99% first mortgages and 1% second mortgages. The following table
outlines Quest's loan portfolio based on the priority of mortgage
security:
Table 6 - Priority of Mortgage Security Charges(1)(2)
($ thousands)
March 31, December 31, March 31,
2009 2008 2008
------------- -------------- -------------
Principal secured by:
First mortgages 376,774 99% 369,647 97% 299,136 92%
Second mortgages 5,000 1% 12,834 3% 26,800 8%
------------- -------------- -------------
Total mortgages 381,774 100% 382,481 100% 325,936 100%
------------- -------------- -------------
------------- -------------- -------------
1. Includes mortgage portion of loan portfolio only.
2. During the first quarter of 2009, the Company purchased the first
mortgage secured by property on which Quest held the second mortgage.
The total loan to this borrower of $11,799 is classified as a first
mortgage.
As at March 31, 2009, the mortgage portfolio was concentrated in
western Canada, with loans in British Columbia representing 40% of
the portfolio, the Prairies 46% and Ontario 14%. Management expects
that the portfolio will continue to be weighted in favour of
western Canada for the near term.
The following table indicates the geographical composition of
the Company's mortgages at the stated period ends.
Table 7 - Geographic Location of Mortgages(1)
($ thousands)
March 31, December 31, March 31,
2009 2008 2008
-------------- --------------- --------------
Principal outstanding:
British Columbia 153,391 40% 151,096 40% 171,044 53%
Prairies 176,610 46% 183,217 48% 133,722 41%
Ontario 51,773 14% 48,168 12% 21,170 6%
-------------- --------------- --------------
Total mortgages 381,774 100% 382,481 100% 325,936 100%
-------------- --------------- --------------
-------------- --------------- --------------
1. Includes mortgage portion of loan portfolio only.
Credit quality and impaired loans
As part of the Company's security, full corporate and/or
personal guarantees are typically required from the borrower in
addition to the property securing the mortgage. Where in Quest's
opinion the real estate security alone is not sufficient to meet
Quest's lending criteria, management requires additional collateral
on other real estate owned by the borrower or letters of credit.
Management reviews the portfolio on a regular basis to estimate the
value of the underlying security and if credit conditions have
adversely impacted the carrying value of the loan, suitable action
is taken.
As at March 31, 2009, Quest had 2 loans totaling $11.7 million
which were classified as past due loans that are not impaired (2008
- 2 loans totaling $24.4 million) These loans are not classified as
impaired because they are less than 90 days past due and are fully
secured and there is reasonable assurance of collection of
principal and accrued interest.
As at March 31, 2009, the Company had fifteen non-performing
loans in the amount of $113.8 million (2008 - 4 non-performing in
the amount of $12.6 million) on which remedial action has been
undertaken. On eleven of these loans totaling $66.8 million, the
Company has provided aggregate specific reserves for credit losses
of $16.3 million. For the remaining four impaired loans, totaling
$47.0 million, management has not provided for any specific loan
losses as the estimated net realizable value of the collateral
securing the loans is in excess of the carrying value of the
impaired loans.
In determining whether a loan is impaired, Quest looks first to
loans where the fulfillment of any contractual terms is in arrears.
If regular loan payments are in arrears 90 days or greater, the
loan is declared to be impaired and non-performing and interest
ceases to be recorded on the loan. If there has been a specific
incident which gives rise to uncertainty as to the ultimate
collectability of a loan, even though the regular loan payments may
not be 90 days or over in arrears, the loan is declared to be
impaired and non-performing. All impaired loans are analyzed to
determine whether there has been a reduction in the value of the
real estate and other collateral securing the loan such that the
carrying value of the loan is in excess of the value of the
security. The value of the security is estimated by management
using independent appraisals and other market knowledge. Where
management can reasonably estimate the time required to dispose of
the security, Quest computes the discounted estimated net proceeds
on disposal of the security at the interest rate inherent in the
loan contract to arrive at the present value of the estimated
future net proceeds. The difference between this present value of
estimated future proceeds of the security and the carrying value of
the loan is charged against income as a specific provision for loan
losses.
From year end, Quest continued to have 14 loans which are
classified as impaired and added another loan for a total of 15
loans, of which 11 have a specific loan loss provision. As at March
31, 2009, the Company's allowance for loan losses increased to
$16.3 million, mainly as a result of an increase in the specific
loan loss provision related to 4 loans, 3 of which continued to be
impaired from December 31, 2008.
As the loan remediation process continues, more information
comes to light, including the listing of properties for sale and
the results of negotiations and comparable sales data and, as a
result, Quest increased the loan loss provisions related to these
loans as follows:
- Quest has 3 impaired loans in the Okanagan region of British
Columbia, which are primarily land loans awaiting re-development
amounting to $31.9 million. As a result of further development
costs to maintain the property value, Quest increased the specific
provisions on one of these loans by $0.3 million.
- Quest has a $4.7 million loan located in northern Alberta
whose specific loan loss reserve has increased by $1.0 million to
$1.4 million. Marketing efforts on this property to date have made
it necessary to increase the reserve.
- Quest has a resource loan for $2.7 million on which the loan
loss allowance has been increased by $0.6 million to $1.9 million
mainly as a result of further deterioration in the value of the
collateral.
- Quest has a residential construction loan in northern Alberta
with a current net loan exposure of $6.3 million. In order to
maximize value and ultimately collect on the security, Quest will
continue to fund the construction until completion. Quest has taken
a specific loan loss of $0.9 million on this loan.
In addition, Quest has a net loan exposure of $25.8 million on a
property in downtown Vancouver, British Columbia which is currently
subject to receivership proceedings. The loan continues to be
classified as impaired however no provision for any loan loss has
been determined as required as at March 31, 2009. An independent
appraisal from a qualified third party obtained in early 2009 has a
value in excess of Quest's carrying value. However, the appraisal
is based on a number of significant conditions including the
condominium project being built on a timely basis, which is subject
to the receivership proceedings being successfully concluded in the
short term.
Quest uses various methods to estimate the current net
realizable value for its impaired loans. Most important amongst
these is the requisition of independent appraisals from recognized
national appraisal firms. Appraisal methodology utilizes data
points in the form of recent comparable transactions as a key basis
for valuation. Where these data points are not available, the
appraisal process is more difficult. The downturn in real estate
sales over the past year has reduced the number of recent
comparable transactions on which appraisals may be based and
consequently, this has made it difficult to accurately value
certain of the types of properties on which Quest lends. This leads
to significant measurement uncertainty and the ultimate net
realizable values for real estate by which an impaired loan is
secured may be materially different than that estimated by
management.
In particular, land development loans have a significant degree
of measurement uncertainty. Quest has two significant land
development loans totaling $57.6 million where the loans are
currently classified as performing loans and the recent appraisal
values are in excess of the carrying values. Should these loans
become impaired, in the current economic climate, the Company would
not be able to dispose of the collateral on a timely basis and the
measurement of the value of the underlying security would be
difficult to determine and further loan losses may be incurred.
Future income taxes and other assets
Future income tax assets and liabilities reflect management's
estimate of the value of temporary differences. The Company has
recognized a future tax asset based on the likely utilization of
tax losses and other deductions against future taxable income. As
at March 31, 2009, the future tax asset decreased $0.7 million to
$4.2 million compared to $4.9 million at December 31, 2008. This
decrease is the result of utilizing the non-capital loss carry
forwards against the current period taxable income of $1.3 million.
The balance of non-capital losses carried forward is $7.8 million
at March 31, 2009 compared to $9.1 million at December 31, 2008.
The Company has also recognized a future tax liability related to
its former U.S. based operations.
Other assets at March 31, 2009 include $2.9 million of
restricted cash, of which $1.3 million was held in trust to fund
borrower's future interest payments.
Liabilities
Total liabilities at March 31, 2009 were $89.1 million as
compared to $93.3 million as at December 31, 2008, representing a
$4.2 million or 5% decrease. Compared to March 31, 2008, total
liabilities increased $40.9 million or 85%. The largest components
of total liabilities were the Company's revolving debt facility and
preferred share liability. At March 31, 2009, the Company had an
authorized $70.0 million revolving debt facility, upon which the
Company had drawn $46.9 million. This facility is used to fund
loans, as well as to bridge any gap between loan advances and loan
repayments. In December 2008, the Company raised $40 million in a
13.5% cumulative preferred share private placement for liquidity
purposes and to pay down its revolving debt facility. The
redeemable and retractable preferred shares are classified as
liabilities under GAAP. The increase of $0.14 million in the
carrying value from $38.7 million at December 31, 2008 represents
the amortization of deferred transaction costs using the effective
interest rate method. The preferred shares may not be redeemed or
retracted without the permission of the Company's bankers prior to
January 2010, and are required to be redeemed by December 31,
2010.
Capital management
Quest's shareholders' equity has increased $2.8 million to
$293.8 million as at March 31, 2009 compared to $291.0 million at
December 31, 2008. The Company did not declare a common share
dividend in the first quarter of 2009 in order to preserve capital
and boost liquidity. The Company intends to reinstate the common
share dividend as soon as management determines that it is prudent
to do so.
In anticipation of its revolving debt facility maturity in
January 2010, the Company decreased available borrowings on the
revolving debt facility to $70 million from $88 million in December
2008. Subsequent to March 31, 2009, the Company further
renegotiated the terms of its revolving debt facility including its
financial covenants, maximum facility amount and interest rate
increment. Further information on the impact on the Company's
capital resources is discussed in the "Liquidity Risk" section
herein.
Contractual obligations
The Company has contractual obligations for its leased office
space in Vancouver and Toronto. The total minimum lease payments
for the years 2009 - 2013 are $2.0 million. Subsequent to March 31,
2009, the Toronto office was closed and is in the process of being
sublet. The Company's contractual obligations related to the
Toronto office remains. As well, the Company has committed to fund
loan principal as at March 31, 2009 in the amount of $36.2 million.
The following table illustrates these obligations due by
period:
Table 8 - Contractual obligations
($ thousands) Obligations due by period
------------------------------------------
Less
than 1 1 - 3 4 - 5 After 5
Types of Contractual Obligation Total Year Years Years Years
---------------------------------------------------------------------------
Office leases and other 1,967 511 1,431 25 -
Loan commitments 36,193 35,183 1,010 - -
---------------------------------------------------------------------------
Total 38,160 35,694 2,441 25 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
SUMMARY OF QUARTERLY RESULTS
Table 10 - 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
2009 2008 2008 2008 2008 2007 2007 2007
----------------------------------------------------------------
$ $ $ $ $ $ $ $
- - - - - - - -
Interest
income 8,697 11,592 12,547 11,549 11,000 11,133 9,497 9,356
Other
income 13 30 44 114 251 2,360 2,165 4,336
Provision
for loan
losses 2,597 10,685 2,600 246 204 - - -
Income
(loss)
before
taxes 2,066 (380) 6,662 8,053 7,484 8,156 7,782 10,735
Net income 1,383 1,848 6,358 7,526 7,099 3,648 5,264 7,366
Earnings
Per Share
- Basic 0.01 0.01 0.04 0.05 0.05 0.02 0.04 0.05
Earnings
Per Share
- Diluted 0.01 0.01 0.04 0.05 0.05 0.02 0.04 0.05
Total
Assets 382,824 384,255 381,722 366,539 342,491 325,744 304,294 295,798
Total
Liabilities 89,062 93,256 86,211 71,015 48,156 35,110 13,125 7,487
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As a result of the increase in impaired loans on which the
recording of interest income has ceased, the Company's interest
income has decreased during the period as compared to prior
quarters. Prior to the fourth quarter 2008, interest income had
generally continued to increase on a quarterly basis as the
Company's loan portfolio had grown. Other income continues to
decrease in 2009 as a result of a lower fee structure on syndicated
loans and the Company's divestiture of its management and corporate
finance services operations in December 2007.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in
Note 3 of its audited consolidated financial statements as at
December 31, 2008 and 2007 and for the years ended December 31,
2008, 2007 and 2006. 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 had established a general
allowance for loan losses to provide for unknown but probable
losses in the loan portfolio. As a result of a comprehensive
portfolio review of its loan portfolio as at December 31, 2008 (and
updated to March 31, 2009) and the resulting provision for a
specific loan loss, where there is insufficient value of collateral
or expected cashflows through remediation processes on any impaired
loan, management concluded that there was no need for a general
allowance for loan losses as at March 31, 2009.
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, 2009, the Company adopted the CICA handbook
section 3064 "Goodwill and Intangible Assets". The adoption of this
standard did not have a material affect on the Company's
consolidated interim financial statements.
TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Canadian Institute of Chartered Accountants ("CICA") has
previously announced planned convergence of Canadian GAAP with
International Financial Reporting Standards ("IFRS") for public
companies over a transition period, with IFRS expected to be
effective for fiscal periods beginning on or after January 1, 2011.
Management has established a changeover plan to adopt IFRS on
January 1, 2011. An implementation team has been created and
management will be engaging a third-party advisor to assist.
Management has not yet started the process of assessing accounting
policy choices and elections that are allowed under IFRS.
Management will also assess the impact of the conversion on Quest's
business activities including the effect on information technology
and data systems, internal controls over financial reporting and
disclosure controls. Management will continually review and adjust
its implementation process to ensure the convergence timetable is
met.
TRANSACTIONS WITH RELATED PARTIES
The Company's related party transactions are described in Note
12 of its unaudited interim consolidated financial statements as at
March 31, 2009 and for the three months ended March 31, 2009 and
2008. The significant related party transactions in 2009 involved
administration services charged to and by a party related by virtue
of having certain directors and officers in common.
DISCLOSURE OF OUTSTANDING SHARE DATA
As at May 14, 2009, the Company had the following common shares
and stock options outstanding:
Common shares 150,335,908
Stock options 4,629,131
-------------
Fully diluted shares outstanding 154,965,039
-------------
RISKS AND UNCERTAINTIES
Additional risk factors are disclosed under "Risk Factors" in
the 2008 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. The Company is
further exposed to adverse 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 increased if the value of real estate securing the
Company's loans falls to a level approaching or below the loan
amounts. Any decrease in real estate values may delay the
development process and will adversely affect the value of the
Company's security.
Senior management is committed to several processes to ensure
that this risk is appropriately mitigated. These include:
- emphasis on first mortgage financings;
- emphasis on borrowers' experience;
- local and regional diversification of mortgages;
- diversification of the loan portfolio by asset type;
- the investigation of the creditworthiness of all
borrowers;
- the employment of qualified and experienced loan originators
and underwriters;
- the engagement of qualified independent consultants and
advisors 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 applications for loans 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 members 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, 2009, the
largest loan in the Company's loan portfolio was $29 million (8% of
the Company's loan portfolio) and was not impaired. 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 ongoing basis.
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 and the repayment of the revolving debt
facility at maturity. As well, effective liquidity management
involves determining the timing of such commitments to ensure cash
resources are optimally utilized. Quest manages its loan commitment
liquidity risk by the ongoing monitoring of scheduled mortgage
fundings and repayments, and whenever necessary, accessing its debt
facility to bridge any gaps in loan maturities and funding
obligations. The Company manages its revolving debt facility
liquidity risk by accessing alternative sources of liquidity
whether this be mortgage repayments, syndication proceeds or
preferred share issuances. For both of these liquidity risks, the
Company will syndicate a portion of its loans as part of its
liquidity risk management.
As at March 31, 2009, the Company had drawn $46.9 million on its
$70.0 million revolving debt facility and had future loan
commitments to borrowers of up to $36.2 million. Future loan
commitments are primarily for construction draws which occur over
the course of the term of the relevant loan which is typically 12
to 18 months in duration. Further, as at March 31, 2009, 29% of the
Company's loan portfolio, or $112.9 million, was due within a year.
With the current economic climate, the ability to accurately
forecast actual repayments on the Company's loan portfolio has
become difficult.
The current adverse economic climate is impacting real estate
prices and the timing of take-out financing for certain loans in
the Company's portfolio. Subsequent to March 31, 2009, the Company
renegotiated certain terms of its revolving debt facility which
will reduce amounts available under its debt facility during the
current year and amended certain covenants. Based on management's
current financial projections and taking into account known and
likely loan portfolio market developments over the remainder of
fiscal 2009, the Company does not anticipate any non-compliance
with its covenants, namely minimum equity, and tangible assets to
debt ratios.
Management monitors rolling forecasts of the Company's cash
position based on the timing of expected cash flows, which
incorporates assumptions related to the likely timing of loan
repayments. In addition, the Company has initiated a number of
procedures to assist in its liquidity management during fiscal 2008
and 2009 including:
- restricting loan advances to existing lending obligations and
protective disbursements and a commitment to not fund any new loans
prior to the repayment of the revolving debt facility in its
entirety;
- syndication of existing loans using an A/B priority structure
whereby Quest will hold the B portion;
- obtaining the agreement of preferred shareholders to enable
the Company to settle their dividend payments in common shares of
the Company, at the discretion of the Company.
As a result of these initiatives, it is management's opinion
that the Company has sufficient resources to meet its current cash
flow requirements.
Market Risk
Market risk is the impact on earnings as a result of changes in
financial market variables such as interest rates and foreign
exchange rates which can arise when making loans and borrowing and
making investments. The Company does not engage in any type of
trading activities. The Company's material market risk is limited
to interest rates as noted below.
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 on the basis of bank prime rate plus
a spread, the Company manages this risk through the pricing of
certain of its loans also being based upon the Bank Prime Rate plus
a spread. 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 generally varying
from six months to two years, and by charging prepayment penalties
and upfront commitment fees.
As at March 31, 2009, the Company had 7 variable rate loans
priced off the bank prime rate with an aggregate principal of $50.6
million and 47 fixed-rate loans with an aggregate principal of
$335.6 million.
INTERNAL DISCLOSURE CONTROLS AND PROCEDURES
Changes in Internal Disclosure Controls and Procedures
There were no changes in the Company's internal disclosure
controls and procedures that occurred during the first quarter of
2009 that have materially affected, or are reasonably likely to
affect, the Company's internal disclosure controls and procedures
or internal controls over financial reporting. As announced in the
Company's press release dated, May 4, 2009, Brian Bayley will
become President and CEO, replacing Stephen Coffey effective May
21, 2009 and Ken Gordon, Chief Operating Officer, will no longer be
with the Company. The position will be eliminated.
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. In
addition, the Company's Audit Committee, on behalf of the Board of
Directors, performs an oversight role with respect to all public
financial disclosures made by the Company and has reviewed and
approved this MD&A and the accompanying consolidated financial
statements. 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, or the
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. Accordingly, you are cautioned not to put undue reliance
on these forward-looking statements.
Forward-looking statements should not be read as a guarantee of
future performance or results. 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 anticipated 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 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. Material risk
factors which could cause actual results to differ materially
include those disclosed herein under "Risks and Uncertainties". 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
anticipated 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.
QUEST CAPITAL CORP.
Unaudited Interim Consolidated Financial Statements
March 31, 2009
(Expressed in thousands of Canadian dollars)
Quest Capital Corp.
Unaudited Interim Consolidated Balance Sheets
As at March 31, 2009 with comparative figures for December 31, 2008
and March 31, 2008
(Expressed in thousands of Canadian dollars)
----------------------------------------------------------------------------
March 31, December 31, March 31,
2009 2008 2008
--------------------------------
$ $ $
--------------------------------
ASSETS
Cash deposits 3,875 1,621 1,894
Restricted cash (note 5) 2,906 4,014 8,598
Loans receivable (note 6) 370,382 372,084 327,087
Income tax receivable 91 190 -
Future income tax (note 11) 4,232 4,944 3,552
Premises and equipment (note 7) 841 862 866
Other assets 497 540 494
--------------------------------
382,824 384,255 342,491
--------------------------------
--------------------------------
LIABILITIES
Accounts payable and accrued liabilities
(note 12) 2,694 3,079 6,628
Revolving debt facility (note 8) 46,323 50,153 39,917
Income tax payable - - 165
Future income tax (note 11) 749 841 893
Preferred share liability (note 10) 38,863 38,724 -
Asset retirement obligation (note 9) 433 459 553
--------------------------------
89,062 93,256 48,156
--------------------------------
SHAREHOLDERS' EQUITY
Share capital (note 10) 208,341 207,161 207,161
Contributed surplus (note 10) 8,154 7,954 7,206
Retained earnings 77,267 75,884 79,968
--------------------------------
293,762 290,999 294,335
--------------------------------
382,824 384,255 342,491
--------------------------------
--------------------------------
Commitments and contingencies (notes 6(e) and 13)
Subsequent events (note 20)
Approved by the Board of Directors
"Stephen C. Coffey" Director "A. Murray Sinclair" Director
------------------- --------------------
Stephen C. Coffey A. Murray Sinclair
Quest Capital Corp.
Unaudited Interim Consolidated Statements of Retained Earnings
For the three months ended March 31, 2009 and 2008
(Expressed in thousands of Canadian dollars)
----------------------------------------------------------------------------
2009 2008
-------------------
$ $
-------------------
Retained earnings - beginning of period 75,884 76,539
Net income for the period 1,383 7,099
Dividends - (3,670)
-------------------
Retained earnings - end of period 77,267 79,968
-------------------
-------------------
Quest Capital Corp.
Unaudited Interim Consolidated Statements of Income and Comprehensive Income
For the three months ended March 31, 2009 and 2008
(Expressed in thousands of Canadian dollars, except per share amounts)
----------------------------------------------------------------------------
2009 2008
------------------------
$ $
------------------------
Interest income 8,697 11,000
Interest expense (2,124) (423)
Net interest income 6,573 10,577
Provision for loan losses (note 6(d)) (2,597) (204)
Net interest income after provision for loan losses 3,976 10,373
Other income
Syndication fees (note 12) 13 251
------------------------
Net interest and other income 3,989 10,624
------------------------
Non-interest expense
Salaries and benefits 874 736
Bonuses - 505
Stock-based compensation (note 10(e)) 200 272
Office and other 401 586
Legal and professional services 222 722
Regulatory and shareholder relations 96 203
Directors' fees 45 53
Resource asset related expenses 85 63
------------------------
1,923 3,140
------------------------
Income before income taxes 2,066 7,484
Income tax expense (note 11)
Current 94 64
Future 589 321
------------------------
683 385
------------------------
Net income for the period 1,383 7,099
Other comprehensive income - -
------------------------
Comprehensive income for the period 1,383 7,099
------------------------
------------------------
Earnings per share
Basic 0.01 0.05
Diluted 0.01 0.05
Weighted average number of shares outstanding
Basic 147,913,521 146,789,711
Diluted 147,913,521 147,716,083
Quest Capital Corp.
Unaudited Interim Consolidated Statements of Cash Flows
For the three months ended March 31, 2009 and 2008
(Expressed in thousands of Canadian dollars)
----------------------------------------------------------------------------
2009 2008
-----------------
$ $
-----------------
Cash flows from operating activities
Net income for the period 1,383 7,099
Adjustments to determine net cash flows relating
to operating items:
Amortization of premises and equipment 89 76
Future income taxes 589 321
Stock-based compensation 200 272
Provision for loan losses 2,597 204
Amortization of deferred interest and loan fees (950) (1,650)
Deferred interest and loan fees received 173 2,556
Amortization of financing costs 309 81
Accretion expense 7 9
Expenditures for reclamation and closure (33) (28)
Decrease (increase) in prepaid and other 74 (120)
Increase (decrease) in accounts payables and
accrued liabilities 794 (452)
Decrease in income tax receivable 99 -
Decrease in income tax payable - (23)
-----------------
5,331 8,345
-----------------
Cash flows from (used in) financing activities
Dividends paid - common shares - (3,670)
Revolving debt facility
Advances 4,000 26,500
Repayments (8,000) (11,000)
Financing costs - (664)
Repayment of other debt facility - (1,365)
-----------------
(4,000) 9,801
-----------------
Cash flows from (used in) investing activities
Activity in loans
Funded (11,016) (61,693)
Repayments 12,396 12,834
Other (1,497) (1,628)
Purchases of premises and equipment (68) (102)
Decrease in restricted cash 1,168 3,923
-----------------
983 (46,666)
-----------------
Unrealized foreign exchange loss on cash held
in foreign subsidiary (60) (70)
-----------------
Increase (decrease) in cash deposits 2,254 (28,590)
Cash deposits - beginning of period 1,621 30,484
-----------------
Cash deposits - end of period 3,875 1,894
-----------------
-----------------
Supplementary cash flow information (note 18)
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Notes to the Unaudited Interim Consolidated Financial
Statements
For the three months ended March 31, 2009
(Expressed in thousands of Canadian dollars, except share
capital information)
1 NATURE OF OPERATIONS
Quest Capital Corp.'s ("Quest" or the "Company") business is to
provide mortgage financings. The Company is 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 income
taxes when all taxable income is distributed to shareholders as
dividends during a taxation year and within 90 days of its year
end. Dividend payments made to taxable Canadian shareholders are
subject to Canadian tax as interest income. The Company must
continually meet the following criteria to maintain MIC
eligibility: (i) at least 50% of its assets must consist of
residentially oriented mortgages and/or cash; (ii) it must not
directly hold any foreign assets, including investments secured by
real property located outside of Canada; (iii) it must not engage
in operational activities outside of the business of lending and
investing of funds; and (iv) no person may own more than 25% of the
issued and outstanding shares.
2 BASIS OF PRESENTATION
The accompanying financial information does not include all
disclosures required under generally accepted accounting principles
for annual financial statements. The accompanying financial
information reflects all adjustments, consisting primarily of
normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of results for the
interim periods. These interim unaudited consolidated financial
statements should be read in conjunction with the Company's 2008
audited annual financial statements and notes. Certain comparative
figures have been reclassified to conform to the current period's
presentation.
3 SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements follow the same
accounting policies and methods of application as the Company's
audited annual financial statements, except as noted in Note 4
below. These interim consolidated financial statements are prepared
in accordance with Canadian generally accepted accounting
principles ("GAAP") and include the Company's accounts and those of
its wholly-owned subsidiaries, QC Services Inc., Viceroy Capital
Corp., Viceroy Gold Corporation and its 75% proportionate joint
venture interest in the Castle Mountain property.
4 CHANGE IN ACCOUNTING POLICIES
Effective January 1, 2009, the Company adopted the Canadian
Institute of Chartered Accountants ("CICA") handbook section 3064
"Goodwill and Intangible Assets". The adoption of this standard did
not impact the Company's balance sheet or statement of income.
5 RESTRICTED CASH
Restricted cash comprises:
March 31, December 31, March 31,
2009 2008 2008
--------------------------------
$ $ $
--------------------------------
Castle Mountain 1,603 1,755 1,955
Interest on loans receivable (held in trust) 1,303 2,259 6,643
--------------------------------
Total 2,906 4,014 8,598
--------------------------------
--------------------------------
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$1,271 ($1,603) as at March 31, 2009 (December 31, 2008 -
US$1,441 ($1,755), March 31, 2008 US$1,902 ($1,955)) in a fund to
fulfill reclamation and closure obligations at its' Castle Mountain
property.
b) Interest on loans receivable (held in trust)
Certain of the Company's loan agreements permit the Company to
withhold a portion of the total loan receivable amount in trust as
interest reserves. These amounts are applied as interest payments
become due. Amounts held in trust relating to unearned interest are
reported as restricted cash.
6 LOANS RECEIVABLE
a) Loans and allowance for loan losses
Loans receivable as at March 31, 2009:
Allowance for loan losses
-------------------------
Gross Net
Amount Specific General Total Amount
----------------------------------------
$ $ $ $ $
----------------------------------------
Mortgage principal(1) 381,774 14,438 - 14,438 367,336
Bridge loan principal 4,404 1,894 - 1,894 2,510
Accrued interest and deferred
loan fees 536 - - - 536
----------------------------------------
386,714 16,332 - 16,332 370,382
----------------------------------------
----------------------------------------
(1) Foreclosed real estate assets-held-for-sale with a net carrying value of
$4,231 are included in mortgage principal based on estimated net
realizable value.
Loans receivable as at December 31, 2008:
Allowance for loan losses
-------------------------
Gross Net
Amount Specific General Total Amount
-----------------------------------------
$ $ $ $ $
-----------------------------------------
Mortgage principal(2) 382,481 12,399 - 13,735 370,082
Bridge loan principal 5,106 1,336 - 1,336 3,770
Accrued interest and deferred
loan fees (1,768) - - - (1,768)
-----------------------------------------
385,819 13,735 - 13,735 372,084
-----------------------------------------
-----------------------------------------
2 Foreclosed real estate assets-held-for-sale with a net carrying value of
$4,259 are included in mortgage principal based on estimated net
realizable value.
Loans receivable as at March 31, 2008:
Allowance for loan losses
-------------------------
Gross Net
Amount Specific General Total Amount
-----------------------------------------
$ $ $ $ $
-----------------------------------------
Mortgage principal 325,936 - 198 198 325,738
Bridge loan principal 9,509 - 6 6 9,503
Accrued interest and deferred
loan fees (8,154) - - - (8,154)
-----------------------------------------
327,291 - 204 204 327,087
-----------------------------------------
-----------------------------------------
b) Past due loans that are not impaired
Loans are classified as past due when a loan is outstanding past
the scheduled maturity or payment date. This may arise in the
normal course of business as a result of various factors including
construction or refinancing delays. These loans are not classified
as impaired because they are either less than 90 days past due or
are fully secured and there is reasonable assurance of collection
of principal and accrued interest.
Days Outstanding Number March 31, Number December 31, Number March 31,
Past Maturity of Loans 2009 of Loans 2008 of Loans 2008
-----------------------------------------------------------
$ $ $
-----------------------------------------------------------
1 - 30 days - - - - 1 13,065
31 - 60 days - - 1 8,090 - -
61 - 90 days - - 2 28,514 - -
-----------------------------------------------------------
- - 3 36,604 1 13,065
-----------------------------------------------------------
-----------------------------------------------------------
Loans past payment date:
Days Outstanding Number March 31, Number December 31, Number March 31,
Past Maturity of Loans 2009 of Loans 2008 of Loans 2008
-----------------------------------------------------------
$ $ $
-----------------------------------------------------------
1 - 30 days 1 1,725 1 5,337 1 11,376
31 - 60 days 1 10,000 - - - -
61 - 90 days - - - - - -
-----------------------------------------------------------
2 11,725 - 5,337 - 11,376
-----------------------------------------------------------
-----------------------------------------------------------
The principal collateral and other forms of collateral that the
Company holds as security for the loans includes real property and
other assets, including securities, cash and borrower guarantees.
Valuations of the collateral are periodically updated depending on
the nature of the collateral.
The estimated fair value of the collateral of the past due loans
that are not impaired is in excess of the carrying value of these
loans as at March 31, 2009.
c) Loans renegotiated or renewed during the period
The Company is requesting repayment of all loans at maturity. In
certain instances the Company may choose to renegotiate or renew
loans instead of enforcing its security on loans which have not
been repaid. Loans whose terms have been renegotiated are no longer
considered to be past due but are considered to be in good standing
and are therefore treated as performing loans.
Given current adverse economic conditions and a lack of market
take-out financing options for certain of the Company's loan
borrowers, management uses its market knowledge in considering the
most appropriate measures to achieve preservation of capital. As
these borrowers are unable to repay their loans, the Company takes
measures which may include changes in contractual maturity dates or
interest terms, receipt of additional collateral, borrower personal
guarantees or principal reductions.
During the period ended March 31, 2009, four loans with an
outstanding principal of $37,923 were renegotiated or renewed. None
of the loans were assessed by management as requiring a specific
loan loss provision as at March 31, 2009 based on a comparison of
estimated collateral value and/or expected future cashflows with
the outstanding carrying value of the loans.
d) Impaired loans and allowances for loan losses
Loans are classified as impaired when payment is contractually
90 days past due, or when there is no longer assurance of the
timely collection of principal and interest. Once a loan is
impaired, the Company stops accruing interest and fee income as the
loan is non-performing. Loans are reclassified to performing status
when management obtains reasonable assurance that the full amount
of principal and interest will be recovered in accordance with the
terms and conditions of the loans and accordingly such loans are no
longer classified as impaired.
Alternatively, the Company may restructure a loan to bring it
into good standing and, if the loan is no longer considered
impaired, interest and fee income will be recorded on an accrual
basis.
The Company's impaired loans and specific allowances are as
follows:
March 31, 2009 December 31, 2008 March 31, 2008
-------------------------------------------------------
Gross Gross Gross
Number Impaired Number Impaired Number Impaired
of loans Amount of loans Amount of loans Amount
-------------------------------------------------------
$ $ $
-------------------------------------------------------
Impaired loans
with specific
allowances 11 66,826 10 56,544 - -
Specific allowances (16,332) (13,735) -
-------------------------------------------------------
11 50,494 10 42,809 - -
Impaired loans
without specific
allowances 4 46,999 4 47,180 4 12,600
-------------------------------------------------------
Total impaired
loans, net of
specific
allowances 15 97,493 14 89,989 4 12,600
-------------------------------------------------------
-------------------------------------------------------
At March 31, 2009, the total estimated fair value of the
collateral of impaired loans with specific allowances is $65,177
(December 31, 2008 $48,100, March 31, 2008 $nil) and for impaired
loans without specific allowances is $69,020 (December 31, 2008
$79,222, March 31, 2008 $18,625). Management has estimated the fair
value of the collateral taking into account a number of factors
including independent real estate appraisals, and management's
knowledge of the collateral, credit and real estate markets.
The Company has recorded specific allowances for loan losses as
follows:
March 31, March 31,
2009 2008
----------------------------
$ $
----------------------------
Balance - beginning of period 13,735 -
Provision for loan losses 2,597 -
Direct write-offs, net of reversals - -
----------------------------
Balance - end of period 16,332 -
----------------------------
----------------------------
During the period ended March 31, 2008, the Company began
providing for a general allowance for loan losses to reflect
probable, but unidentified losses in the portfolio. However, at
March 31, 2009 and December 31, 2008, the Company performed a
comprehensive review of its loan portfolio to determine specific
allowances for each loan and as such, a general allowance is not
required.
The Company has recorded general allowances for loan losses as
follows:
March 31, March 31,
2009 2008
----------------------------
$ $
----------------------------
Balance - beginning of period - -
General allowance for the period - 204
----------------------------
Balance - end of period - 204
----------------------------
----------------------------
e) Loan commitments
At March 31, 2009, the Company has loan commitments for future
advances on construction loans of up to $36 million of which $35
million is scheduled for 2009, and $1 million in 2010. However,
these advances are subject to a number of conditions including
presale requirements, the completion of due diligence, and no
material adverse changes in the assets, business or ownership of
the borrower and other terms.
f) Composition of loan portfolio:
The following table indicates the composition of the Company's
loans by sector as follows:
March 31, 2009 December 31, 2008 March 31, 2008
---------------------------------------------------------------
Number Principal Number Principal Number Principal
of loans Outstanding of loans Outstanding of loans Outstanding
---------------------------------------------------------------
$ $ $
---------------------------------------------------------------
Land under
development 21 176,070 21 172,076 23 168,372
Real estate
- residen-
tial 4 8,461 5 13,704 7 24,671
Real estate
- commercial 7 63,591 7 64,784 9 57,097
Construction 19 133,652 20 131,917 16 75,796
---------------------------------------------------------------
Total
mortgages 51 381,774 53 382,481 55 325,936
Bridge loans 3 4,404 4 5,106 5 9,509
---------------------------------------------------------------
Total loan
principal 54 386,178 57 387,587 60 335,445
---------------------------------------------------------------
---------------------------------------------------------------
g) Geographic distribution of loan principal
The following table indicates the geographical distribution of
the Company's mortgage loans:
March 31, 2009 December 31, 2008 March 31, 2008
-----------------------------------------------------------------
Number Principal Number Principal Number Principal
of Outstan- of Outstan- of Outstan-
loans ding loans ding loans ding
-----------------------------------------------------------------
$ $ $
-----------------------------------------------------------------
British
Columbia 17 153,391 40% 17 151,096 40% 20 171,044 53%
Prairies 28 176,610 46% 29 183,217 48% 32 133,722 41%
Ontario 6 51,773 14% 7 48,168 12% 3 21,170 6%
-----------------------------------------------------------------
Total
mortgage
loans 51 381,774 100% 53 382,481 100% 55 325,936 100%
-----------------------------------------------------------------
-----------------------------------------------------------------
7 PREMISES AND EQUIPMENT
March 31, December 31, March 31,
2009 2008 2008
----------------------------------------------------------
Accumulated Net Book Net Book Net Book
Cost Amortization Value Value Value
----------------------------------------------------------
$ $ $ $ $
----------------------------------------------------------
Land 35 - 35 35 35
Leasehold 631 293 338 371 458
improvements
Computer equipment 506 322 184 215 246
Computer software 208 39 169 118 -
Office equipment 204 89 115 123 127
----------------------------------------------------------
1,584 743 841 862 866
----------------------------------------------------------
----------------------------------------------------------
Amortization included in net income for the period is $89 (2008 - $76).
8 REVOLVING DEBT FACILITY
In January 2008, the Company entered into a two year revolving
debt facility syndicated among three Canadian chartered banks for a
maximum borrowing of $88,000. In December 2008, the Company amended
the terms of the agreement and reduced the facility limit to
$70,000. The facility bears interest based on prime rate plus an
increment and is collateralized by the Company's loan
portfolio.
As at March 31, 2009, $46,860 was drawn down under the facility.
The Company amortizes financing costs associated with the revolving
debt facility over the term of the facility which is due to mature
in January 2010. As the Company obtained a waiver of certain
covenants during the period ended March 31, 2009; as at March 31,
2009, the Company was in compliance with all required remaining
financial covenants under the revolving debt facility (see notes 16
and 20(c)).
March 31, December 31, March 31,
2009 2008 2008
--------------------------------
$ $ $
--------------------------------
Revolving debt facility drawn 46,860 50,860 40,500
Less: unamortized balance of financing
costs (537) (707) (583)
--------------------------------
46,323 50,153 39,917
--------------------------------
--------------------------------
9 ASSET RETIREMENT OBLIGATION
The Company's asset retirement obligation relates to closure
obligations at its Castle Mountain property. The fair value of cash
legally restricted for the purposes of settling asset retirement
obligations is disclosed in note 5.
A reconciliation of the asset retirement obligation is as
follows:
March 31, December 31, March 31,
2009 2008 2008
--------------------------------
$ $ $
--------------------------------
Balance - beginning of period/year 459 572 572
Liabilities settled (49) (135) (48)
Accretion expense 7 35 9
Revision in estimated cash flows - (123) -
Foreign exchange 16 110 20
--------------------------------
Balance - end of period/year 433 459 553
--------------------------------
--------------------------------
10 SHARE CAPITAL
a) Authorized
Unlimited first and second preferred shares
Unlimited common shares without par value
b) Cumulative 13.50% First Preferred Shares, Series A issued and
outstanding (classified as liabilities)
March 31, December 31, March 31,
2009 2008 2008
----------------------------------
$ $ $
----------------------------------
Preferred share liability 40,000 40,000 -
Less: unamortized balance of financing
costs (1,137) (1,276) -
----------------------------------
Net liability 38,863 38,724 -
----------------------------------
Number of shares outstanding 20,000,000 20,000,000 -
The First Preferred Shares, Series "A" expire on December 31,
2010. Prior to January 11, 2010, the preferred shares are
redeemable and retractable at the Company's or holder's option,
with consent of the Company's lenders (note 8) and after such date
no consent is required. The redemption or retraction price is equal
to the issue price plus all accrued and unpaid dividends. As the
preferred shares are not convertible and are mandatorily
retractable with a prescribed cumulative dividend, they have been
classified as a liability on the balance sheet.
Dividends are payable on a quarterly basis at a rate of 13.5%
per annum. Dividend payments are recorded as interest expense in
net income. The preferred shareholders, after payment of dividends
at the prescribed rate of 13.5% per annum and the payment of an
equivalent amount of dividends to common shareholders, have the
right to participate pari passu in any additional dividends payable
to common shareholders.
By way of a Dividend Payment Agreement dated March 30, 2009, the
Company has the option to pay the declared dividend in common
shares (note 10(c)).
c) Common shares issued and outstanding
Number of Amount
shares
--------------------
$
--------------------
Common Shares
Opening balance - January 1, 2009 146,789,711 207,161
Agents commission on preferred share issuance 1,404,762 1,180
--------------------
Closing balance - March 31, 2009 148,194,473 208,341
--------------------
--------------------
On April 9, 2009, the Company issued 2,141,435 shares for $1,361
to the holders of the Company's First Preferred shares in
settlement of the March 31, 2009 declared dividend.
d) 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.
The change in stock options outstanding for the period was as
follows:
Weighted average
Number of options exercise price
-------------------------------------
Opening balance - January 1, 2009 5,274,664 $ 2.55
Cancelled (206,251) 2.14
-------------------------------------
Closing balance - March 31, 2009 5,068,413 $ 2.56
-------------------------------------
-------------------------------------
Options exercisable - March 31, 2009 3,289,767 $ 2.58
-------------------------------------
-------------------------------------
The following table summarizes information about stock options
outstanding and exercisable at March 31, 2009:
Options outstanding Options exercisable
----------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Range of Options remaining exercise Options exercise
exercise prices outstanding contractual price exercisable price
life
----------------------------------------------------------------------------
(years) $ $
----------------------------------------------------------------------------
$1.51 223,000 0.39 1.51 223,000 1.51
$ 1.52 to $2.31 1,817,499 3.11 2.15 1,156,231 2.21
$ 2.32 to $3.24 3,027,914 3.31 2.89 1,910,536 2.92
----------------------------------------------------------------------------
5,068,413 3.11 2.56 3,289,767 2.58
----------------------------------------------------------------------------
----------------------------------------------------------------------------
e) Contributed surplus
$
-----
Opening balance - at January 1, 2009 7,954
Stock-based compensation expense 200
-----
Ending balance - at March 31, 2009 8,154
-----
-----
11 INCOME TAXES
The Company has tax losses and other deductions in certain of
its entities which are available to reduce its taxable income in
Canada. The Company has recognized a future tax asset to the extent
that the amount is more likely than not to be realized from future
earnings.
a) The provision for income taxes consists of the following for
the three months ended:
March 31, March 31,
2009 2008
------------------------
$ $
------------------------
Current
Canada - 49
United States 94 15
------------------------
Total current expenses 94 64
------------------------
Future
Canada 712 364
United States (recovery) (123) (43)
------------------------
Total future expenses 589 321
------------------------
Total income tax expense 683 385
------------------------
------------------------
The significant components of the future income tax assets and
liabilities are as follows:
March 31, December 31, March 31,
2009 2008 2008
------------------------------------
$ $ $
------------------------------------
Non-capital loss carry-forwards 2,322 2,753 1,079
Capital loss carry-forwards 7,647 7,935 8,865
Premises and equipment 2 9 9
Other 2,300 2,613 2,888
------------------------------------
12,271 13,310 12,841
Valuation allowance (8,039) (8,366) (9,289)
------------------------------------
Future income tax asset 4,232 4,944 3,552
------------------------------------
------------------------------------
Deferred gain and other 749 841 893
------------------------------------
Future tax liability 749 841 893
------------------------------------
------------------------------------
b) The Company has non-capital losses to reduce future taxable
income in Canada of approximately $7,781. These losses will expire
in 2015 ($5,330) and 2028 ($2,451).
12 RELATED PARTY TRANSACTIONS
a) Included in accounts payable and accrued liabilities as at
March 31, 2009 is $nil due to employees and officers for bonuses
payable (December 31, 2008 - $50, March 31, 2008 - $4,278).
b) For the three months ended March 31, 2009, the Company paid
$16 (March 31, 2008 - $nil) for administration services to a party
related by virtue of having certain directors and officers in
common. The Company was also reimbursed $28 (March 31, 2008 - $nil)
in office and premises costs by the same related party, of which
$18 (December 31, 2008 - $11) is included in accounts
receivable.
c) For the three months ended March 31, 2009, the Company
received $4 (March 31, 2008 - $5) in syndication fees from parties
related by virtue of having certain directors and officers in
common.
d) Included in accounts payable and accrued liabilities as at
March 31, 2009 is $44 (December 31, 2008 - $39, March 31, 2008 -
$46) in co-lender interest payable to parties related by virtue of
having certain directors and officers in common.
13 COMMITMENTS AND CONTINGENCIES
a) Surety bond guarantees of $592 (US$486) have been provided by
Castle Mountain Joint Venture for compliance with reclamation and
other environmental agreements.
b) The Company has entered into operating leases for office
premises and other commitments. Annual payments required are
approximately as follows:
$
---
2009 511
2010 586
2011 423
2012 423
2013 25
c) Other commitments and contingencies are disclosed in note
6(e).
14 INTEREST RATE SENSITIVITY
The Company's exposure to interest rate changes results from the
difference between assets and liabilities and their respective
maturities or interest rate repricing dates. Based on current
differences as at March 31, 2009, the Company estimates that an
immediate and sustained 100 basis point increase in interest rates
would decrease net interest income over the next 12 months by $224.
An immediate and sustained 100 basis point decrease in interest
rates would increase net interest income over the next 12 months by
$262.
The carrying amounts of assets and liabilities in the following
table are presented in the periods in which they next reprice to
market rates or mature based on the earlier of contractual
repricing and maturity dates, as at March 31, 2009:
Non -
Floating Within 6 6 to 12 1 to 3 Over Interest
Rate Months Months Years 3 Years Sensitive Total
----------------------------------------------------------------------------
$ $ $ $ $ $ $
----------------------------------------------------------------------------
Total assets 50,574 160,191 101,792 73,620 - (3,353) 382,824
Total
liabilities
and equity 46,860 - - 40,000 - 295,964 382,824
----------------------------------------------------------------------------
Difference 3,714 160,191 101,792 33,620 - (299,317) -
----------------------------------------------------------------------------
Cumulative
difference 3,714 163,905 265,697 299,317 299,317 - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cumulative
difference
as a
percentage
of total
assets 1.0% 42.8% 69.4% 78.2% 78.2% - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value represents the amount at which a financial instrument
could be exchanged in an arm's length transaction between willing
parties who are under no compulsion to act and is best evidenced by
a quoted market price in an active market. Quoted prices are not
always available and in these cases, the Company determines fair
value of financial assets using valuation techniques based on
observable market data and management's best estimates of market
conditions. The estimates are subjective and involve particular
assumptions and matters of judgement and as such, may not be
reflective of future realizable values.
The fair values of cash deposits are assumed to approximate
their carrying values due to their short-term nature.
The fair values of loans reflects changes in the general level
of interest rates that have occurred since the loans were
originated, net of any allowances for loan losses. These
instruments lack an available trading market and are not typically
exchanged. They have been valued assuming they will not be sold.
The fair values are not necessarily representative of the amounts
realizable in an immediate settlement of the instrument. For
variable rate loans, the fair value approximates their carrying
values since these instruments reprice to market frequently. For
fixed rate loans, fair value is determined by discounting the
expected future cash flows at current market rates for loans with
similar terms and risks.
The fair value of the revolving debt facility is based on a
variable rate of interest and reprices to market frequently and on
that basis the fair value approximates the carrying value.
The fair value of the preferred share liability is determined by
using market interest rates for financial instruments with similar
terms and risks. This instrument lacks an available trading market
and is not typically exchanged.
The table below sets out the fair values of financial
instruments and does not include assets and liabilities that are
not considered financial instruments.
March 31, December 31, March 31,
2009 2008 2008
-----------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
value value value Value value Value
-----------------------------------------------------
$ $ $ $ $ $
-----------------------------------------------------
Assets
Cash deposits 3,875 3,875 1,621 1,621 1,894 1,894
Restricted cash 2,906 2,906 4,014 4,014 8,598 8,598
Loans receivable 369,846 369,598 373,852 372,757 327,087 327,087
Liabilities
Revolving debt
facility 46,860 46,860 50,860 50,860 40,500 40,500
Preferred share
liability 40,000 40,000 40,000 40,000 - -
16 CAPITAL AND RISK MANAGEMENT
Capital management
The Company's capital management objectives are to maintain a
strong and efficient capital structure to provide liquidity to
support operations. The Company continually monitors its capital
position to ensure these objectives are met. A strong capital
position also provides flexibility in considering accretive growth
opportunities. As at March 31, 2009, the Company was in compliance
with its revolving debt facility covenants.
At March 31, 2009, management considers the Company's capital to
be comprised of debt payable of $46,323, preferred share net
liability of $38,863 and all components of shareholders' equity
which amount to $293,762 for a total of $378,948.
Commencing in 2008, the Company's dividend policy is to
distribute sufficient dividends to shareholders throughout the
fiscal year and within 90 days thereafter to reduce its taxable
income to a negligible amount, after first deducting all available
loss carry-forwards and other deductions against taxable income.
The Company's dividend policy is further described in the Company's
management's discussion and analysis for the three months ended
March 31, 2009.
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. The Company is
further exposed to adverse 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 increased if the value of real estate securing the
Company's loans falls to a level approaching or below the loan
amounts. Any decrease in real estate values may delay the
development process and will adversely affect the value of the
Company's security.
Senior management is committed to several processes to ensure
that this risk is appropriately mitigated. These include:
- emphasis on first mortgage financings;
- emphasis on borrowers' experience;
- local and regional diversification of mortgages;
- diversification of the loan portfolio by asset type;
- the investigation of the creditworthiness of all
borrowers;
- the employment of qualified and experienced loan originators
and underwriters;
- the engagement of qualified independent consultants and
advisors 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 applications for loans 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 members 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, 2009, the
largest loan in the Company's loan portfolio was $29 million (8% of
the Company's loan portfolio) and was not impaired. 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 ongoing basis.
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 and the repayment of the revolving debt
facility at maturity. As well, effective liquidity management
involves determining the timing of such commitments to ensure cash
resources are optimally utilized. Quest manages its loan commitment
liquidity risk by the ongoing monitoring of scheduled mortgage
fundings and repayments, and whenever necessary, accessing its debt
facility to bridge any gaps in loan maturities and funding
obligations. The Company manages its revolving debt facility
liquidity risk by accessing alternative sources of liquidity
whether this be mortgage repayments, syndication proceeds or
preferred share issuances. For both of these liquidity risks, the
Company will syndicate a portion of its loans as part of its
liquidity risk management.
As at March 31, 2009, the Company had drawn $46.9 million on its
$70.0 million revolving debt facility and had future loan
commitments to borrowers of up to $36.0 million. Future loan
commitments are primarily for construction draws which occur over
the course of the term of the relevant loan which is typically 12
to 18 months in duration. Further, as at March 31, 2009, 29% of the
Company's loan portfolio, or $112.9 million, was due within a year.
With the current economic climate, the ability to accurately
forecast actual repayments of the Company's loan portfolio has
become more difficult.
The current adverse economic climate is impacting real estate
prices and the timing of take-out financing for certain loans in
the Company's portfolio. Subsequent to March 31, 2009, the Company
renegotiated certain terms of its revolving debt facility which
will reduce amounts available under its debt facility during the
current year (refer to subsequent note 20(c)) and amended certain
covenants. Based on management's current financial projections and
taking into account known and likely loan portfolio market
developments over the remainder of fiscal 2009, the Company does
not anticipate any non-compliance with its covenants, namely
minimum equity and tangible assets to debt ratios.
Management monitors rolling forecasts of the Company's cash
position based on the timing of expected cash flows, which
incorporates assumptions related to the likely timing of loan
repayments. In addition, the Company initiated a number of
procedures to assist in its liquidity management during fiscal 2008
and 2009 including:
- restricting loan advances to existing lending obligations and
protective disbursements and a commitment to not fund any new loans
prior to the repayment of the revolving debt facility in its
entirety;
- syndication of existing loans using an A/B priority structure
whereby Quest will hold the B portion;
- obtaining the agreement of preferred shareholders to enable
the Company to settle their preferred share dividend payments in
common shares of the Company, at the discretion of the Company.
As a result of these initiatives, it is management's opinion
that the Company has sufficient resources to meet its current cash
flow requirements.
Market Risk
Market risk is the impact on earnings as a result of changes in
financial market variables such as interest rates and foreign
exchange rates which can arise when making loans and borrowing and
making investments. The Company does not engage in any type of
trading activities. The Company's material market risk is limited
to interest rates as noted below.
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 on the basis of bank prime rate plus
a spread, the Company manages this risk through the pricing of
certain of its loans also being based upon the Bank Prime Rate plus
a spread. 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 generally varying
from six months to two years, and by charging prepayment penalties
and upfront commitment fees.
As at March 31, 2009, the Company had 7 variable rate loans
priced off the bank prime rate with an aggregate principal of $50.6
million and 47 fixed-rate loans with an aggregate principal of
$335.6 million.
17 SEGMENTED INFORMATION
The Company principally has one operating segment, which is the
provision of mortgage financings. The Company's geographic location
is Canada.
18 SUPPLEMENTAL CASH FLOW INFORMATION
a) Cash received or paid for the three months ended:
March 31, March 31,
2009 2008
-------------------
$ $
Interest received (non-loan) 14 254
Interest paid 325 319
Income tax instalments 33 67
b) Non-cash financing and investing activities:
March 31, March 31,
2009 2008
-------------------
$ $
Common shares issued as agent's fee 1,180 -
19 FUTURE ACCOUNTING CHANGES
The CICA has previously announced planned convergence of
Canadian GAAP with International Financial Reporting Standards
("IFRS") for public companies over a transition period, with IFRS
expected to be effective for fiscal periods beginning on or after
January 1, 2011. Management has established a changeover plan to
adopt IFRS on January 1, 2011. An implementation team has been
created and management is engaging a third party advisor to assist.
Management has not yet started the process of assessing accounting
policy choices and elections that are allowed under IFRS.
Management will also assess the impact of the conversion on the
Company's business activities including the effect on information
technology and data systems, internal controls over financial
reporting and disclosure controls. Management will continually
review and adjust its implementation process to ensure the
convergence timetable is met.
20 SUBSEQUENT EVENTS
a) On April 9, 2009, the Company issued 2,141,435 common shares
in payment of its March 31, 2009 declared dividend of $1,361 on the
Cumulative 13.5% First Preferred Shares, Series A. Refer to note 10
(b) and (c).
b) On April 22, 2009, the Company completed a $30,000
syndication of a portion of its loan portfolio. The syndication was
effected through a structure involving senior and subordinated
positions, whereby the syndicate partners are in the senior
position and the Company is in the subordinated position. The
proceeds of the syndication were applied to reduce the Company's
revolving debt facility.
c) On April 30, 2009, the Company successfully renegotiated its
revolving debt facility whereby the Company has amended its
financial covenants, the maximum facility amount and the interest
rate increment.
d) On May 4, 2009, the Company announced the closure of one of
its offices and the departure of several employees. The severance
and related costs associated with these measures will result in an
estimated charge of $1,545 to expenses in the second quarter
2009.
Contacts: Contacts in Canada Quest Capital Corp. Stephen Coffey,
President & CEO (416) 367-8383 (416) 367-4624 (FAX) Quest
Capital Corp. A. Murray Sinclair Co-Chair (604) 687-8378 (604)
682-3941 (FAX) Website: www.questcapcorp.com AIM NOMAD: Canaccord
Adams Limited Ryan Gaffney or Ryan Cohen 011 44 20 7050 6500
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