Quest Capital Corp.
TSX : QC
AMEX : QCC
AIM : QCC

Quest Capital Corp.

November 02, 2006 02:00 ET

Quest Reports its Financial Results for the Third Quarter 2006 and Announces an Increase in its Dividend Rate

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Nov. 2, 2006) - Quest Capital Corp. ('Quest' or the 'Company') (TSX:QC)(AMEX:QCC)(AIM:QCC), announces its unaudited consolidated interim financial results for the nine months ended September 30, 2006 (a copy of which is attached hereto and is also available on SEDAR at www.sedar.com).

HIGHLIGHTS

- Net earnings of $8.8 million ($0.06 per share) for the three months ended September 30, 2006 and $27.7 million ($0.20 per share) for the nine months ended September 30, 2006, as compared to net earnings of $4.3 million ($0.04 per share) and $12.2 million ($0.13 per share), respectively, for the comparative periods in 2005;

- Total loans arranged during the nine months ended September 30, 2006 totaled $205.1 million, of which the Company funded $184.9 million;

- Loan portfolio increased 98% during the nine months ended September 30, 2006 to $246.6 million, as compared to $124.6 million as at December 31, 2005;

Managing Director, A. Murray Sinclair commented: "The growth of our loan portfolio by $55 million (29%) in the third quarter and $122 million (98%) in the first nine months of the year is evidence that our business model is being successfully implemented."

As a reflection of the continued growth in our business, the Company is pleased to announce that on November 1, 2006 its board of directors approved an increase in its dividend rate from $0.06 per year to $0.08 per year. This new dividend will be paid quarterly, at the rate of $0.02 per share. The Company is also pleased to announce that the board of directors has also declared its first quarterly dividend to be paid on November 30, 2006 to shareholders of record at the close the business on November 15, 2006.

About Quest

Quest Capital Corp. is a merchant bank that focuses on providing financial services, specifically mortgages and bridge loans. Quest's primary expertise is providing asset backed loans to companies in real estate, manufacturing and resource sectors. Quest complements its lending business by providing corporate finance services through its wholly owned subsidiary, Quest Securities Corporation.

Forward-Looking Statements

Statements contained in this news release that are not historical facts are forward-looking statements that involve various risks and uncertainty affecting the business of Quest. Actual results realized may vary materially from the information provided in this release. As a result, there is no representation by Quest that actual results realized in the future will be the same in whole or in part as those presented herein.

Quest Capital Corp.

Consolidated Financial Statements

(Expressed in thousands of Canadian dollars)

(Unaudited)

September 30, 2006



Quest Capital Corp.
Consolidated Balance Sheets
(expressed in thousands of Canadian dollars)
(Unaudited)
--------------------------------------------------------------------------

September 30, December 31,
2006 2005

Assets
Cash and cash equivalents $ 12,794 $ 33,739
Marketable securities (note 6) 1,269 945
Loans (note 6 and 7) 246,631 124,551
Investments (note 6) 11,361 17,117
Future income tax asset 7,187 6,488
Restricted cash 2,676 2,265
Prepaid and other receivable 672 739
Resource and fixed assets 510 700
Other assets (note 6) 1,835 2,008
Assets held for disposition (note 5) - 1,051
-------------------------------
$ 284,935 $ 189,603
-------------------------------
-------------------------------

Liabilities
Accounts payable and accrued liabilities $ 3,885 $ 3,734
Income taxes payable (note 13) 1,783 458
Dividend payable - 3,518
Deferred interest and loan fees 4,151 1,685
Asset retirement obligation 1,066 1,884
Debt (note 6 and 8) 10,000 -
Liabilities and provision for loss on
assets held for disposition (note 5) - 730
-------------------------------
20,885 12,009
-------------------------------

Shareholders' Equity
Share capital (note 9) 202,459 138,891
Contributed capital (note 9) 6,366 6,772
Retained earnings 54,106 30,739
Currency translation adjustment 1,119 1,192
-------------------------------
264,050 177,594
-------------------------------
$ 284,935 $ 189,603
-------------------------------
-------------------------------

Contingencies and commitments (note 7 and 11)

Bob Buchan, Director A. Murray Sinclair, Director

The accompanying notes are an integral part of these consolidated
financial statements.


Quest Capital Corp.
Consolidated Statements of Retained Earnings
(Expressed in thousands of Canadian dollars)
(Unaudited)

For the period ended
--------------------------------------------------------------------------

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005

Retained earnings -
Beginning of period $ 45,336 $ 18,567 $ 30,739 $ 10,706

Net earnings for the period 8,770 4,295 27,680 12,156
Dividends - - (4,313) -
-----------------------------------------
Retained earnings -
End of period $ 54,106 $ 22,862 $ 54,106 $ 22,862
-----------------------------------------
-----------------------------------------

The accompanying notes are an integral part of these consolidated
financial statements.


Quest Capital Corp.
Consolidated Statements of Earnings
(Expressed in thousands of Canadian dollars, except per share amounts)
(Unaudited)

For the period ended
--------------------------------------------------------------------------

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005

Interest and related fees $ 8,781 $ 4,399 $ 21,994 $ 11,855
----------------------------------------------

Non-interest income
Management and finder's fees 1,051 505 3,499 2,032
Marketable securities and other
assets trading gains 413 204 4,083 589
Realized gains and writedowns
of investments 1,904 1,165 9,636 2,429
Other income - 9 16 665
----------------------------------------------
3,368 1,883 17,234 5,715
----------------------------------------------
Total interest and
non-interest income 12,149 6,282 39,228 17,570

Provision for losses net of
recovery (5) - (238) -
----------------------------------------------
12,144 6,282 38,990 17,570
----------------------------------------------
Expenses and other
Salaries and benefits 878 532 2,249 1,466
Bonuses 904 500 4,562 1,350
Stock-based compensation 112 451 393 1,564
Office and other 255 175 747 479
Legal and professional services 432 127 1,182 509
Regulatory and shareholder
relations 119 17 426 186
Director's fees 53 85 214 163
Interest 250 7 265 61
Foreign exchange gain 24 110 59 90
Other expenses relating to
resource properties 30 24 (173) 162
Writedown, gains adjustment to
reclamation provision and
settlement of Australian
operations - (37) - (569)
----------------------------------------------
3,057 1,991 9,924 5,461
----------------------------------------------
Earnings before income taxes 9,087 4,291 29,066 12,109

Provision for income taxes
(note 13) 317 - 1,386 -
Non-controlling interest in a
subsidiary - (4) - (47)
----------------------------------------------
Net earnings for the period $ 8,770 $ 4,295 $ 27,680 $ 12,156
----------------------------------------------
----------------------------------------------
Earnings per share
Basic $ 0.06 $ 0.04 $ 0.20 $ 0.13
Fully diluted $ 0.06 $ 0.04 $ 0.20 $ 0.12

Weighted average number of
shares outstanding
Basic 143,779,107 104,715,468 135,332,615 96,048,801
Fully diluted 146,746,232 108,161,718 138,460,558 98,614,661

The accompanying notes are an integral part of these consolidated
financial statements.


Quest Capital Corp.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
(Unaudited)

For the period ended
--------------------------------------------------------------------------

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005

Cash flows from operating
activities
Net earnings for the period $ 8,770 $ 4,295 $ 27,680 $ 12,156
Adjustments to determine
net cash flows relating
to operating activities
Future income tax 828 - (700) -
Stock-based compensation 112 451 393 1,564
Non-controlling interest
in a subsidiary - (4) - (47)
Provision for losses - - 386 -
Amortization of deferred
interest and loan fees (1,332) (1,718) (3,624) (3,934)
Marketable securities
trading gains (413) (204) (4,083) (589)
Realized gains and
writedowns of investments (1,904) (1,165) (9,636) (2,429)
Gain on dilution in
interest of subsidiary - - - (252)
Depreciation 53 - 128 34
Other expenses relating
to resource properties 19 17 58 135
Gains on sale of resource
assets and adjustments to
retirement obligations - (37) - (551)
Other assets and investments
received as finder's fees (231) (233) (728) (827)
Deferred interest and loans
fees received 2,553 901 5,011 2,461
Activity in marketable
securities held for trading
Purchases (1,371) (15) (3,382) (15)
Proceeds on sales 1,970 820 8,975 1,895
Expenditures for reclamation
and closure (208) (566) (821) (1,641)
Changes in prepaid and other
receivable 72 117 51 521
Changes in accounts payable
and accrued liabilities (553) 85 180 (2,927)
Changes in income taxes
payable (748) - 1,325 -
----------------------------------------------
7,617 2,744 21,213 5,554
----------------------------------------------
Cash flows from financing
activities
Proceeds from shares issued 2,101 39,606 62,768 47,106
Dividend payment (4,312) - (7,830) -
Proceeds from debt 27,931 - 27,931 3,000
Repayment of debt (17,931) - (17,931) (3,000)
----------------------------------------------
7,789 39,606 64,938 47,106
----------------------------------------------
Cash flows from investing
activities
Activity in loans
Net (increase) decrease
in loans and convertible
debentures (55,351) (18,142) (122,466) (26,331)
Activity in investments
Purchases (75,073) (966) (75,679) (3,651)
Proceeds on sales 77,627 3,201 91,966 7,320
Net proceeds on dilution
of a subsidiary - - - 621
Change in restricted cash 17 (2) (505) 5,900
Cash transferred to
purchaser of resource
property - - - (2,546)
Proceeds on sale of
resource and fixed assets - 33 103 166
Expenditures on resource
and fixed assets (2) (86) (73) (102)
Net other assets acquired (150) - (425) -
----------------------------------------------
(52,932) (15,962) (107,079) (18,623)
----------------------------------------------

Foreign exchange loss on
cash held in a foreign
subsidiary (32) (21) (17) 84

Increase (decrease) in
cash and cash equivalents (37,558) 26,367 (20,945) 34,121

Cash and cash equivalents
- Beginning of period 50,352 14,361 33,739 6,607

Cash and cash equivalents
- End of period $ 12,794 $ 40,728 $ 12,794 $ 40,728
----------------------------------------------
----------------------------------------------

Supplemental cash flow information (note 12)

The accompanying notes are an integral part of these consolidated
financial statements


Quest Capital Corp.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars; tables in thousands, except share capital
information)
(Unaudited)

Nine months ended September 30, 2006 and 2005


1 Nature of operations

Quest Capital Corp.'s ("Quest" or the "Company") primary focus is providing commercial bridge loans and mortgage financings of up to approximately $35.0 million. The Company also provides a range of services including the raising of capital, consulting, management and administrative services through its wholly owned subsidiaries, Quest Management Corp. and Quest Securities Corporation.

2 Basis of presentation

The accompanying financial information does not include all disclosure required under generally accepted accounting principles for annual financial statements. The accompanying financial information reflects all adjustments, consisting primarily of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. These consolidated financial statements should be read in conjunction with the Company's 2005 audited annual financial statements and notes.

3 Significant accounting policies

These interim consolidated financial statements follow the same accounting policies and methods of application as the Company's annual financial statements. These interim consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and include the Company's accounts and those of its wholly-owned subsidiaries, Quest Management Corp., Quest Securities Corporation, Quest Mortgage Corp., Viceroy Gold Corporation and its 75% proportionate joint-venture interest in the Castle Mountain Property.

4 Change in accounting policies

No new accounting policies have been adopted during the nine months ended September 30, 2006.

5 Assets and liabilities and provision for loss on assets

In November 2005, Lara Exploration Ltd. ("Lara"), in which the Company had a 66% interest, agreed to acquire a private Brazilian company that holds the rights to nine prospective gold, nickel, copper and zinc properties in Brazil. In return for the assignment of the shares of the private Brazilian company to Lara, the Company agreed to transfer its 3,000,000 escrow shares of Lara to the shareholders of the private Brazilian company for nominal consideration. On completion of the transaction and a concurrent private placement by Lara, the Company holds less than 10% of the outstanding shares of Lara and ceased to exercise control or significant influence of Lara. This transaction was completed in February 2006 and the Company's remaining investment has been accounted for using the cost method. The following is a breakdown of the net assets disposed of:



Assets held for disposition $ 1,051
Liabilities and provision for loss on assets
held for disposition 730
-------
Remaining investment $ 321
-------
-------


6 Financial instruments

The carrying values of cash and cash equivalents, restricted cash, other receivables accounts payable and debt approximate their fair values due to the short-term nature of these instruments.

The fair values of the Company's remaining financial assets and liabilities are as follows:



September 30, December 31,
2006 2005
----------------- ----------------
Carrying Fair Carrying Fair
value value value value

Marketable securities $ 1,269 1,481 $ 945 1,168
Loans and convertible debentures 246,631 246,631 124,551 124,551
Investments 11,361 14,199 17,117 24,430
Other assets 1,028 1,028 1,601 1,601
--------------------------------------------------------------------------


Marketable securities and investments represent shares in publicly traded companies. The fair value represents the quoted trading price of the shares. The fair value of loans and debt are estimated to be approximately the equivalent of carrying value due to the relatively short term of these instruments. The fair value of convertible debentures is generally considered to be the equivalent of carrying value unless the trading price of the underlying security exceeds the conversion price of the debenture. Fair value is then considered to be the quoted trading price of the underlying security. Financial instruments included in other assets include securities and investments in capital pool companies, which are restricted from trading and are carried at cost.

7 Loans and convertible debentures

a) Loans are repayable over various terms up to 22 months from September 30, 2006, and bear interest at a fixed rate of between 8% and 18% before commitment and other fees. Marketable securities, real property, corporate or personal guarantees generally are pledged as security. At September 30, 2006, the composition of the loan portfolio was 83% real estate mortgages, 10% in resource sectors, and 7% in other sectors. At September 30, 2006, mortgages were geographically located; 63% in British Columbia, 19% in Alberta, 15% in Ontario and 3% in other; and 73% are first mortgages and 27% are second mortgages.

As at September 30, 2006, 76% of the Company's loan portfolio is due within a year. The Company had approximately $11.5 million of loans impaired as a result of certain principal and/or interest payments being in arrears as at September 30, 2006. The Company's provision for loan losses is $0.6 million. The Company monitors the repayment ability of borrowers and the value of underlying security. In determining the provision for possible loan losses, management considers the length of time the loans or convertible debenture has been in arrears, the overall financial strength of borrowers and the residual value of security pledged. The Company expects to collect the full carrying value of its loan portfolio.

Loan and convertible debenture analysis as at September 30, 2006 is as follows:



Term loans Specific allowance Carrying amount

Unimpaired Loans $ 235,759 $ - $ 235,759
Impaired Loans 10,872 - 10,872
-----------------------------------------------
$ 246,631 $ - $ 246,631

Convertible Debentures 586 586 -
-----------------------------------------------
$ 247,217 $ 586 $ 246,631
-----------------------------------------------
-----------------------------------------------


b) The Company has recorded an allowance for losses as follows:



September 30, 2006

Balance - Beginning of period $ 537
Additions (Deductions)
Specific provision for the period 238

Specific loans written off for the period (189)
------------------
Balance - End of period $ 586
------------------
------------------


c) At September 30, 2006, the Company has also entered into agreements to advance funds of $14.6 million of which the Company expects to syndicate a portion thereof. Advances under these agreements are subject to due diligence, no material adverse change in the assets, business or ownership of the borrower and other terms.

8 Debt

In August 2006, the Company entered into a short term unsecured debt facility for a total amount of $27.9 million. The facility bears interest at prime plus 2%. At September 30, 2006, $10.0 million was owing under this facility.

9 Share capital

a) Authorized

Unlimited First and Second Preferred Shares

Unlimited common shares without par value

b) Shares issued and outstanding



Number of shares Amount
Common shares
Opening balance - January 1, 2006 119,265,568 $ 138,891
Issued for cash 15,625,000 47,311
Issued on exercise of stock options 1,074,500 2,901
Issued on exercise of warrants 8,833,335 13,300
Issued on exercise of compensation options 24,225 56
---------------------------
Ending balance - September 30, 2006 144,822,628 $ 202,459
---------------------------
---------------------------


In April 2006, the Company completed an offering of 15,625,000 shares of the Company at a price of $3.20 per share for aggregate proceeds of $50,000,000. The Company also granted the underwriters an over allotment option exercisable to May 26, 2006 to purchase up to 2,343,750 shares at a price of $3.20 per share, of which the underwriters exercised no shares. Net proceeds from the equity offering after expenses were $47,311,000.

c) Warrants issued and outstanding



Exercise
Number of price
warrants per share Expiry date

Common shares
Opening balance comprised of: $ -
Issued pursuant to a private
placement 8,333,335 1.50 June 30, 2008
Issued pursuant to a private
placement 500,000 1.60 October 20, 2008
---------

Exercised (8,333,335) 1.50
Exercised (500,000) 1.60
---------
Ending balance - September 30, 2006 -
---------
---------


d) Compensation options issued and outstanding



Exercise
Number of price
warrants per share Expiry date

Common shares
Opening balance comprised of: - -
Issued pursuant to a equity
placement 1,110,000 $ 2.30 August 23, 2007
Issued pursuant to a equity
placement 48,000 2.30 October 26, 2007
---------

Exercised (24,225) 2.30
---------
Ending balance - September 30, 2006 1,133,775
---------
---------


e) Stock options outstanding

The Company has a stock option plan under which the Company may grant options to its directors, employees and consultants for up to 10% of the issued and outstanding common shares. The exercise price of each option is required to be equal to or higher than the market price of the Company's common shares on the day of grant. Vesting and terms of the option agreement are at the discretion of the Board of Directors.

During the nine months ended September 30, 2006, the change in stock options outstanding was as follows:



Weighted average
Number of shares share price

Common shares
Opening balance 9,563,333 $ 1.91
Granted 500,000 2.77
Exercised (1,074,500) 1.95
Cancelled (37,500) 2.30
----------------------------------

Closing balance 8,951,333 $ 2.01
----------------------------------
----------------------------------
Options exercisable 7,898,978 $ 1.97
----------------------------------
----------------------------------


The following table summarizes information about stock options outstanding and exercisable at September 30, 2006:



Options outstanding Options exercisable
-------------------------------------------------- ----------------------
Weighted
average Weighted Weighted
remaining average average
Range of Options contracted exercise Options exercise
exercise prices outstanding life (years) price exercisable price

$ 0.81 113,333 1.06 $ 0.81 113,333 $ 0.81
$ 1.51 273,000 2.89 1.51 273,000 1.51
$ 1.80 to 1.95 6,890,000 2.36 1.95 6,683,750 1.95
$ 2.30 1,175,000 4.21 2.30 624,209 2.30
$ 2.64 to 3.08 500,000 4.42 2.77 204,686 2.75
-----------------------------------------------------------
8,951,333 2.72 $ 2.01 7,898,978 $ 1.97
-----------------------------------------------------------
-----------------------------------------------------------


f) Contributed capital



Opening balance $ 6,772
Stock-based compensation 393
Fair value of stock options exercised (799)
------------------
Ending balance $ 6,366
------------------
------------------


During the three months ended September 30, 2006, no new grants of stock options took place.

10 Related party transactions

a) For the nine months ended September 30, 2006, the Company received $1,202,000 (2005 - $667,000) in advisory, management and finder's fees from parties related by virtue of having certain directors and officers in common. Other assets include $479,000 of non-transferable securities held in either private or publicly traded companies related by virtue of having certain directors and officers in common. For the nine months ended September 30, 2006, the Company recorded a write-down of other assets of $74,000 (2005 - $Nil) in parties related by virtue of having certain directors in common.

b) Loans and convertible debentures include $1,000,000 in amounts due from parties related by virtue of having a director in common. During the nine months ended September 30, 2006, the Company received $580,000 (2005 - $1,770,000) in interest and fees from parties related by virtue of having certain directors and officers in common. During the nine months ended September 30, 2006, the Company has made $386,000 in additional provision for losses on convertible debentures from parties related by virtue of having a director in common.

c) For the nine months ended September 30, 2006, the Company received $31,000 (2005 - $96,000) in syndication loan administration fees from parties related by virtue of having certain directors and officers in common.

d) Marketable securities and investments include $8,920,000 of shares held in publicly traded companies related by virtue of having certain directors and officers in common. For the nine months ended September 30, 2006, the Company recorded a gain on disposal of securities of $10,727,000 (2005 - $1,072,000) from parties related by virtue of having certain directors and officers in common. For the nine months ended September 30, 2006, the Company recorded a write-down of investments of $470,000 in parties related by virtue of having certain directors in common.

e) Included in accounts payable is an accrual of $2,650,000 payable to officers and employees under the Company's incentive plan.

11 Contingencies and commitments

a) Surety bond guarantees totalling US$2,405,000 have been provided by Castle Mountain Joint Venture to ensure compliance with reclamation and other environmental agreements. In April 2006, the Company completed its closure obligations at the Castle Mountain property, other than for long-term monitoring and maintenance.

b) On March 22, 2002, Quest Investment Corporation, a predecessor of the Company, and other parties were named as defendants in a lawsuit filed in the Supreme Court of British Columbia. The plaintiff has claimed approximately $410,000 plus interest due for consulting services. Management intends to fully defend this claim. Accordingly, no provision has been made for this claim in the consolidated financial statements. The ultimate outcome of this claim is not determinable at the time of issue of these consolidated financial statements and the costs, if any, will be charged to income in the period(s) in which they are finally determined.

c) The Company has entered into operating leases for office premises. Minimum annual lease payments required are approximately as follows:



2006 $ 484,000
2007 406,000
2008 331,000
2009 331,000
2010 254,000
2011 33,000


d) Other commitments and contingencies are disclosed elsewhere in these consolidated financial statements and notes.

12 Supplemental cash flow information

Non-cash operating, financing and investing activities



Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005

Marketable securities and
investments received as
loan fees $ 804 $ 561 $ 1,204 $ 2,051
Fair value of compensation
options issued - 500 - 500
Other assets and investments
received as finder's fees 231 828 728 828
Investment purchases funded
by brokerage margin account (30,899) - (30,899) -
Investment proceeds used to
repay brokerage margin account 30,899 - 30,899 -
Loans and debentures settled
with shares - - - 4,516
Shares received as
consideration for sale of
resource property - - - 1,800


13 Income taxes

The Company has utilized tax losses in certain of its entities to reduce its taxable income in Canada. The Company has recognized a future tax asset to the extent that the amount is more likely than not be realized from future earnings.

The provision for (recovery of) income taxes consists of the following as at September 30, 2006:



Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005

Current
Canada $ (711)$ - $ 1,886 $ -
United States 200 - 200 -
----------------------------------------------
Total current expenses (511) - 2,086 -
----------------------------------------------
Future
Canada 828 - (700) -
United States - - - -
----------------------------------------------
Total future recovery 828 - (700) -
----------------------------------------------
Total provision for income
taxes $ 317 $ - $ 1,386 $ -
----------------------------------------------
----------------------------------------------


QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006


INTRODUCTION

The following information, prepared as of October 27, 2006, should be read in conjunction with the Company's audited annual consolidated financial statements for the years ended December 31, 2005 and 2004 and related notes attached thereto, which were prepared in accordance with Canadian generally accepted accounting principles ("Cdn GAAP"), together with the related management's discussion and analysis ("MD&A"). All amounts are expressed in Canadian dollars unless otherwise indicated.

The business of Quest Capital Corp. (the "Company") consists of:

- mortgage financings secured by first and second real estate mortgages;

- providing commercial bridge loans primarily to publicly traded development stage companies;

- financial and corporate assistance in arranging equity offerings for companies; and

- management and administrative services to public and private companies.

The Company primarily generates revenues through interest it earns on its loan portfolio. The Company's revenues are subject to the return it is able to generate on its capital, its ability to reinvest funds as loans mature and are repaid, the nature and credit quality of its loan portfolio, including the quality of the collateral security. In addition, the Company generates revenues from gains on sale of marketable securities and investments. The Company also receives fees from its corporate finance activities. These fees are subject to the number and dollar amounts of the transactions in which the Company participates.

The following discussion, analysis and financial review is comprised of 12 main sections:

1. RESULTS OF OPERATIONS

2. SUMMARY OF QUARTERLY RESULTS

3. LIQUIDITY

4. RELATED PARTY TRANSACTIONS

5. SUBSEQUENT AND PROPOSED TRANSACTIONS

6. OFF BALANCE SHEET ARRANGEMENTS

7. OUTLOOK

8. CRITICAL ACCOUNTING POLICIES AND ESTIMATES

9. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION

10. DISCLOSURE OF OUTSTANDING SHARE DATA

11. RISKS AND UNCERTAINTIES

12. FORWARD LOOKING INFORMATION

Additional information about us, including our Revised Annual Information Form and other public filings, are available on SEDAR at www.sedar.com.

1. RESULTS OF OPERATIONS

Total assets as at September 30, 2006 were $284.9 million comprised of $12.8 million of cash, $1.3 million of marketable securities, $246.6 million in loans; $11.4 million in investments with a fair value of $14.2 million and $12.8 million of other assets.

The composition of the loan portfolio at September 30, 2006 was 83% in first and second real estate mortgages, 10% in resource sectors, and 7% in other sectors. At September 30, 2006, mortgages were geographically located; 63% in British Columbia, 19% in Alberta, 15% in Ontario and 3% in other areas; and 73% are first mortgages and 27% are second mortgages. This investment concentration may vary from time to time depending on the investment opportunities available, however in the near term the Company does not expect any material changes in the composition of its loan portfolio.

For the three months ended September 30, 2006, the Company had consolidated net earnings of $8.8 million ($0.06 per share) compared to net earnings of $4.3 million ($0.04 per share) for the comparative period in 2005. During the nine months ended September 30, 2006, the Company had consolidated net earnings of $27.7 million ($0.20 per share) compared to $12.2 million ($0.13 per share) for the comparative period in 2005.

Interest and Related Fees

Net interest income from the Company's lending activities increased during the three months ended September 30, 2006 as compared to the comparative period in 2005, due to the growth in its loan portfolio year-over-year. Total loans as at September 30, 2006 were $246.6 million as compared to $98.1 million as at September 30, 2005, representing a 151% increase. Interest and related fees during the three months ended September 30, 2006 totaled $8.8 million as compared to $4.4 million for the comparative period in 2005, representing a 100% increase. During the nine months ended September 30, 2006, the Company earned interest and related fees of $22.0 million compared to $11.9 million for the comparative period in 2005, due to the growth in its loan portfolio year-over-year.

Non-Interest Income

Net earnings were positively impacted by an increase in management and finder's fees during the nine months ended September 30, 2006 as compared to the comparative period in 2005, primarily as a result of increased activity in the Company's corporate finance business. The fair value of non-monetary compensation received as finder's fees in the form of shares, broker warrants and/or options are estimated using the trading price for shares, adjusted for liquidity, hold periods and other restrictions and the Black-Scholes option model for warrants.

Marketable securities are carried at the lower of average cost and market value. Accordingly, trading gains during the three months ended September 30, 2006 resulted in the Company recording a gain of $0.4 million compared to $0.2 million for the comparative period in 2005. During the nine months ended September 30, 2006, the Company recorded trading gains of $4.1 million as compared to $0.6 million for the comparative period in 2005.

Net realized gains from the sales and write-downs to carrying value of investments resulted in the Company recording a net gain of $1.9 million during the three months ended September 30, 2006 as compared to $1.2 million for the comparative period in 2005. During the nine months ended September 30, 2006, the Company realized gains from the sale of investments of $9.6 million as compared to $2.4 million for the comparative period in 2005.

Expenses and Other

Total expenses and other for the three months ended September 30, 2006 was $3.1 million as compared to $2.0 million for the comparative period in 2005. Total expenses and other for the nine months ended September 30, 2006 were $9.9 million as compared to $5.5 million for the comparative period in 2005.

Salaries and benefits have increased during the three months and nine months ended September 30, 2006 as compared to the comparative periods in 2005 as a result of expansion of the business and the addition of new employees.

Bonuses of $0.9 million during the three months ended September 30, 2006 and $4.6 million during the nine months ended September 30, 2006, represent amounts under the incentive plan to officers and employees of the Company. The increase in bonuses is the result of the realized gain on sale of securities and increased level of loan activity. The payments and allocations under such plan are subject to the approval of the Compensation Committee and Board of Directors. The Company's incentive plan includes discretionary and non-discretionary components. The non-discretionary components are based on the Company's corporate finance activities and loan underwritings. The discretionary components are primarily based on the earnings of the Company.

Stock based compensation decreased during the three months and nine months ended September 30, 2006 over the comparative period in 2005, as a result of fewer options being issued and vested.

In April 2006, the Company completed its closure obligations at the Castle Mountain property, other than for long-term monitoring and maintenance.

Income tax expense was $1.4 million for the nine months ended September 30, 2006. The Company estimates its annual effective tax rate for its Canadian entities will be 6.5% and nominal for its U.S. entities for 2006. In addition, income tax expense has been positively impacted by the recognition of a future tax asset as a result of the likely realization of unused tax losses to be realized from fiscal earnings beyond 2006. During the quarter the Company was able to reduce its estimated annual effective tax rate through the use of tax efficient strategies of acquiring and disposing of investments. The Company further intends to proceed with a reorganization amongst its wholly owned entities as an effective tax planning strategy.

2. SUMMARY OF QUARTERLY RESULTS

(In thousands of Canadian dollars, except per share amounts)



Third Second First Fourth Third Second First Fourth
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
2006 2006 2006 2005 2005 2005 2005 2004
---------------------------------------------------------------
Interest
and
related
fees 8,781 7,415 5,798 5,555 4,399 4,004 3,452 2,941
Non-interest
income 3,368 7,905 5,961 4,028 1,883 2,377 1,202 1,502
Earnings
before
taxes 9,087 11,664 8,315 5,059 4,291 4,507 3,311 529
Net earnings 8,770 10,882 8,028 11,395 4,295 4,550 3,311 212
Basic and
Diluted
Earnings
Per Share 0.06 0.08 0.06 0.10 0.04 0.05 0.04 0.00
Total
Assets 284,935 267,891 208,060 189,603 166,928 123,487 114,030 111,905
Total
Liabilities 20,885 14,828 8,999 12,009 6,718 7,525 10,684 12,385
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Company's interest and related fees have continued to increase for the past eight quarters as the Company's loan portfolio grows.

Non-interest income will vary by quarter depending on the management, advisory, and finder's fees received, marketable securities' trading gains/(losses) and realized gains and write-down of investments. Quarter to quarter comparisons of financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.

During the fourth quarter of 2005, net earnings were positively impacted by the recognition of a Future Tax Asset of $6.4 million as a result of the likely realization of unused tax losses from future earnings.

During the fourth quarter of 2004, net earnings were impacted by the provision of $1.5 million for the 2004 bonuses. In 2005 and 2006, provisions for bonuses have been made on a quarterly basis.

3. LIQUIDITY

The Company's cash resources at September 30, 2006 were $12.8 million as compared to $33.7 million as at December 31, 2005. The Company's primary focus is to provide loans and its cash balances will vary depending on the timing of loans advanced and repaid.

As at September 30, 2006, the Company had commitments under existing loan agreements to lend further funds of $14.6 million of which the Company expects to syndicate a portion thereof. Advances under these agreements are subject to a number of conditions, including due diligence and no material adverse change in the assets, business or ownership of the borrower.

The Company's loan portfolio as at September 30, 2006 was $246.6 million comprised of 83% real estate mortgages, 10% in resource sectors, and 7% in other sectors. As at September 30, 2006, 76% of the loan value is scheduled to mature within a year. The Company had approximately $11.5 million of loans impaired as a result of certain principal and/or interest payments being in arrears as at September 30, 2006 against which the Company has a provision of $0.6 million. The Company expects to collect the full carrying value of its loan portfolio.

During the nine months ended September 30, 2006, cash flow from operations provided $21.2 million as compared to $5.6 million for the comparative period in 2005, as a result of higher earnings and proceeds received from the sale of marketable securities.

In April 2006, the Company completed an equity offering of 15,625,000 common shares and received net proceeds of $47.3 million.

During the nine months ended September 30, 2006, the Company's loan portfolio increased by $122.1 million to $246.6 million as compared to December 31, 2005. In the nine months ended September 30, 2006, the Company had arranged $205.1 million of new loans (net to Company - $184.9 million) and $70.8 million of loans (net to the Company - $58.2 million) were repaid.

As part of the Company's effective tax planning strategies significant acquisitions and disposals of investments occurred during the current quarter funding by internal sources and the use of margin accounts. During the upcoming quarter, the Company will continue with similar type of transactions.

Management is not aware of any trends or expected fluctuations that would create any liquidity deficiencies. The Company believes that cash flow from continuing operations and existing cash resources will be sufficient to meet the Company's short-term requirements, as well as ongoing operations, and will be able to generate sufficient capital to support the Company's business. However, Quest assumes short-term debt from time to time to fund its investments and loan operations. In addition, Quest is reviewing the implementation of various term debt facilities.

The Company has contractual obligations for its leased office space in Vancouver and Toronto. The total minimum lease payments for the years 2006 - 2010 are $1,839,000.



Obligation due by period
----------------------------------------------
Type of Contractual Less than 1 - 3 3 - 5 More than
Obligation Total 1 Year Years Years 5 Years
---------------------------------------------------------------------------
Office Leases $ 1,839,000 $ 484,000 $1,068,000 $287,000 -
Loan Commitments $14,600,000 $14,600,000 - - -
---------------------------------------------------------------------------
Total $16,439,000 $15,084,000 $1,068,000 $287,000 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4. RELATED PARTY TRANSACTIONS

For the nine months ended September 30, 2006, the Company received $1,202,000 (2005 - $667,000) in advisory, management and finder's fees from parties related by virtue of having certain directors and officers in common. Other assets include $479,000 of non-transferable securities held in either private or publicly traded companies related by virtue of having certain directors and officers in common. For the nine months ended September 30, 2006, the Company recorded a write-down of other assets of $74,000 (2005 - $Nil) in parties related by virtue of having certain directors in common.

Loans and convertible debentures include $1,000,000 in amounts due from parties related by virtue of having a director in common. During the nine months ended September 30, 2006, the Company received $580,000 (2005 - $1,770,000) in interest and fees from parties related by virtue of having certain directors and officers in common. During the nine months ended September 30, 2006, the Company has provided an additional allowance of $386,000 for a loss on a convertible debenture from a party related by virtue of having a director in common.

For the nine months ended September 30, 2006, the Company received $31,000 (2005 - $96,000) in syndication loan administration fees from parties related by virtue of having certain directors and officers in common.

Marketable securities and investments include $8,920,000 of shares held in publicly traded companies related by virtue of having certain directors and officers in common. For the nine months ended September 30, 2006, the Company recorded a gain on disposal of securities of $10,727,000 (2005 - $1,072,000) from parties related by virtue of having certain directors and officers in common. For the nine months ended September 30, 2006, the Company recorded a write-down of investments of $470,000 in parties related by virtue of having certain directors in common.

As at September 30, 2006 included in accounts payable is an accrual of $2,650,000 payable to officers and employees under the Company's incentive plan.

5. SUBSEQUENT AND PROPOSED TRANSACTIONS

Nothing to report.

6. OFF BALANCE SHEET ARRANGEMENTS

The Company has no off balance sheet arrangements.

7. OUTLOOK

As at September 30, 2006, the Company had $12.8 million of cash on hand. Reinvestment of the Company's cash as loans mature is the paramount focus of management. The Company is not planning any material changes in the make-up of its lending business, although the precise composition of its loan portfolio may vary somewhat from the currently existing percentages as loans are made in the context of market conditions. During the upcoming year, the Company may hire additional employees and raise equity or debt as is required to fund the growth of the Company's loan portfolio (also refer to Liquidity).

8. CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's accounting policies are described in Note 3 of its audited consolidated financial statements for the years ended December 31, 2005 and 2004. 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 an allowance for credit losses 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. The 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 a monthly basis and specific provisions are established on a loan-by-loan basis. In determining the provision for possible loan losses, the Company considers the following:

- length of time the loans have been in arrears;

- the overall financial strength of the borrowers;

- the nature and quality of collateral and, if applicable, guarantees;

- secondary market value of the loans and the collateral; and

- the borrower's plan, if any, with respect to restructuring the loans.

Valuation of Investments

The Company's investments are primarily held in public companies. Investments are recorded at cost or at cost less amounts written off to reflect any impairment in value that is considered to be other than temporary. The Company regularly reviews the carrying value of its portfolio positions. A decline in market value may be only temporary in nature or may reflect conditions that are more permanent. Declines may be attributable to general market conditions, either globally or regionally, that reflect prospects of the economy as a whole or prospects of a particular industry or a particular company. Such declines may or may not reflect the likelihood of ultimate recovery of the carrying amount of an investment.

In determining whether the decline in value of the investment is other than temporary, quoted market price is not the only factor considered, particularly for thinly traded securities, large block holdings and restricted shares. Other factors considered include:

- the trend of the quoted market price and trading volume;

- the financial position of the company and its results;

- changes in or reorganization of the business plan of the investment; and

- the current fair value of the investment (based upon an appraisal thereof) relative to its carrying value.

Future Tax Asset

The Company has recognized a future tax asset to the extent that the amount is more likely than not to be realized from future earnings. The 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. 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 the funds. If an asset has been recorded and the Company assesses that realization 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 its more likely than not to be realized, it will be recorded in the balance sheet and statement of earnings.

Asset Retirement Obligations

The amounts recorded for asset retirement obligations are based on the fair value of the estimated future costs to obtain final closure from regulatory agencies of the Company's remaining resource property.

9. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION

No new accounting policies have been adopted during the nine months ended September 30, 2006.

10. DISCLOSURE OF OUTSTANDING SHARE DATA

As at October 27, 2006, the Company had the following common shares, stock options and compensation options outstanding:



-----------------------------------------------
Common shares 144,822,628
Stock options 8,951,333
Compensation options 1,133,775
-----------------------------------------------
Fully diluted shares outstanding 154,907,736
-----------------------------------------------


Dividends

The Board of Directors declared its second semi-annual dividend of $0.03 per share which was paid on July 6, 2006 to shareholders of record on June 21, 2006.

11. RISKS AND UNCERTAINTIES

Additional risks factors are disclosed under "Risk Factors" in the Revised Annual Information Form filed on SEDAR at www.sedar.com.

Liquidity Risk

The Company maintains a sufficient amount of liquidity to fund its obligations as they come due under normal operating conditions. As at September 30, 2006, 76% of the value of the loan portfolio is scheduled to mature within a year.

Credit Risk

Credit risk management is the management of all aspects of borrower risk associated with the total loan portfolio, including the risk of loss of principal and/or interest from the failure of the borrowers to honour their contractual obligations to the Company.

The composition of the loan portfolio at September 30, 2006 was 83% in first and second real estate mortgages, 10% in resource sectors, and 7% in other sectors. At September 30, 2006, mortgages were geographically located; 63% in British Columbia, 19% in Alberta, 15% in Ontario and 3% in other; and 73% are first mortgages and 27% are second mortgages. The Company generally provides real estate mortgages to approximately 75% of the value of the security and generally provides commercial bridge loans to primarily publicly traded development stage companies to approximately 50% of the value of guarantees and security. The Company provides for loan losses on a specific loan basis and has a provision of $0.6 million as at September 30, 2006.

12. FORWARD-LOOKING INFORMATION

These materials include certain statements that constitute "forward-looking statements" within the meaning of Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934. These statements appear in a number of places in this document and include statements regarding our intent, belief or current expectation and that 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 document, words such as "believe", "anticipate", "estimate", "project", "intend", "expect", "may", "will", "plan", "should", "would" "contemplate", "possible", "attempts", "seek", and similar expressions are intended to identify these forward-looking statements. These forward-looking statements are based on various factors and were derived utilizing numerous assumptions that could cause our actual results to differ materially from those in the forward-looking statements. Accordingly, you are cautioned not to put undue reliance on these forward-looking statements. Forward-looking statements include, among others, statements regarding our expected financial performance in future periods, our plan of operations and our business strategy and plans or budgets.


Contact Information

  • Quest Capital Corp.
    A. Murray Sinclair
    Managing Director
    (604) 689-1428 or Toll Free: (800) 318-3094
    or
    Quest Capital Corp.
    Mark Monaghan
    Vice President
    (416) 367-8383
    Website: www.questcapcorp.com