ex99_2.htm

Loans past payment date:

Days Outstanding Past Payment Date	Number of Loans		June 30, 2009		Number of Loans		December 31, 2008		Number of Loans		June 30, 2008
						$				$		$
1 – 30 days		-		-		1		5,337		-		-
31 – 60 days		-		-		-		-		-		-
61 – 90 days		-		-		-		-		-		-
		-		-		-		5,337		-		-

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 June 30, 2009.

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 six months ended June 30, 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 June 30, 2009 based on a comparison of estimated collateral value and/or expected future cashflows with the outstanding carrying value of the loans.

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.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

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:

	June 30, 2009					December 31, 2008					June 30, 2008
	Number of loans		Gross Impaired Amount			Number of loans		Gross Impaired Amount			Number of loans		Gross Impaired Amount
							$					$		$
Impaired loans with specific allowances		12		95,058			10		56,544			-		-
Specific allowances				(19,998	)				(13,735	)				-
		12		75,060			10		42,809			-		-
Impaired loans without specific allowances		5		67,268			4		47,180			3		12,391
Total impaired loans, net of specific allowances		17		142,328			14		89,989			3		12,391

At June 30, 2009, the total estimated fair value of the collateral of impaired loans with specific allowances is $91,119 (December 31, 2008-$48,100, June 30, 2008-$nil) and for impaired loans without specific allowances is $79,925 (December 31, 2008 - $79,222, June 30, 2008 - $20,538). 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. In assessing the adequacy of the specific loan loss provision management takes into account likely realizable values, legal costs and incorporates a time value and credit risk component into estimated future cashflows.

The Company has recorded specific allowances for loan losses as follows:

	Three Months Ended June 30, 2009			Three Months Ended June 30, 2008		Six Months Ended June 30, 2009			Six Months Ended June 30, 2008
		$			$		$			$
Balance – beginning of period		16,332			-		13,735			-
Provision for loan losses		5,843			-		8,440			-
Direct write-offs		(2,177	)		-		(2,177	)		-
Balance – end of period		19,998			-		19,998			-

During the six month period ended June 30, 2008, the Company began providing for a general allowance for loan losses to reflect probable, but unidentified losses in the portfolio. However, at June 30, 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.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

The Company has recorded general allowances for loan losses as follows:

	Three Months Ended June 30, 2009		Three Months Ended June 30, 2008		Six Months Ended June 30, 2009		Six Months Ended June 30, 2008
		$		$		$		$
Balance – beginning of period		-		204		-		-
General allowance for the period		-		246		-		450
Balance – end of period		-		450		-		450

Loan commitments

At June 30, 2009, the Company has loan commitments for future advances on construction loans of up to $27,697 of which $22,233 is scheduled for 2009, and $5,464 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.

Composition of loan portfolio

The following table indicates the composition of the Company’s loans by sector as follows:

	June 30, 2009				December 31, 2008				June 30, 2008
	Number of loans		Principal Outstanding		Number of loans		Principal Outstanding		Number of loans		Principal Outstanding
						$				$		$
Land under development		20		177,262		21		172,076		20		148,841
Real estate – residential		2		1,775		5		13,704		9		39,923
Real estate – commercial		7		63,592		7		64,784		10		68,359
Construction		17		121,612		20		131,917		18		83,525

Total mortgages		46		364,241		53		382,481		57		340,648

Bridge loans		3		4,468		4		5,106		6		18,846

Total loan principal (1)		49		368,709		57		387,587		63		359,494
(1) Excludes specific loan loss provision

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

Geographic distribution of loan principal

The following table indicates the geographical distribution of the Company’s mortgage loans:

	June 30, 2009						December 31, 2008						June 30, 2008
	Number of loans		Principal Outstanding				Number of loans		Principal Outstanding				Number of loans		Principal Outstanding
								$						$			$
British Columbia		17		153,611	42	%		17		151,096	40	%		21		161,388	47	%
Prairies		23		156,828	43	%		29		183,217	48	%		33		157,878	46	%
Ontario		6		53,802	15	%		7		48,168	12	%		3		21,382	7	%
Total mortgage loans(1)		46		364,241	100	%		53		382,481	100	%		57		340,648	100	%
(1) Excludes specific loan loss allowances.

Non-recourse loan syndication

In April 2009, certain of the Company’s loans receivable were individually syndicated to third parties on a non-recourse basis involving senior and subordinated positions in each loan, whereby the third party holds the senior position and Quest the subordinated position. The senior position earns interest at the contractual interest rate inherent in the loan with a term equal to the remaining term in the loan receivable.

At the Company’s discretion, it may exercise an option to repurchase the senior position at principal plus accrued interest. Accordingly, under CICA Accounting Guideline 12, Transfer of Receivables, the Company is deemed to have retained effective control over the loan receivables. As a result, the Company has presented the senior position of $28,394, net of deferred fees, separately from the loan receivable of $93,870 using a gross rather than net presentation basis.

The Company amortizes the placement fee associated with this syndication over the remaining term inherent in the loans receivable.

	June 30, 2009			December 31, 2008		June 30, 2008
		$			$		$
Non-recourse loan syndication		28,581			-		-
Less: unamortized balance of deferred fees		(187	)		-		-
		28,394			-		-

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

7 PREMISES AND EQUIPMENT AND INTANGIBLE ASSETS

	June 30, 2009						December 31, 2008		June 30, 2008
Premises & equipment	Cost		Accumulated Amortization		Net Book Value		Net Book Value		Net Book Value
		$		$		$		$		$
Land		35		-		35		35		35
Leasehold improvements		631		326		305		371		430
Computer equipment		500		347		153		215		225
Office equipment		204		96		108		123		124
		1,370		769		601		744		814

Amortization included in the net loss for the six month period is $139 (2008 - $146).

Intangible assets	June 30, 2009						December 31, 2008		June 30, 2008
	Cost		Accumulated Amortization		Net Book Value		Net Book Value		Net Book Value
		$		$		$		$		$
Computer software		208		56		152		118		115

Amortization included in the net loss for the six-month period is $35 (2008 - $nil).

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. In May 2009 the facility was further reduced to $55,000 and to a maximum of $39,600 in June 2009. The maximum borrowing amount reduces with loans repaid. The facility bears interest based on prime rate plus an increment and is collateralized by the Company’s loan portfolio.

As at June 30, 2009, no funds were 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 at June 30, 2009, the Company was in compliance with all required financial covenants under the revolving debt facility.

	June 30, 2009		December 31, 2008			June 30, 2008
		$		$			$
Revolving debt facility drawn		-		50,860			66,510
Less: unamortized balance of financing costs(1)		-		(707	)		(500	)
		-		50,153			66,010
(1) At June 30, 2009 $405 of deferred costs are included in other assets.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

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:

	June 30, 2009			December 31, 2008			June 30, 2008
		$			$			$
Balance - beginning of period		459			572			572
Liabilities settled		(79	)		(135	)		(83	)
Accretion expense		14			35			17
Revision in estimated cash flows		-			(123	)		-
Foreign exchange		(18	)		110			16
Balance - end of period		376			459			522

10 SHARE CAPITAL

Authorized

Unlimited first and second preferred shares

Unlimited common shares without par value

Cumulative 13.50% First Preferred Shares, Series A issued and outstanding (classified as liabilities)

	June 30, 2009			December 31, 2008			June 30, 2008
		$			$			$
Preferred share liability		40,000			40,000			-
Less: unamortized balance of financing costs		(993	)		(1,276	)		-
Net liability		39,007			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 (note 16 – “Liquidity and Liquidity Risks”). 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.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

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 (loss). 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 declared preferred share dividends in common shares (note 10(c)).

Common shares issued and outstanding

	Number of shares			Amount
					$
Common Shares
Opening balance – January 1, 2009		146,789,711			207,161
Issued from treasury – agent’s fee on preferred share issuance		1,404,762			1,180
Issued from treasury – preferred share dividend (note 10(b))		2,141,435			1,361
Returned to treasury – expiry of sunset clause (note 10(e))		(442,709	)		(446	)
Closing balance – June 30, 2009		149,893,199			209,256

On January 15, 2009, the Company issued 1,404,762 shares for $1,180 as an agent’s fee on the issuance of the First Preferred shares (note 10(b)).

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.

On June 30, 2009 pursuant to the sunset clause included in the terms of the 2003 Plan of Arrangement (the “Arrangement”), 442,709 shares of the Company were returned to treasury for cancellation at an assigned value of $1.01 per share. The shares had been held in escrow by the Company’s transfer agent as their owners did not exchange their shares of predecessor companies for common shares of the Company tendered as part of the Arrangement. The offsetting credit has been recorded in contributed surplus.

On July 2, 2009, the Company issued 1,571,135 shares for $1,346 to the holders of the Company’s First Preferred shares in settlement of the June 30, 2009 declared dividend.

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.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

The change in stock options outstanding for the period was as follows:

	Number of options			Weighted average exercise price
Opening balance – January 1, 2009		5,274,664		$	2.55
Granted		250,000			1.05
Cancelled		(1,610,197	)		2.48

Closing balance – June 30, 2009		3,914,467		$	2.48

Options exercisable – June 30, 2009		3,024,739		$	2.64

The following table summarizes information about stock options outstanding and exercisable at June 30, 2009:

Options outstanding							Options exercisable
Range of exercise prices	Options outstanding		Weighted average remaining contractual life (years)		Weighted average exercise price		Options exercisable		Weighted average exercise price
				$				$		$
0.00 to 1.49		250,000		4.89		1.05		20,830		1.05
1.50 to 1.99		350,000		3.91		1.99		145,820		1.99
2.00 to 2.49		1,371,664		2.53		2.20		1,027,804		2.24
2.50 to 2.99		785,306		3.39		2.65		785,306		2.65
3.00 to 3.49		1,157,497		2.66		3.16		1,044,979		3.15
		3,914,467		3.02		2.48		3,024,739		2.64

Contributed surplus

	Three Months Ended June 30, 2009		Six Months Ended June 30, 2009
		$		$
Balance – beginning of period		8,154		7,954
Stock-based compensation expense		113		313
Expiry of sunset clause (note 10(c))		447		447

Balance – end of period		8,714		8,714

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

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:

	Three Months Ended June 30, 2009			Three Months Ended June 30, 2008			Six Months Ended June 30, 2009			Six Months Ended June 30, 2008
		$			$			$			$
Current
Canada		-			(26	)		-			23
United States		22			(10	)		116			5
Total current expense (recovery)		22			(36	)		116			28

Future
Canada		(1,674	)		570			(963	)		934
United States		(41	)		(7	)		(163	)		(50	)
Total future (recovery) expense		(1,715	)		563			(1,126	)		884
Total income tax (recovery) expense		(1,693	)		527			(1,010	)		912

The significant components of the future income tax assets and liabilities are as follows:

	June 30, 2009			December 31, 2008			June 30, 2008
		$			$			$
Non-capital loss carry-forwards		4,037			2,753			524
Capital loss carry-forwards		7,647			7,935			7,837
Premises and equipment		2			9			13
Other		2,255			2,613			2,871
		13,941			13,310			11,245
Valuation allowance		(8,034	)		(8,366	)		(8,264	)

Future income tax asset		5,907			4,944			2,981

Deferred gain and other		646			841			879
Future tax liability		646			841			879

The Company has non-capital losses to reduce future taxable income in Canada of approximately $13,526. These losses will expire in 2015 ($6,727), 2028 ($2,478) and 2029 ($4,321).

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

12 RELATED PARTY TRANSACTIONS

a)	Included in accounts payable and accrued liabilities as at June 30, 2009 is $216 due to employees and officers for bonuses payable (December 31, 2008 - $50, June 30, 2008 - $1,951).

For the six months ended June 30, 2009, the Company paid $56 (June 30, 2008 – $nil) for administration services to a party related by virtue of having certain directors and officers in common. The Company was also reimbursed $55 (June 30, 2008 – $20) in office and premises costs by the same related party, of which $18 (December 31, 2008 - $11, June 30, 2008-$nil) is included in accounts receivable.

c)	For the six months ended June 30, 2009, the Company received $14 (June 30, 2008 - $13) 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 June 30, 2009 is $43 (December 31, 2008 - $39, June 30, 2008 - $40) 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 $564 (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	341
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 June 30, 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 $214. An immediate and sustained 100 basis point decrease in interest rates would increase net interest income over the next 12 months by $214.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

The carrying amounts of assets and liabilities in the following tables 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:

June 30, 2009	Floating Rate			Within 6 Months			6 to 12 Months		1 to 3 Years			Over 3 Years			Non –Interest Sensitive			Total
		$			$			$		$			$			$			$
Total assets		35,362			244,882			84,965		3,500			-			(6,257	)		362,452
Total liabilities and equity		-			26,082			2,500		40,000			-			293,870			362,452
Difference		35,362			218,800			82,465		(36,500	)		-			(300,127	)		-
Cumulative difference		35,362			254,162			336,627		300,127			300,127			-			-
Cumulative difference as a percentage of total assets		9.8	%		70.1	%		92.9		82.8	%		82.8	%		-			-

December 31, 2008	Floating Rate			Within 6 Months			6 to 12 Months			1 to 3 Years			Over 3 Years			Non –Interest Sensitive			Total
		$			$			$			$			$			$			$
Total assets		50,156			164,621			101,590			71,220			-			(3,332	)		384,255
Total liabilities and equity		50,860			-			-			40,000			-			293,395			384,255
Difference		(704	)		164,621			101,590			31,220			-			(296,727	)		-
Cumulative difference		(704	)		163,917			265,507			296,727			296,727			-			-
Cumulative difference as a percentage of total assets		(0.2	%)		42.7	%		69.1	%		77.2	%		77.2	%		-			-

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

June 30, 2008	Floating Rate			Within 6 Months			6 to 12 Months			1 to 3 Years			Over 3 Years			Non – Interest Sensitive			Total
		$			$			$			$			$			$			$
Total assets		44,990			173,451			53,732			82,592			-			11,774			366,539
Total liabilities and equity		66,510			-			-			-			-			300,029			366,539
Difference		(21,520	)		173,451			53,732			82,592			-			(288,255	)		-
Cumulative difference		(21,250	)		151,931			205,663			288,255			288,255			-			-
Cumulative difference as a percentage of total assets		(5.8	%)		41.4	%		56.1	%		78.6	%		78.6	%		-			-

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 loan principal 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.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

The table below sets out the fair values of financial instruments and does not include assets and liabilities that are not considered financial instruments.

	June 30, 2009				December 31, 2008				June 30, 2008
	Carrying value		Fair value		Carrying value		Fair Value		Carrying value		Fair Value
		$		$		$		$		$		$
Assets
Cash deposits		3,136		3,136		1,621		1,621		3,101		3,101
Restricted cash		1,911		1,911		4,014		4,014		8,763		8,763
Loan principal		348,711		348,921		373,852		372,757		359,494		359,494

Liabilities
Preferred share liability		40,000		40,000		40,000		40,000		-		-
Non-recourse loan syndication		28,582		28,582		-		-		-		-
Revolving debt facility		-		-		50,860		50,860		66,510		66,510

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 June 30, 2009, the Company was in compliance with its revolving debt facility covenants.

At June 30, 2009, management considers the Company’s capital to comprise revolving debt of $nil, preferred share net liability of $39,007 and all components of shareholders’ equity which amount to $290,957 for a total of $329,964.

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 six months ended June 30, 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.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

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.

During the loan origination process, senior management takes into account a number of factors and 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;

allocation of the responsibility of the loan to two Quest employees which allow for peer review;

physical inspection of the property;

review of the sufficiency of the borrower’s business plans including strategies to exit the property and/or enhance the value of the property;

continuous written status updates provided on the business plans and if applicable, construction progress;

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; and

the segregation of duties to ensure that qualified staff are satisfied with all due diligence requirements prior to funding.

As a result of the recent changes to the credit markets and the Company’s focus on loan remediation and the collection of loans, senior management has implemented several additional procedures as well as heightening others. These include:

The formation of a remediation team who focus on the identification and remediation of problem loans;

Strategy formulation as to the most appropriate method to protect the Company’s interest including obtaining additional security, request for principal reductions, protective disbursements and foreclosure proceedings;

Frequent physical inspection of the properties by loan remediation team members;

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

Engaging new legal counsel, realtors, and other professionals;

Frequent updating of appraisals and/or re-underwriting of loans including updating borrower and guarantor financial conditions; and

Weekly management review and discussion of the status of the loan including legal status, market intelligence, and business plans of the borrower.

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 comprise 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 at origination, the Company does not allow any one loan to exceed 10% of the Company’s equity and restricts lending to any one borrower to 20% or less of the Company’s equity. As at June 30, 2009, the largest loan in the Company’s loan portfolio was $29 million (8% of the Company’s loan portfolio) and is considered 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 and 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 may syndicate a portion of its loans as part of its liquidity risk management.

As at June 30, 2009, the Company had no drawings on its revolving debt facility and had future loan commitments to borrowers of up to $27.7 million. Currently, $39.6 million is available under its revolving debt facility. The amount available under this facility decreases with loan repayments received by the Company. The facility is set to expire in January 2010 and the Company does not anticipate any non-compliance with its covenants, namely minimum equity, and tangible assets to debt ratios.

The Company’s preferred share liabilities have a mandatory redemption in December 2010 and retraction and redemption privileges with the consent of the lenders prior to the expiry of the revolving debt facility in January 2010. Lender consent is not required upon the expiry of the revolving debt facility provided the debt is extinguished. The Company is obligated to retract the preferred shares only if more than 66 2/3% of the then issued and outstanding preferred shareholders provide a retraction notice. As there are five preferred shareholders, four out of the five preferred shareholders would have to provide a retraction notice to be more than 66 2/3%. The Company is negotiating with the preferred shareholders to amend the terms of the preferred shares including the retraction and redemption privileges.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

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 June 30, 2009, 23% of the Company’s loan portfolio, or $85.0 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.

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 and property sales.

In addition, the Company has initiated a number of procedures to assist in its liquidity management during 2009 including:

restricting loan advances to existing lending obligations and protective disbursements and a commitment to not fund any new loans;

syndication of existing loans and where necessary using a senior and subordinate priority structure whereby Quest will hold the subordinate 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 and projections, it is management’s opinion that the Company has sufficient resources to meet its current cash flow requirements. Given the economic climate and the delays in repayment of some of the Company’s loans, management continue to forecast expected cashflows, while considering current requirements and various liquidity management tools which are available.

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.

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

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 June 30, 2009, the Company had 3 variable rate loans priced off the bank prime rate with an aggregate principal of $35.4 million and 46 fixed-rate loans with an aggregate principal of $333.3 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:

	Three Months Ended June 30, 2009		Three Months Ended June 30, 2008		Six Months Ended June 30, 2009		Six Months Ended June 30, 2008
		$		$		$		$
Interest received (non-loan)		4		88		18		342
Interest paid		73		601		397		920
Income tax instalments		28		-		61		67

b) Non-cash financing and investing activities:

	Three Months Ended June 30, 2009		Three Months Ended June 30, 2008		Six Months Ended June 30, 2009		Six Months Ended June 30, 2008
		$		$		$		$
Common shares issued as agent’s fee		-		-		1,180		-
Common shares issued for preferred share dividend		1,361		-		1,361		-

Quest Capital Corp.

Unaudited Interim Consolidated Balance Sheets

As at June 30, 2009 with comparative figures for December 31, 2008 and June 30, 2008

(Expressed in thousands of Canadian dollars)

19 FUTURE ACCOUNTING CHANGES

The CICA’s Accounting Standards Board (AcSB) amended CICA Handbook Section 3862, Financial Instruments – Disclosures, to enhance the disclosure requirements regarding fair value measurements and the liquidity risk of financial instruments. The amendments will be effective for the Company’s annual fiscal year ending December 31, 2009.

The AcSB also amended CICA Handbook Section 3855, Financial Instruments – Recognition and Measurement. The amendment clarified that, subsequent to the recognition of an impairment loss on a financial asset (other than a loan), interest income on the impaired financial asset is recognized using the interest rate used to determine the impairment loss. The amendment will be effective for interim periods ending after August 20, 2009.

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 plan to adopt IFRS on January 1, 2011 with restatement for comparative purposes of amounts reported by the Company for the interim periods and the year ended December 31, 2010.

20 EMPLOYEE TERMINATION COSTS

In connection with a reorganization of the Company’s executive and other employees undertaken in April and May 2009, the Company incurred one time salary and related benefit costs of $1,499.

21 SUBSEQUENT EVENT

On July 2, 2009, the Company issued 1,571,135 common shares in payment of its June 30, 2009 declared dividend of $1,346 on the Cumulative 13.5% First Preferred Shares, Series A. Refer to notes 10 (b) and (c).


“Brian E. Bayley”	Director	“A. Murray Sinclair”	Director
Brian E. Bayley		A. Murray Sinclair

	Three Months						Six Months
	Ended June 30						Ended June 30
	2009			2008			2009			2008
		$			$			$			$
Retained earnings - beginning of period		77,267			79,968			75,884			76,539

Net (loss) income for the period		(4,280	)		7,526			(2,897	)		14,625

Dividends		-			(6,605	)		-			(10,275	)

Retained earnings - end of period		72,987			80,889			72,987			80,889

	Three Months				Six Months
	Ended June 30				Ended June 30
	2009		2008		2009		2008
		$		$		$		$
Interest income		6,478		11,549		15,175		22,680
Interest expense		(2,225)		(726)		(4,349)		(1,149)
Syndication expense (note 6(h))		(371)		-		(371)		-
Net interest income		3,882		10,823		10,455		21,531
Provision for loan losses (note 6(d))		(5,884)		(246)		(8,481)		(450)
Net interest (loss) income after provision for loan losses		(2,002)		10,577		1,974		21,081
Other
Syndication and other income (note 12)		16		114		29		234
Loss on sale of loan		(325)		-		(325)		-
Net interest and other		(2,311)		10,691		1,678		21,315

Non-interest expense
Salaries and benefits (note 20)		2,411		1,429		3,285		2,670
Stock-based compensation (note 10(e))		113		268		313		540
Office and other		524		452		925		1,038
Legal and professional services		289		258		511		980
Regulatory and shareholder relations		219		155		315		358
Directors’ fees		50		65		95		118
Resource asset related expenses		56		11		141		74
		3,662		2,638		5,585		5,778
(Loss) income before income taxes		(5,973)		8,053		(3,907)		15,537
Income tax (recovery) expense (note 11)
Current		22		-36		116		28
Future		(1,715)		563		(1,126)		884
		(1,693)		527		(1,010)		912
Net (loss) income for the period		(4,280)		7,526		(2,897)		14,625
Other comprehensive income		-		-		-		-
Comprehensive (loss) income for the period		(4,280)		7,526		(2,897)		14,625
(Loss) earnings per share
Basic		0		0		0		0
Diluted		0		0		0		0
Weighted average number of shares outstanding
Basic		150,142,785		146,789,711		148,203,726		146,789,711
Diluted		150,142,785		146,839,776		148,203,726		147,315,821

	Three Months						Six Months
	Ended June 30						Ended June 30
	2009			2008			2009			2008
		$			$			$			$
Cash flows from operating activities
Net (loss) income for the period		(4,280	)		7,526			(2,897	)		14,625
Adjustments to determine net cash flows relating to operating items:
Amortization of premises and equipment and intangible assets		85			70			174			146
Future income taxes		(1,715	)		563			(1,126	)		884
Stock-based compensation		113			268			313			540
Preferred share interest paid in common shares		1,361			-			1,361			-
Provision for loan losses		5,884			246			8,481			450
Loss on sale of loan		325			-			325			-
Amortization of deferred interest and loan fees		(543	)		(1,281	)		(1,493	)		(2,931	)
Deferred interest and loan fees (written-off) received		(32	)		1,685			141			4,241
Amortization of syndication costs		413			-			413			-
Amortization of financing costs		659			83			968			164
Accretion expense		7			8			14			17
Expenditures for reclamation and closure		(64	)		(39	)		(97	)		(67	)
Decrease (increase) in prepaid and other		(18	)		142			56			22
Increase (decrease) in accounts payables and accrued liabilities		380			(3,074	)		1,174			(3,522	)
Decrease in income tax receivable		14			-			113			-
Decrease in income tax payable		-			(120	)		-			(143	)
		2,589			6,081			7,920			14,426
Cash flows from (used in) financing activities
Dividends paid – common shares		-			(6,605	)		-			(10,275	)
Non-recourse syndication
Advances		30,000			-			30,000			-
Repayments		(1,418	)		-			(1,418	)		-
Financing costs		(600	)		-			(600	)		-
Revolving debt facility
Advances		-			72,710			4,000			99,210
Repayments		(46,860	)		(21,700	)		(54,860	)		(32,700	)
Financing costs		(382	)		-			(382	)		(664	)
Repayment of other debt facility		-			(25,000	)		-			(26,365	)
		(19,260	)		19,405			(23,260	)		29,206
Cash flows from (used in) investing activities
Activity in loans
Funded		(7,731	)		(62,043	)		(18,747	)		(123,736	)
Repayments		25,186			39,030			37,582			51,864
Other		(2,519	)		(969	)		(4,016	)		(2,597	)
Purchases of premises and equipment		-			(18	)		-			(120	)
Intangible assets acquired		-			(115	)		(68	)		(115	)
Decrease (increase) in restricted cash		869			(178	)		2,037			3,745
		15,805			(24,293	)		16,788			(70,959	)
Unrealized foreign exchange loss on cash held in foreign subsidiary		127			14			67			(56	)
(Decrease) increase in cash deposits		(739	)		1,207			1,515			(27,383	)
Cash deposits - beginning of period		3,875			1,894			1,621			30,484
Cash deposits – end of period		3,136			3,101			3,136			3,101

Supplemental cash flow information (note 18)

			Allowance for loan losses
	Gross Amount		Specific		General		Total		Net Amount
		$		$		$		$		$
Mortgage principal		364,241		17,901		-		17,901		346,340
Bridge loan principal		4,468		2,097		-		2,097		2,371
Accrued interest and deferred loan fees		1,099		-		-		-		1,099
		369,808		19,998		-		19,998		349,810

	June 30,		December 31,		June 30,
	2009		2008		2008
		$		$		$
assets
Cash deposits		3,136		1,621		3,101
Restricted cash (note 5)		1,911		4,014		8,763
Loans receivable (note 6)		349,810		372,084		350,419
Income tax receivable		77		190		-
Future income tax (note 11)		5,907		4,944		2,981
Premises and equipment (note 7)		601		744		814
Intangible assets (note 7)		152		118		115
Other assets		858		540		346
		362,452		384,255		366,539
liabilities
Accounts payable and accrued liabilities (note 12)		3,072		3,079		3,559
Preferred share liability (note 10)		39,007		38,724		-
Non-recourse loan syndication (note 6(h))		28,394		-		-
Revolving debt facility (note 8)		-		50,153		66,010
Income tax payable		-		-		45
Future income tax (note 11)		646		841		879
Asset retirement obligation (note 9)		376		459		522
		71,495		93,256		71,015

shareholders’ equity
Share capital (note 10)		209,256		207,161		207,161
Contributed surplus (note 10)		8,714		7,954		7,474
Retained earnings		72,987		75,884		80,889
		290,957		290,999		295,524
		362,452		384,255		366,539

Commitments and contingencies (notes 6(e) and 13)
Subsequent event (note 21)

Days Outstanding	Number		June 30,		Number		December 31,		Number		June 30,
Past Maturity	of Loans		2009		of Loans		2008		of Loans		2008
			$			$	$			$		$
1 – 30 days		1		5423		-		-		1		4173
31 – 60 days		1		643		1		8090		-		-
61 – 90 days		-		-		2		28514		2		9615
		2		6066		3		36604		3		13788